IMF sharply cuts US economic growth estimate - 9-Oct-07 - Generational Dynamics

Generational Dynamics Web Log for 9-Oct-07

IMF sharply cuts US economic growth estimate

But all that matters to investors is that the Fed is less concerned than before about inflation.

Please read the new article I just posted: "The bubble that broke the world."

It compares what's happening today to what happened in the 1920s. I was able to make some specific new predictions about the scenario that I expect to unfold in the next couple of years, especially in our relationship with China.

On September 18, the Fed shocked investors by announcing a ½ point interest cut, twice as much as had been expected.

Since then, believing that the Fed had saved the world, investors have pushed the Wall Street markets up to new historic highs.

On Tuesday, the Fed released the minutes from the committee meeting that it held on September 18 at which the ½ point decision was made. It's called the "Fed Open Market Committee," and it releases the minutes of its meetings several weeks after each meeting is held.

The minutes contain some pretty negative stuff, such as "consumer sentiment turned down in August" and and the "housing sector remained exceptionally weak." But none of that matters.

All that matters is that "with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation."

Even this comment on inflation was part of a larger sentence: "With economic growth likely to run below its potential for a while and with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation."

So there's the usual craziness. Economic growth is slowing -- which means that corporate earnings will go down, which SHOULD mean that stock prices should go down.

But in the continuing bizarre, upside-down world of the investor, bad news is good news. Why? Because bad news means that the Fed might lower interest rates again, and everyone knows that lowering interest rates will save the world again, and any time the world needs saving.

In fact, the signs of an economic downturn are growing. The International Monetary Fund (IMF) is expected to report on Wednesday that the US economic forecast is down sharply.

And Rodrigo Rato, outgoing managing director of the International Monetary Fund, has warned that the credit squeeze was a "serious crisis" that was not over yet and would curtail growth worldwide.

As I read through the book that I quoted in "The bubble that broke the world," I was struck by two things. First, how total, absolute and universal the self-delusion was in the 1920s among investors, financiers, journalists and politicians. And second, how all the same elements of universal self-delusion that occurred in the 1920s are recurring with full force today.

How on earth, with all the bad economic news coming out, could investors possibly think that this is good news because the Fed might lower interest rates again, and that the stock market bubble, which is already astronomically large, should be blown even larger?

Almost every day, investors act en masse to do something which, by "normal" standards, if absolutely insane. What happened on Tuesday is just one more example. (9-Oct-07) Permanent Link
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Generational Dynamics Web Log for 9-Oct-07 IMF sharply cuts US economic growth estimate

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Generational Dynamics Web Log for 9-Oct-07
IMF sharply cuts US economic growth estimate