This week we do something a little different in our Outside the Box. Every weekend I get a very information-filled blog called Investment Postcards from Cape Town (http://www.investmentpostcards.com) by Dr. Prieur du Plessis. In it he highlights what he thinks is the most important portion of the writings of 10 to 15 analysts from around the world on the state of the economy and investing, and summarizes the news and data. I find it very useful, as Prieur generally finds a lot of interesting pieces that I miss and go on to read in my effort to stay on top of the markets. You can subscribe on your own if you like by activating the subscription option on the blog.
Dr. Prieur du Plessis is chairman of the Plexus group of companies, which is a well established money management firm in South Africa, one part of which is essentially the Morningstar of South African mutual funds. And I am proud to say he is my South African partner.
This week in Outside the Box we take look at the how the Fed acted in the last debt crisis of 1998 and what they are likely to do this time. How will the Fed address the looming liquidity crisis stemming from the subprime debacle primarily, and from the abused Yen carry-trade, lax lending practices, and excess liquidity, generally? Asha Bangalore, Vice President and Economist at the Northern Trust Company, believes that given the actions taken by the European and Japanese banks in response to credit and liquidity concerns in the markets by an infusion of €200 Billion, and ¥600 Billion, respectively, the Fed will also take the customary action of cutting interest rates to assuage the market at the October 30-31 Fed meeting.
Your humble analyst believes that a rate cut will not likely occur on account of inflation concerns, and I thought you should read an opposing and well-reasoned view. As an aside this makes the CPI numbers which will be released this Wednesday very important and any difference from the expectations will have the tendency to move the markets significantly. If inflation comes in high as it did last month, the market will take that as a sign that the Fed will have less room to cut rates. Conversely, if inflation is lower than expected, you could see a real leap. As a reference, the previous CPI (MoM) was .2%, with economists estimating it coming in at .1%, CPI Ex. Food & Energy (MoM) was .2% with no estimated change forecasted.