For the second time this year, on October 8th, the Fed announced an emergency rate cut.

A man named Jeffrey Staut, the chief strategist at Raymond James, stated shortly afterwards, “This better work. This is the last chance.”

In the two days following, the Dow shed more than 1,000 points. True, it gained it back the following week (undoubtedly a result of short profit-taking and bottom-hungry purchases rather than real interest), but it has since shrugged off that attempt at fixing a much larger problem and we’re back where we were on October 10th.

Seems like we’ve had a lot of “last chances” lately. Luckily, our government is adept at creating money (at the expense of the critically injured US dollar), and can be just as proficient creating new last chances.

With the current federal funds rate nervously sitting at 1.5%, few people can look each other in the eye and reasonably expect the Fed to do nothing when they meet again next Wednesday. Big, Beleaguered Ben and friends have so few options anymore, they might as well chop it down to match the lowest rate in history.

The federal funds rate in limbo – how low can you go?

That is, of course, assuming they decide to pull it back by only half a percentage point. The fed funds futures are currently pricing that in, but there are some mumblings about a “what-if” scenario, where they could slice 0.75% off the rate, bringing it lower than ever.

The Chicago Board of Trade is giving evidence that the chance of this happening is around 25%.

I see a problem here.

It’s not as if the rate is being cut from 13% to 4%. The rate was already quite low, and regardless of the fact that many companies and banks are operating on already thin margins, and a rate reduction should conceivably help, anyone with a strong knowledge of the financial system can tell you that the effect this rate cut is designed to have is just as much, if not more, psychological than anything else.

More importantly, with each rate cut we experience, there are fewer and fewer options for rate cuts in the future. This is not a matter of financial theory, but rather a function of simple arithmetic. It is not possible, as a matter of economics, for the federal funds rate to go negative – which would imply that the “cut the rate” strategy will soon no longer be an option.

Lowering the price of food won’t matter if no one is hungry.

By cutting rates, the Fed believes that the lower cost of borrowing money will encourage spending by both businesses and consumers.

However, the real problem does not have jack to do with the cost of the government’s money. It has everything to do with the fact that banks and other lending institutions are suddenly (and rightfully) afraid to lend and obsessed with maintaining a certain amount of near-term capital… for, well, whatever the hell happens next.

Dropping rates now would basically be throwing whatever food you have in the lifeboat overboard and hoping that it makes the fish happy enough to drag your ass home.

The real solution may be Father Time.

In a recent interview, John Derrick of Global Investors, Incorporated, stated something profound. Not profound because it is radical, revolutionary, or even clever.

It’s profound because it demonstrates that someone is actually thinking realistically for a change.

He stated that if the markets don’t take to the rate cuts the way we’d like, then the elapsing of time may be only true solution for the crisis we find ourselves in.

Thank you, John.

I happen to believe that this is true – that none of the bailouts, rate cuts, or other band-aids are going to have more than a small effect on the massive correction taking place. This is not only because people are fearful (which is not remedied by complicated economic and financial adjustments, the ramifications of which the average investor may not fully understand), but also because the recession is global. Instead of being limited to this side of the Atlantic, Europe and Asia are feeling the same painful effects that we are.

That means we’ll be in this one longer than usual.

No effect, fine. Reverse effect , bad.

The worst part about a federal rate cut (among other feeble attempts at controlling a world economy that has been devastated by corporate deception leading to mass mistrust), is a personal opinion of mine that it could actually have the reverse effect.

The rate cut that occurred a couple of weeks ago was followed by a huge selloff, a brief rebound, and then further tumbling.

It is entirely possible that, like each of the attempts the government has made at plugging the leaks in a dam that is already broken, the American investor will hear the good news, see no immediate result, and lose what little faith he has left in the system.

A government that is pulling out all the stops, as it has thus far, gives the impression that it doesn’t know what’s going to work and therefore will give the sick patient a shot of every type of antibiotic left in the hospital.

This broadcast of uncertainty does not lead to rampant stock purchases. Uncertainty, instead, has historically been the single greatest enemy of a stock’s price.

Stay tuned, I might get those $75 spyders after all.

John K. Whitehall
Analyst, Oxbury Research