Washington Insights:
The Madness Behind the Method

We do not use the word "disaster" lightly. And we don't use it to provoke, titillate or dramatize this country's fiscal condition. To paraphrase Sergeant Friday's famous quote from the old "Dragnet" days on TV...we bring you the facts, "just the facts!"

But here's the rub: Facts are hard to come by when the government releases questionable economic numbers. From "jobs" and "inflation" to the "trade" and "budget deficit" numbers, assumptions are often substituted for the plain truth, making it difficult to know the true state of our economy and our investments. The problem is then exacerbated by the reportage of the media via television, radio, newspapers, the Internet, Wall Street, etc.

No wonder so many people lose money. Half the time we're investing under false pretenses!

For a perfect case in point, we need look no further than the Federal Reserve's recent half-point cut in short-term interest rates. Think about this for a moment: If the economy is as healthy as Washington and Wall Street says it is, why would we need this "cheaper" money? Wouldn't a one-quarter percent cut have been sufficient?

The day of the interest-rate reduction, the market (read Dow Jones Industrial Average) closed UP more than 335 points, with roughly 200 of those coming mere minutes after the Fed's Open Market Committee (or, as Alan Abelson of Barron's aptly calls it, the Federal Reserve "Open Mouth" Committee) announced the cut.

But here's what you probably didn't hear: By the end of the day, as Wall Street cheered, commodities and currency traders jeered. The rate cut sent the price of gold up to $715 per ounce, the price of oil up almost $1 a barrel, the value of the U.S. dollar to a new low against the Euro and other currencies and long-term rates higher!

Why?

The larger than generally expected cut by the Fed made it abundantly clear to international commodities and currency traders and U. S. bond traders that this economy is a LOT sicker than Washington is willing to admit.

That's a bold statement, I know, but let me clue you in on the behind-the-scenes method to the Fed's madness.