Yep, even with fed funds down to 1.75 by the end of 2001 and then 1.25 by November of 2002, the market got pole-axed -- not reviving until early 2003.
It will be interesting to see whether history will be repeated. Todays rate cut, if you read between the lines, is an admission by the Fed through its action of a 50 bps cut that it is dealing with both recession and systemic risks.
That brings me to mention the dollar which swooned today - hitting a record low against the euro at near 1.40 and slumping in the basket of currencies known as the dollar index. When the Fed started cutting rates in '01, the dollar index was perched at 107. Today it finished at 79.22! The forex judged the move by the Fed as a big mistake, at least where the dollar is concerned. Has the Fed set the stage for an insidious sort of arbitrage where money will flee away from the U.S. and into higher yielding assets?
The monthly Treasury International Capital report, known as TIC, showed international investors bought a net $19.2 billion of long-term U.S. securities in July. That's way below the $97.3 billion in June. This will be the key report to eye each month. The implications of weakened inflows of foreign money into long term Treasurys will have a profoundly negative impact for Uncle Sam and for you and me.
A Barclays report summed it up this way: "With foreign investors holding a quarter of all outstanding U.S. government bonds, the possibility that Fed easing will reduce foreign appetite for these securities, resulting in higher risk premium for U.S. assets and a weaker dollar, is very real in our view."
With a weaker dollar, comes reduced spending power, or inflation. The gold bugs loved today's rate cut and sent the October futures up to the $724 level. A weaker dollar also impacts the price of crude oil since it takes more weaker dollars to pay for it. Crude is trading above $82 tonight.
Option open interest has never been higher, the next fun event for the market --quarterly expiration on Friday. More on that tomorrow.