There is an expression called a ‘Dead Cat Bounce’ and it is where a market or stock take a fall and then as people see it going down they believe it then represents value and buy in causing a temporary upswing, There is a moderate rise in the price followed by a spectacular fall. This is the ‘bounce’ but alas, if the cat is dead it continues shortly there after to fall. It comes from the reasoning that ‘even a dead cat will bounce if it falls from a great height’. Good school playground reasoning I suppose!
Is this what we are witnessing in the rally? I think that given all of the recessionary indicators present that it may be the lesser of the two evils to let a recession come in and run its course, the average recession is about a year, the average boom is about 5 years.
there is a belief out there that recessions are the ultimate evil, I can tell you that they are not, George Bush is the ultimate evil, but thankfully after eight painstaking years we’ll be rid of him once and for all. Anyways, the plan of action taken by the Fed will probably not be copied by the ECB so now all of the cosy collusion which happened earlier in the year – which I personally thought was great and a good indicator of the world acting in some kind of unison – between the Central Banks may now be undone as we enter a stage where we see the core differences between Bernanke and Trichet, the former is a capitalist the latter is an economist, both have their merits but its finding the correct path which gives rational protection which will decide the order of the day and also who is the greater witted of the two.
Personally I’m surprised that Bernanke is taking this course of action, he co-wrote an article in 1997 showing how raising oil and inflation always lead to a recession, its the same as jumping off a 30 storey building leads to death, so why try so desperately to avert this when doing so may be the metaphorical equivalent of just going up more and more flights of stairs so that when the pinch comes you are now going from the 45th floor instead of the 30th? Time will tell, this particular skeptic remains aligned to the Bears.
Then there area few interesting facts, The rate cut caused the following:
Japans Market fell 10% in two days
India down by 10% in a day (17% in two days)
and then today there is the rally – I call it a ‘bounce’ and doubt it will last. The fundamental causes for recessions are kind of like Darwin’s survival of the fittest, there is a time of plenty and every species seems to thrive, but this has to be counter balanced by some kind of environmental test, it may be a slowdown, a bust, or in the animal kingdom the proliferation of a new ultra predator, such as the T-Rex for instance. Then from the wreckage new opportunities unfold and we enter another growth stage. Recessions are not unlike ice-ages, thankfully they just don’t last as long.
The Fed is scared, so I’m scared, because when I see them make a three quarters of a percent rate cut BETWEEN meetings then there is something wrong, could they not wait the extra six days until their next meeting?
I don’t think we are out of the woods just yet.