Shock and Awe From Larry Kudlow

After a small hiatus of worrying about lagging inflation indicators, my favorite business talk show host has come back around on the need for further and more dramatic rate cuts. He makes some poignant arguments noting credit risk spreads increasing to August crisis levels recently. What took you so long Larry? Excerpts from his blog below..............................


Kudlow 101: More Shock and Awe


I have changed my mind.Until recently, I thought the Fed could stand pat at their December 11th meeting. However, I have completely changed my mind in light of the continuing credit market turbulence.Take a look at the commercial paper market (90-day asset-backed CP minus 90-day T-bill). Think mortgages, credit cards, auto loans, etc:






We’re back to almost 250 basis points. The spreads have widened so much that they’re close to where we were last August. The key here is that short-term money markets are not funding properly. This deterioration is what Mr. Bernanke and Mr. Kohn are looking at. It is of grave concern. It means businesses cannot function properly. And that could mean job losses.


Rest of Blog Post Here

Fed Backtracks on Hawkish Stance

Previously I posted how absurd the Fed's statements were weeks ago that growth and inflation risks were relatively equal. Now Donald Kohn is helping the Fed to backtrack and setting the stage for a much needed rate cut in December.........

Rate-Cut Hopes Lift Stocks

Stocks took a bull run on Wednesday, spurred by non-stop good news, including rising hopes for a Fed rate cut, signs of recovery in the battered financial sector and a stabilizing dollar.....

.......There was at least one spark for the day's gains, however: rekindled hopes for a further rate cut by the Federal Reserve. Fed Vice Chairman Donald Kohn said credit conditions had deteriorated again in previous weeks, and suggested the Fed could step in to bolster the economy. The remarks seemed less hawkish than those of other Fed speakers recently, implying the Fed might be more inclined to cut rates at its next policy meeting on Dec. 11.

"The Fed is giving the market hope for rate cuts…while financials are going through some self-help," said Alan Gayle, senior investment strategist.......

By CAROLYN CUI - WSJ

WSJ link here

Inflation? Bond Market Doesn't Think So

10-Year Treasury Yield at 2 1/2 Year Low

Treasurys Rally on Credit Market Fears; 10-Year Yield Drops to Lowest Point Since June 2005

NEW YORK (AP) -- Treasury prices rallied dramatically Monday on more credit concerns, pushing the benchmark 10-year note's yield down to its lowest level in two and a half years.

Trading was dominated by a fresh set of worries about the impact of deteriorating below prime home loans on the credit and housing sectors; those concerns led investors away from risk and to again seek the safety of government bonds.....

........The benchmark 10-year Treasury note rose 1 17/32 to 103 20/32 with a yield of 3.85 percent, down from 4.00 percent late Friday. The 10-year yield has not been this low since June 2005.

The 30-year long bond advanced 2 27/32 to 112 1/32 with a yield of 4.25 percent, down from 4.43 percent late Friday. ..........


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Growth and Inflation Equal Risk? I Don't Think So

I apologize for the infrequent post as of late, hasn't been too much that has riled me up lately, until now. With the Fed releasing it's short and long term forecast and minutes from it's last meeting, obviously they are posturing big time on the threat of inflation. Let me say this for the umpteenth time, inflation is not our problem. Inflation is 2-3 year lagging indicator that has been contained. The Fed needs to be concerned with growth which apparently they are internally by their minutes and externally by their somber forecast. I think they need to continue to cut 25 basis points or more at each of the next 4 meetings and see what happens..............

Squaring the circle over Fed's stance on cuts

Information in the minutes of the last Federal Reserve meeting and the new economic projections by the US central bank provide ammunition for both sides in the rate-cut debate.

On the one hand the minutes devoted greater attention to the risks to growth than the risks to inflation - unlike the statement issued after the meeting, which declared that the risks were "roughly balanced" following the rate cut.

On the other, the economic projections revealed that the Fed has a low assessment of the potential growth rate of the US economy - a view that would make it less inclined to cut interest rates when growth is sluggish for fear of igniting inflation.

The discussion in the minutes is hard to square with the notion that the central bank sees the growth and inflation risks as completely balanced.

"It was a little bit of a stretch for them to get to neutral, given the preponderance of downside risks in the minutes," says Peter Hooper, chief economist at Deutsche Bank Securities..............

Excerpts From Financial Times

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A Shot in the Arm for Jumbo Mortgages

Bernanke sets out jumbo mortgage plan


Ben Bernanke, Federal Reserve chairman, on Thursday put forward a plan to help revive the secondary market for jumbo (large denomination) mortgages that would involve Fannie Mae and Freddie Mac, as well as credit guarantees from the federal government.

Mr Bernanke told Congress he would support raising the limit on the size of the individual loans eligible for securitisation by the government-sponsored mortgage finance entities from $417,000 to $1m (€680,000, £475,000) on a temporary basis.

