Call it lucky number thirteen. That's our conservative count of stories today related to the so-called credit crisis and subprime meltdown in just the Wall Street Journal alone. That's one heck of a lot of ink to spill for a relatively small portion of the US economy.
Indeed, it would be extremely difficult, if not absurd, for the bears to argue reality is truly worse than today's dire expectations pertaining to the credit markets. When worries become bigger than reality, it means the story is priced in to stocks and therefore no longer has power to move markets. This may well be the most covered financial story of the bull market thus far. Unless you've relocated to Siberia, it's pretty certain you've caught wind of credit crunch headlines by now.
Nonetheless, market turbulence over the last couple weeks has investors once again expecting a rate cut from the Fed to "bail us out." Cries from economists like, "The only thing the Fed can do to get out of this liquidity crisis is cut rates," are quickly becoming a chorus in the financial press.
The beginning of 2007 was eerily similar. Pervasive sentiment reigned among investors that the economy would surely sink into recession without a little Fed pick-me-up in the form of rate cuts. That didn't prove necessary before, and it's almost assuredly not the case today either.
Though not impossible, we find it highly unlikely the Fed would do anything at this juncture other than sit tight. Bernanke has stated very strongly in the past the Fed's focus is on low unemployment and low inflation. Both are contained nicely at the moment. These, coupled with stronger than expected GDP growth in the second quarter, don't provide much ammo for the Fed to get spooked over. (See our past commentary: "Just doing our job, Ma'am" 7/20/07 for more.)
Bernanke is already getting some major finger pointing in his direction!
Bernanke's Bear Market
Editorial Staff, The Wall Street Journal (*site requires registration)
Ending Greenspan's 'Put'
By Breakingviews via The Wall Street Journal (*site requires registration)
We find it difficult to comprehend why suddenly the Fed would be interested in coming to the aid of the credit market by lowering short interest rates. In our view, the only thing that's materially changed over the last several weeks is sentiment. Global economic fundamentals are very robust, and long-term interest rates have actually declined recently—from levels still below historical norms. Coupled with the stock market's recent decline, stocks are at or near their cheapest levels globally since 2007 began. For our updated thoughts on the credit markets, liquidity, subprime, and recent market turbulence see these past commentaries:
• In the Meantime (7/31/07)
• Corrective Measures (8/3/07)
• Debt Disambiguation (7/26/07)
The hype over subprime and credit markets seems to be growing by the day. Investors hoping for a credit messiah in the form of our bearded friend Bernanke are likely to be disappointed. But that's ok—soon enough the dust should settle to reveal no savior was needed in the first place.