Head East Young Man, Head East

Looks like a new war is breaking out in the wild, wild, west between California and Nevada. Now if Nevada could just promise to put Harry Reid on the unemployment rolls I could really get behind this campaign.

I don't blame Nevada at all for taking advantage of California's woes. I would however warn them to make sure they only go after the businesses and make sure all of the other fruit loops in California stay there, or they will take your state and turn it into what ruined their state in the first place.

And no the irony of the fact that I got this from a British news source (BBC), has not escaped me. Our news here in the states is all about dead celebrities, soon to be dead celebrities and the latest reality show update.

Bear Stearns Bailout

The Feds have bailed out Bear Stearns.

Bear Stearns Cos. Inc. went on life support Friday, forced to accept an extraordinary bailout package after being deserted by the clients and counterparties at the heart of the Wall Street firm's business.

Triggering a sell-off throughout the financial sector, Bear shares slumped 36% to $36.71 during afternoon trading, their biggest one-day drop in at least two decades.

The upshot is this: there is so much uncertainty in the market right now that the major players are hesitant to do much business with anybody who has a large exposure to the mortgage business.

J.P. Morgan was involved as a conduit for the financial support from the Feds, as the Fed can only loan to a commercial bank. This loan is good for 28 days and buys some time to find a buyer for Bear Stearns or some other long term solution.

Don't be surprised other investment houses need to be propped up. Also, don't be surprised if J.P Morgan or some other commercial bank ends up acquiring Bear Stearns for a while.

Long term, I think the Fed's will end up having to buy up a lot of these bad mortgages. They are more or less doing that now anyway.

Europe and the Weak Dollar

European policy makers are unhappy about the weak dollar.

Worried euro zone policymakers pressured on Washington on Tuesday to do more to halt the dollar's decline, a day after the U.S. currency hit a record low against Europe's single currency.

Guy Quaden, Belgium's representative at the European Central Bank, said in an interview on Belgian radio: "Things are becoming exaggerated".

So why do they care?

Belgian Finance Minister Didier Reynders, attending a second day of meetings with European colleagues on Tuesday, put it less bluntly than Quaden but the basic message was the same, that Europe was counting on active U.S. help to tackle an issue which makes life harder for euro zone exporters in world markets.

It boils down to export/import activity. A weak dollar makes U.S. goods very cheap for foreign buyers and conversely makes European goods very expensive for U.S. buyers. Therefore, it helps the U.S. trade picture and hurts the European trade business.

Actually, there is not a whole lot Washington can do about the weak dollar but try to talk it up. The main cause of the dollar slide is the difference in interest rates between the U.S. and Europe.

The higher interest rates in Europe cause investors to sell dollars and buy other currencies (such as the Euro) to get the higher interest yield in those other country's.

Interest rates are a monetary policy item, which is in the hands of the Federal Reserve Board and not Congress or the White House. When U.S. interest rates rise relative to other rates you will see the dollar appreciate again, but right now, the Feds seem to be headed for another discount rate cut.

Europe and the U.S. both have cooling economies and rising inflation. In monetary policy, you can either deal with a recession or you can deal with inflation, but you cannot deal with both at the same. Europe has chosen to deal with the inflation via raising their interest rates, and, I believe, hoping the U.S. would deal with the coming recession and save Europe the trouble.

The U.S. Fed has chosen instead to deal with the threat of recession by lowering interest rates (and quietly expanding the money supply via Open Market Operations).

Wall Street Buzzing Over Rate Cut

Wall Street is abuzz with anticipation of Fed action later today. The only debate is will the Fed cut the discount rate by 25 basis points or 50?

25 or 50? Bernanke's Fed faces a key test

Most economists think the central bank will cut by a quarter-percentage point to 5.0%, but some are attracted to the somewhat strong move of a half-percentage point.

"While the arguments favoring a bold move are compelling, we believe the chances of a 25 basis point cut carry a higher probability," said Michael Moran, chief economist at Daiwa Securities America Inc., in a note to clients.

The Fed's are not exactly what you would call bold decision makers. Therefore, I say they will cut the discount rate 25 basis points while also quietly expanding the money supply via open market operations (which most of the public does not understand), and then they will sit back and see how things go.

Regardless of all the analysis and computer modeling they do, the Fed's will almost always just tweak rates by 25 basis points at a time and then see what happens.

By the way, this also presents a tasty profit opportunity out there for anybody who knows how to set themselves up correctly to take advantage of a rate cut.