Today's 362 point sell-off is a reaction to yesterday's Fed Statement, High Energy Prices, a CIBC warning that Citigroup (C) may have to cut its dividend, and the REAL possibility of a recession.
The first thing irritating investors is the Fed's policy statement that said " economic and inflation concerns were equally balanced" which simply means don't expect any more rates cuts in the immediate future.
Wall Street is scared if the Fed does not continue lowering rates, the economy will fall into recession, and the sub-prime/CDO market will remain in turmoil.
In reality, if the Fed continues to lower rates, a recession will happen anyway since a falling dollar and high oil prices will continue to take disposable income from consumers.
I found yesterday's news on MasterCard (MA) quite interesting. The stock soared 32.76 points to $189.91 after profits increased on a boost in cardholder spending. Not to be a skeptic, but this morning we received news that home foreclosures doubled from a year ago. Since consumers home equity has essentially dried up (household ATM machines), one can assume that home equity extractions have been replaced by credit cards.
Oil stocks have pullback despite record high energy prices. Could it be that these stocks are factoring in the lower demand that comes with a recession?
As the REAL possibility of a recession kicks in, energy and commodity prices will fall in anticipation of slowing demand. This will give the Fed room to cut rates in the months ahead.
If the US falls into recession, US consumers will have less demand for products from countries like China and India. This will cause a global slowdown which will curb foreign demand for energy and commodities bring down prices, and cooling inflationary pressures.
We may not think so right now, but a recession may be a major positive. Once inflation subsides (energy and commodity prices), and economies in Asia catch a cold, the door will be wide open for further rate cuts in the US.
If economies around the globe begin to contract, or even go into recession, foreign Central Banks would begin to lower interest rates which would be a positive for the US dollar.
In the long run, I see a recession and a worldwide economic slowdown as the only viable solution to our predicament. If the Fed has room to lower interest rates without fears a of collapsing dollar, and higher energy prices, our economy can begin a new bull market.
It is naive to believe that any economy can escape or interrupt the natural course of the business and economic cycle. A recession is a very natural part of the process.
Yes, I know, you have heard all about the "Goldilocks" economy, and all of the convincing arguments that come with it. I need to remind you that "Goldilocks" is a fictional character, but the business and economic cycle are for real.
