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September 5, 2007 (you may need to refresh your browser to view the latest issue)
“Risk”y Business
Written by Jeff Thredgold, CSP, President, Thredgold Economic Associates
Developments of the past week or two have raised the odds that the global financial community will survive relatively intact the risk crisis that has been front and center during the past five weeks. It is also likely that stock market gyrations and wild swings in investor and lender emotion will continue.
Late last week both the President and the Federal Reserve Chairman gave speeches designed to lessen financial market paranoia. The President announced a program wherein the Federal Housing Administration would guarantee loans for certain distressed borrowers, allowing them to avoid foreclosure and refinance mortgages at lower rates. Fed Chairman Bernanke made it clear that “The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly function of markets.”
“No” to Speculators
Both the President and the Fed Chair noted that their efforts would be to help people who faced legitimate financial pressures tied to rising mortgage rates, not speculators and others who found themselves in financial stress. The President noted “It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.” The Fed Chair stated “It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions.”
The Fed is still expected to cut its key short-term interest rate…the federal funds rate…from the 5.25% level in place since June 2006. The most likely timing of a cut remains September 18, the date of the next regularly scheduled Open Market Committee meeting. Most financial forecasters expect a 0.25% rate cut on that date, with another 0.25% rate cut or two on October 31 and/or December 11.
We largely agree with this scenario, although we suggest that the Fed will consider a more aggressive 0.50% rate cut on September 18. We also continue to suggest that IF financial market confidence takes a major hit in comings days, the Fed will not hesitate to enter the market with an immediate rate cut of 0.50% (or possibly more) prior to September 18. As we have also noted, the Fed’s strongest preference would be to see global financial markets stabilize and strengthen enough to allow the Fed to remain on the monetary sidelines beyond September 18.
Every 10 Years
In recent media interviews promoting our new book, econAmerica, I have tried to point out that shocks to U.S. and global financial markets are historically common occurrences, with 10-year cycles at play more recently. Twenty years ago saw financial markets and investors trying to survive the Crash of ’87, where the Dow fell more than 22% in one day. Ten years ago saw the Asian financial crisis of 1997, followed quickly by the collapse of high profile Long Term Capital Management in 1998.
Also reported last week was a significant upward revision to U.S. economic growth during the April-June quarter. The economy grew at a 4.0% real (after inflation) annual rate—the strongest growth pace since early 2006—and was revised up from the initial 3.4% growth estimate. Growth at about half that pace remains our view for the remainder of the year, with a return to near 3.0% real annual growth in 2008.
Money & Music
A client presentation that has become increasingly popular this year is entitled Money & Music, in which I am joined by my exceptionally talented wife, pop violinist and recording artist Lynnette Thredgold. We had two such performances in recent weeks for an insurance convention in Sun Valley, Idaho on August 13 just before lunch, and for a financial services client in Jackson Hole, Wyoming on August 24 after dinner. Please contact us for references for these events, as well as others.
Visit www.moneyandmusic.net for more information about Money & Music. You can also give us a call at 888-847-3346. Lynnette and I would love the opportunity to present Money & Music at your next special event.
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