17th of August. Friday. Fed lowered the interest rate of its discount window by 0.50%, from 6.25% to 5.75%.
The discount window is a place where banks can shove all kinds of weird and crappy assets to the Federal Reserve in order to get loans.
Notice how the discount window rate was 1% above the Fed target rate. The difference is in the Fed target rate, banks can only get that rate providing "approved" assets as collateral. While the discount window allows for all sorts of crap.
Before I say what central banks want. Lets begin with what they (supposedly) don't want.
1. They don't want to destroy the value of the currency.
2. They don't want to encourage failed practices of bad lending/investment ie. do not want to encourage moral hazard.
Now, what don't they mind...
1. They don't mind people having their equity wiped out.
Therefore, what they do want...
1. An orderly selling in order for prices to fall to a level that truly reflects the value of assets.
I was an angry man as a bear on Friday when the Fed made its move... Then I began looking into what I wrote last week...
Turns out that I was an angry man LAST FRIDAY too when the Fed stepped in to provide liquidity...
I suddenly realize, the Fed basically is hoping to do just enough to slow selling. Notice I used the word SLOW and not STOP.
Falling will proceed, perhaps like last week, when on Monday and Tuesday, equity prices barely moved after gapping up 200 pts to open on Monday.
But by Wednesday, the carnage reignited.
Also, part of the tactical reason to announce on the 17th August Friday, was because a lot of put options in the US was going to expire. By jacking up the market for Friday, a lot of bear's financial strength was weakened (mine certainly was), thereby reducing the desire and ability to further short the market. The effect will be SLOWED selling.
Falls of a couple hundred points a day for the HSI or a 100pts a day for Dow is highly acceptable to the Federal Reserve. The fed will have to see 1000pts drop on consecutive days to act again.
For all those people who says this is over. I can tell you this...
IT AIN'T over until every asset can be priced.
Then with all assets priced...
IT AIN'T over until those with no equity left is wiped out,
IT AIN'T over until banks announced their losses,
IT AIN'T over until everyone knows where their balance sheet stands...
Then its over.
When it's over... do you think the market will be higher or lower than now?