He suggested that Fannie and Freddie could pay insurance premiums on these loans to the federal government, which would "act as guarantor" by taking on some of the credit risk.

Charles Schumer, the Democratic chairman of the Joint Economic Committee, enthusiastically welcomed the idea and said he would try to insert it into legislation already before Congress.

The unusually specific proposal by Mr Bernanke reflects his disappointment at the continued problems in the jumbo market, and concern that this will aggravate the US housing downturn.

By Krishna Guha - Financial Times

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Silicon Valley Q3 Venture Capital Still Rolling

Start-ups fatten up: Venture capital spigot flows freely in Q3

MERCURY NEWS SPECIAL REPORT: VENTURE CAPITAL

With investments in the emerging "clean tech" industry continuing to soar, Silicon Valley companies received more than $2.48 billion in venture capital in the third quarter of 2007 - a sign that the valley's entrepreneurial culture is thriving despite broader economic worries.

The quarterly MoneyTree Report found that the valley's total venture investments, while dipping slightly from the previous quarter, represented robust 9 percent year-over-year growth. As usual, Silicon Valley and the broader Bay Area outpaced other tech hubs by a wide margin, reaping 35 percent of the $7.1 billion in venture investments in the United States........

For the venture capital industry, the upbeat quarter came at a time the U.S. economy quivered from the rippling effects of the subprime mortgage meltdown. The ensuing credit crunch as well as rising fuel prices have economists warning of a marked slowdown and a potential recession.

But the valley's tech-driven economy seems cushioned from the domestic worries as it relies increasingly on expanding global markets. VCs, in particular, exhibit a buoyant mood, according to a quarterly survey by University of San Francisco Professor Mark Cannice that is compiled in the university's Silicon Valley VC Confidence Index........

By Scott Duke HarrisMercury News

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With Productivity Up Sharply Fed Can Cut More

Productivity Rises, Easing Inflation Fears

WASHINGTON -- U.S. productivity jumped last quarter at its fastest pace in four years while labor costs fell, a welcome relief for Federal Reserve officials worried about the inflationary effect of rising energy and commodity prices.

Still, the productivity rebound may prove temporary if the economy slows as expected in the fourth quarter and in early 2008.

Nonfarm business productivity swelled at a 4.9% annualized rate between July and September, the Labor Department said Tuesday. That is more than double the 2.2% rate in the second quarter, which was revised down from a previous estimate of 2.6%. Productivity is defined as output per unit of labor.

The third quarter productivity gain was well above Wall Street expectations of a 3.4% rise. The increase reflects the recent mix of strong economic growth data with slower gains in payrolls.

Unit labor costs -- a key gauge of inflationary pressures -- fell 0.2% last quarter, the biggest drop since the second quarter of 2006. Economists had expected a 0.8% rise. Still, labor costs were up 4.3% from a year ago, suggesting some pressures linger.......

By BRIAN BLACKSTONE - WSJ

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Keep Cutting

Excerpts from James C. Cooper - Businessweek - Business Outlook

On Guard Against Recession
All signs suggest meager growth—if that—in the fourth quarter, with little improvement in early 2008. So the Fed is taking preemptive action

The goods news: The government says the economy grew 3.9% in the third quarter. The bad news: That's the last of the good news on growth. In the fourth quarter, look for the full brunt of the credit crunch, the latest downturn in the housing slump, $90-a-barrel oil, and growing caution by consumers and businesses to take their tolls. Most economists expect growth of only 1% to 2% this quarter, with little improvement in early 2008, and many of those folks have their fingers crossed. The risks to that somber forecast are almost all to the downside.

It is the unknowns that prompted the Federal Reserve to take out some more recession insurance on Oct. 31 by lopping a quarter-point off its target interest rate, bringing it to 4.5%. Whether the economy will be derailed by the tighter financial conditions caused by the mortgage-related turmoil in the credit markets remains the biggest unknown. Federal Reserve Chairman Ben S. Bernanke and other influential policymakers have noted recently that in times of high uncertainty, strong, preemptive action may be the right policy to prevent broad damage to the economy.......

........The problem is that the third quarter started strong but finished much weaker, with manufacturing, hiring, and confidence on the wane. The Conference Board's October index of consumer confidence dropped for the third month in a row, to a two-year low, partly reflecting job worries.....

......Business confidence is also slipping, which puts capital spending and payroll gains at risk. Companies are hesitant to commit money to new projects. Orders for capital goods other than aircraft have stagnated since April, and production of business equipment has made no progress since July. A credit squeeze could be one reason. Yield spreads between investment-grade corporate bonds and riskless Treasury notes, a gauge of investors' risk aversion, remain wide, even for AAA-rated companies.........

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