Thursday, March 20, 2008
This has been an eventful week with the Federal Reserve having done a lot to increase liquidity in the markets, by both lowering the Federal Funds rate and the Discount rate, while also feeding more funds into the economy thru banks in investment firms. The impetus for this seems to have been the fear that Bear Stearns would go under and that other investment banking firms might follow. With the help of the Federal Reserve's finances J.P. Morgan bought the venerable old firm, cheap! The initial reaction to all of this activity was to see the stock market hold its own on Monday and go roaring up on Tuesday! This was followed today, Wednesday, with another downturn in the stock market. All and all it would seem that there are still more sellers than buyers in the market. We have not reached the bargain basement yet! The Federal Reserve seems to have restored the sense of adequate liquidity to the fixed markets and municipal bond markets in particular, that went through a very difficult period from the middle of February up until about a week ago. In my opinion, the changes that the Federal Reserve has made will take time to go through the economy before they have the desired effect. Generally such changes take anywhere from three to six months after implementation before they make the desired positive change. The changes made by the Federal Reserve at the end of January have not fully been realized! My thinking remains that the economy is in a recession, that there are currently some opportunities in fixed securities (bonds) and that stocks will either be lack luster or down until mid year. I also believe that the much-maligned U.S. Dollar is going to see a rebound during this period, which makes me hesitant to venture too much investment money into international stocks or bonds. The one overriding concern that I have is inflation. With the monetary policy of the Federal Reserve focused on the economy and making money readily available it may lead to higher levels of inflation. Time will tell.