Reply #1: Market WrapUp: Fed Rate Cuts Can Backfire by Lifting Crude Oil Higher

[ozymandius]

BY GARY DORSCH

After Wall Street’s dismal start in 2008, there is a growing unease within the Republican Party that this election year could be one of scanty returns. The highly accurate “January Barometer” states that as goes the stock market in January, so goes the year. Since 1950, the “January Barometer” has a 91.2% accuracy rate. Food and energy prices remain stubbornly high, thanks to a chronically weak US dollar, and is sapping the pocketbooks of the US consumer.

Bernanke’s magic potion for whatever ails the US economy is: Fed rate cuts and massive money injections into the markets, dropped from helicopters and B-52 bombers. The Fed was scheduled to convene on January 30th, but held an emergency meeting after stock markets plunged in Europe and Asia, while Wall Street was closed for a holiday. Bernanke rode to the rescue of the badly shaken stock markets with a 0.75% rate cut to 3.50%, the biggest injection of morphine in 23-years.

But little thought was ever given to the destabilizing impact of big rate cuts on the US dollar, which can unleash hyper-inflation into the US economy, if it goes into free-fall. In the second half of 2007, the Fed’s rate cutting campaign back-fired by igniting an explosive surge in crude oil, grains, and precious metals, which in turn set off a whole new round of global inflation.
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The Saudi royal family is disturbed by the sudden plunge in the local stock market over the past two weeks. The combined market capitalization of the seven Gulf equity exchanges has fallen by 15% or $170 billion from a week ago. The Saudi Tadawul All-Share Index took the worst hit, losing 21% of its value, while Dubai market indexes in the UAE have seen their shares drop 15%.

http://www.financialsense.com/Market/wrapup.htm