PUNDITS SQUIRM, GOLD FALLS, DOLLAR RALLIES

Once again, we learn that lower interest rates do not cause higher inflation. Day after day for months on end, including yesterday and today, the pundits have cried that lower interest rates will lead to the collapse of the dollar and to super inflation. The actions of the market have made them look wise but only because the low dollar has pushed for lower rates not because lower rates have pushed the dollar lower. Yesterday, rates were cut by 75 basis points out of a total of 325 basis points, this is one of the largest percentage drops if not the largest percentage drop in FF rates ever. What happened, the dollar rallied and gold has fallen about 5%!

The markets are still working their way around the BIG TURN. Can you see it? Do you also appreciate that the extra "facilities" offered by the FOMC to support trouble spots has not necessarily increased the money supply and inflation. The evidence suggests that the FOMC has to some extent "sterilized" these extra loans by calling in other loans. The key work of the FOMC is done in what is called open market transactions. The FOMC is constantly buying or selling t-bills to and from banks to soak up money or to send money to the markets.

SEVEN WEEKS

In all fairness to the FOMC, the correct level of short rates is a moving target and it does make sense to see the effect of prior cuts before moving too fast. The time from the last cut to this one seemed very long but largely because the FOMC was so far behind the curve all last fall and winter. The big monster cuts in late January followed by 75 of 325 is huge. The total decline in the discount rate from 6.25% to 2.5% is VERY, VERY BIG!

COMMON SENSE IS SCREAMING BUY!

There are dozens of indicators screaming BUY. Hopefully the loudest one is your own common sense. The federal government has put money on sale! There are millions and millions of business opportunities available today that made no sense to fund at 6.25% (+ the bank spread) that make all the sense in the world at 2.5% (+ the bank spread). Lower input costs make a number of "losers" profitable opportunities. By the same token, consumers who were facing dramatic increase in house payments have gotten relief. Many a variable rate loan that would have seen an interest rate rise if rates had stayed up will now see an interest rate decline. The cost to carry many a rent house has fallen, many a cash flow "alligator" has turned into a "woolly sheep" ready for shearing. Consumers will see lower credit card bills, lower house payment bills, lower car financing opportunities and more.

NOW IS THE TIME TO FIND THE FEW EXTRA DOLLARS TO INVEST THAT WILL MAKE A HUGE COMPOUNDED DIFFERENCE!

NO, MARKETS DO NOT GO STRAIGHT UP BUT HISTORY IS ON OUR SIDE. THE WORST OF THE CREDIT CRUNCH IS OVER, GOOD MARKETS ARE BECKONING!