This morning, Merrill Lynch downgraded a bunch of large-cap banks and said that there is a 60% chance of a recession. And in response to this...
The market's up. Pretty substantially, too. So what gives? You'd think that with all of the liquidity concerns, a wholesale downgrade of banks would be taken as bad news.
That's the problem, though. I think the market is buying on bad news, in the hopes that bad news will spur a rate cut by the Fed. I've heard predictions of 50 basis points, and hopes of 100 basis points.
Cheap money's great, don't get me wrong. However, I don't think it's the Fed's job to try to stabilize the stock market, or the housing market. Using interest rates as a tool to control across-the-board price inflation is one thing; micromanaging individual components of the economy that are correcting, or overbought, is another thing altogether, and it's not a good thing.
Especially for us in the insurance industry. Carriers are limited in their investment options. They're also not necessarily as efficient as they could be, often due to substandard backoffice technology and a reluctance to upgrade. Combine that reluctance with a drain on surplus, and you have a recipe for more of the same headaches for carriers - headaches they've been living with pretty much since Y2K.
Let's hope that the Fed does the right thing, and keeps the rate where it's at in two weeks. The market will sell that day, but in the long run, we'll be better off.
