Interest rates drop – Recession dead ahead

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Fed rate cut not enough to forestall recession or falling stock prices

Patrick Lalande on WordPress

The Fed interest rate cut is not enough to forestall a recession.  Think of it like this.

A big ship (the economy or the stock market) is full under way towards its next port of call (a growing, stable economy) when a storm (the sub-prime loan fiasco) pops up.   The storm winds whip up waves (little glitches in a capitalist system) and blow on the ship until, instead of pointing toward a safe harbor, is now pointing towards rocks (a recession). 

Each subsequent wind and wave (real estate decline, mortgage defaults rising, credit card defaults, inflation, etc.) provides a tail-wind to the ship.  We now we find our ship heading, way too fast, towards the rocks. 

Suddenly, the Feds cut interest rates.  By casual observance, everything calms down.  The wind stops its howling.  The waves smooth off.  The silence gets loud!  We are saved!  We want to start making reservations for the return trip (buy stocks) while the price of the room (stock price) is low.

But wait!  There’s more!

With so much speed and such a big ship, there is no way to stop or turn fast enough to avoid the rocks. 

The question that should be asked at this time is not, “Will the stock market or the economy turn around now?”, but “How bad will the damage be when the ship hits the rocks?”

With our ship, still too rapidly advancing toward the rocks, we may not be able to avoid a collision.  What we want to know, for sure, is the true extent of the damage, which has yet to be seen.  Politics and macro-economics aside, we are in a recession. 

My Advice; Until the ship has turned and heading away from the rocks, do not make reservations for the return trip.   

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