Fed: Trapped

Obviously, my posts have become less frequent this past week as I do have a major client that pays me a tidy sum for my services. Given that credit markets were in a near freefall, monitoring and advising took precedence over most other aspects of my life in recent days. I do think all of this mind-boggling madness of mispriced credit indeed has the potential to create a scenario that unfolds similar to a depression era. But I also think its very odd that just a 7-percent drop in the S&P 500, after a near 30-percent 12-month rally, is eliciting screams for a Fed rate cut. I know its much much worse in credit markets. People have lost billions and will lose billions, maybe trillions more. But people have totally lost touch with what real risk, when it works against them, actually feels like. Some of these folks deserve to get wiped out and more institutions will also see their equity purged. The unfortunate thing is that some innocent folks will go down with them. And this can be credited partly to an environment of egregiously lax oversight and lose regulation. In years to come, the word, "regulation," that "pro-growers" had essentially been successful at coining as a dirty word, will no longer be greeted with hisses and boos. Which brings me to another point, we need to remove these folks from office that believe unconditionally, that regulation of any kind is bad for business and consumers at large. How many deregulated mishaps will we have to bail-out before folks realize this. Remember Enron? It was just a few years ago. Now there is a poster boy for how deregulation has the potential to defraud and ruin otherwise innocent folks' lives. In case its not obvious by now, business does not always have others best interests in mind when gone unchecked. It floors me when these folks take that tack of the "regulation v. deregulation" side of the argument. When "free markets" are left alone and go unchecked, its amazing how often we find the "free market's" invisible hands in our pockets. I'm saying this even though I have made a nice life for my family and myself from the fruits of the capital markets. I'm really very pro-business. Most of my friends and acquaintances that make their living from capital markets are fantastic forthright individuals. But its the small fraction that aren't that we all need some form of protection from. And we've simply overshot to the "deregulated" side of the equation. Again, I say all of this because what we're witnessing in capital markets can be attributed to a very lax oversight environment.

But I digress. It's Fed-watch Eve. I really am sensing that Ben Bernanke, the Fed and Treasury Secretary, Hank Paulson are hanging onto just a thread of credibility. Their protestations of the obvious in recent years ("No housing bubble, no inflation, subprime is contained") have made them pretty much irrelevant. I think the best case scenario this coming week for a Fed that is essentially trapped, is for them to again play on markets gullibility and not act overly concerned (again). They'll change their tune on inflation and say something like they've lowered growth expectation due to the "ongoing adjustment in the housing and mortgage markets." They might even hint at somekind of cut in the near future if they feel its necessary to stimulate credit markets "as mortgage markets continue to adjust." They'll use the words "adjust" or "adjustment" probably more than once in lieu of crash or financial dislocation. It just sounds better and keeps folks from slitting their wrists. But if they cut on Tuesday, it will look too much like panic. I think markets would bounce initially and then absolutely crumble when they see the dollar index heading for 75. Expect nothing, again, from the woefully trapped U.S. Federal Reserve.