Something smells rotten in Denmark; rate cut causes a market meltdown?
Normally, any hint of a lower interest rate to come sparks a rally in the equity markets. A confirmed cut in the Federal Funds rate, as what happened Wednesday afternoon, will usually set off a veritable stampede into stocks. Interest rate reductions are the stuff that releases animal spirits in the stock market, causing prices to soar.
No matter how many times the Dunkin’ Corporation insists “America runs on Dunkin”, it is cheap money that is the fuel that America runs on. Stocks slumped, the dollar soared and the cost of borrowing money became more expensive on Wednesday, as the Fed struck a hawkish tone on the economy, despite cutting the short-term interest rate it controls.
The S&P 500 index dropped 3 percent, its biggest decline since the start of August. The Russell 2000 index of smaller companies that are more closely tied to the domestic economy tumbled more than 4 percent. The Dow Jones industrial average fell for a 10th-straight day, its longest losing streak since October 1974.
In the lead up to this debacle, there were several canaries in the coal mine indicating over-valuation if you were attuned to them. A company…
