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Not Yet Enough!

Tuesday, January 22, 2007 - by Dan Nussbaum

Today's rate cut of 3/4% came sooner than expected---but is still not enough.
 
With the 2 yr note now down to 2.05%---the Fed will now need to get down to 2%--or lower.
 
The question is--how--and how soon---as well as---will they ever get ahead of the curve will all of its implications.
 
The cut today---just 8 days before the next scheduled meeting---automatically guarantees AT LEAST another 1/2 pt cut next week to 3%. With any luck, the Fed will cut 1 full pt to 2.5%---setting the stage to "catch" the market by March with an inter-meeting cut in Feb before the March  meeting. I now see the fed needing to get to 1.5% by May. No one believed me before--believe me now.
 
What is interesting about all of this is that while you see an economic capitulation due to the FED being too restrictive for too long---this downturn, started and caused by higher rates which caused the worst housing downturn since  the Great Depression---is actually starting to see the first signs of life. Let me explain--
 
While all of the pundits have been pondering whether or not the US would go into a recession--it was clear to me from the beginning that the recession started Aug 10th--just after the capital markets froze. There is little doubt that we were heading that way--but the seizing of the markets accelerated the decline. The Fed's response to this was--and has proven to be--anemic as they stay consistently behind the curve, and noticeably above the 2 yr bond. They have continued to mis-read the unemployment levels---due to the fact that a huge amount of people have lost their jobs--but these people were not employed, they were independent contractors! They were real estate agents and brokers, mortgage brokers and bankers, appraisers and pest control companies, movers, plumbers, electricians,  carpenters, etc. You get the drift.
 
Against this backdrop of a worldwide stock market decline and clear capitulation of panic selling-----has come the first glimmers of spring with the first signs of life in the housing market---the very market that led the downturn. How do I say this?
 
We started to see the first signs of life when searches for real estate turned the corner December 26th---when all of a sudden, our budgets in certain markets were not enough to satisfy the demand for people looking for homes. We continued to see this starting Jan 3rd when real estate leads---those people who either contact us because they want more information on a home or an appointment  to see them--simply exploded. This has been starting to be reinforcing by the number of people who have not only contacted us--but want to see homes NOW. Up to this point, the attitude by prospective home buyers has been--I'd like to see the home--maybe in a week or two--"I'm kinda busy." This has dramatically shifted.
 
As you know, housing tends to lead a market into a recession---but it is also the leading indicator for an economic revival and tends to pick up midway thru the recession. Since postwar recessions tend to last 10 months--midway would be Feb 10th---and we're not too far from that. While it would be very easy to say that this is not a normal credit-led downturn by any means [and I completely agree] this must be held against these important facts---that the Fed started lowering rates immediately following Aug 9th's debacle [rather than waiting for the economic fall-out to be more widespread before finally acting]---and that they actually started to reflate the economy starting last May when they embarked on a policy of increasing M 3 by a 15.3% annual rate. These two VERY important factors will get us out of this sooner than the consensus feels. Additionally, I now expect real estate prices to be HIGHER at the end of the year and a huge number of transactions to occur due to these sharply lower interest rates. I feel that today's emergency interest rate cut not only says that they are going to be cutting much more than people expected---but it will accelerate the home buying process and recovery---since we have three years of pent-up demand to go along with these sharply lower interest rates.