Thursday, February 18, 2010

Fed Changes Everything

Today's decision is hard to comprehend. Fed behaves like inflation is at the gate. Cutting discount rate, shortening loan maturity to overnight, stopping quantitative easing.

Looks like we are following Japanese way, the way of the samurai. I don't feel enough guts in myself for that. My guts don't like an idea of seppuku.

Short term, we are going to see a sell-off. Long term picture changes as well. Last April, I wrote quite an optimistic piece Fork On The Road. Last November, I updated it to even more optimistic view: 4 Possible Market Scenarios, Updated. Below is a review of the secnarios.

Inflation and stagnation = stagflation

Ain't gonna happen. People are too scared of inflation (something most of currently active people lived through in 1970s) and Fed members are just people. They are scared of every shadow of it.

Probability: 0%

Japanese disease (Zero growth with zero inflation or low deflation)

Fed's decision, together with obviously coming tax hikes, makes this scenario much more probable.

Probability: 30%

Great Depression 2.0

Welcome back to the jungle. We can have depression either Japanese way or American way. I don't know which one is worse. American way is probably better, Great Depression ended in a dozen years. But it's still a big question for how long it could last without World War II.

Probability: 50%

Great Recession

If what we had was Great Recession back in the beginning of 2009, we are out of it already. Maybe. There is still some hope. But not much. Combined forces of Fed (rate hikes), Government and Congress (tax hikes and/or spending cuts) can kill current recovery quickly and efficiently (is it the only thing our government can do efficiently?)

Probability: 20%

I'm getting less bullish. Careful, the path ahead of us is through unknown waters. "There be dragons".

I usually don't believe in conspiracies, but one little thing caught my attention. Yesterday and today somebody (or a group of somebodies) was going against banks the usual way (short common, long preferreds). At least action (banks down, preferreds up) suggested that. I just wonder, maybe information of coming rate hike somehow fell in the hands of those somebodies?

Full disclosure: at the time of publication author had long positions in banks: GS, USB and long positions in bank preferreds: BWF, PGF. Positions can change any time.

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1 comment:

Anonymous said...

банк USB? Серьезно? Они деньги не на флешках случайно хранят :)