The stock market was overjoyed -- the Fed is making an extra $200B available to banks and financial institutiosn, hoping that liquidity will make them more likely to invest in mortgage backed securities. The idea is that with more investors for the paper, the institutions will be more likely to make mortgages in the first place, and at lower rates.
BUT . . . what about homeowners who are facing foreclosure? It will take months for this new liquidity package to float through the economy. And during those months, the foreclosures will continue to mount! And the headlines will continue to remind other consumers that the economy is in precarious shape. That worry destroys confidence, and consumer spending!
The stock market liked the move, for sure! But stocks don't question why the liquidity is there to buy stocks; stocks just move higher because buyers are willing to be aggressive, pushing prices higher. In fact, for a time stocks should definitely benefit from the liquidity that creates inflation -- because while the value of the dollar declines in inflationary times, stock prices can rise -- thus becoming a hedge against inflation.
But just look at interest rates, gold, and oil!
Mortgage rates on 30 year fixed rate mortgages have risen from 5.5% in January to 6.03% last week -- because the banks weren't lending. Now banks will start lending again. But mortgage rates are set by long term Treasury rates, which are set at auction. And there will be a lot of worry about committing to buying long-term treasuries in the face of potential inflation.
The old mantra of the successful investor has always been: "Don't Fight the Fed!"
Now the Fed is doing everything possible to drive interest rates down and flood the market with liquidity. They'll likely cut short term rates at least 50 basis points, or more, next week.
But the U.S. is deeply in debt -- $9 TRILLION -- which we need to borrow to keep our government afloat. Who in the world will lend us that kind of money, at lower interest rates, in the face of massive Fed intervention to create "liquidity" (inflation)?
The gold market, and oil -- which is priced in dollars -- are telling you the world isn't so happy about the Fed's actions, even though the U.S. Stock market rallied.
And worried homeowners, who find themselves without equity to refinance as home prices drop, might not own those homes long enough to benefit from the inflation that will ultimately push prices of assets higher. That's the Savage Truth!
