Free money for everyone… forever.

The Fed’s 75-point cut yesterday makes history on two counts. At a “range” of 0-0.25%, the Fed’s rate hasn’t been this low in half a century — and they have never set a range to their target lending rates.

But that wasn’t all. In a monetary version of “shock and awe” policymaking, the Fed threw “all available tools” at the crisis. Other groundbreaking details include:

• An assurance that the nearly nonexistent rate will stay low “for some time”
• Confirmation that the Fed’s $600 billion mortgage-backed security and agency debt repurchase program will roll out “over the next few quarters”
• A hint at the FOMC’s interest in purchasing longer-term Treasury securities
• Promises that the Fed “will continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

“This announcement,” Dan Amoss wrote to his readers, “convinced the markets that the Fed will inflate as much as necessary to stave off deflation. I expect the Fed to work even closer with the Treasury Dept. under the Obama administration. This may include a major mortgage refinancing initiative in 2009. A hint of such an initiative could spark an extension of the stock market rally that began in late November.

“This radical new dollar debasement will not come without consequences; expect further gains in the price of precious metals.”

In anticipation of this “shock and awe” rate decision, Dan helped his Strategic Short Report readers take 245% profits just hours before the Fed’s announcement yesterday. How about you? Learn more here.

Nearly all stocks soared after the Fed’s press release. Expecting a 50-point cut and far less aggressive policy implementation, traders went all in. The Dow rose 4.2%. The Nasdaq and S&P 500 jumped even higher.

Banks, of all freaking things, led the way… now that they can get their money for nothing and their chicks for free. If Greenspan’s 1% rates following the tech bust begat a bubble the size and scale of the housing mess — just imagine what mayhem a few quarters of 0-0.25% rates will do. Oy.

At least… that’s what we suspect the Fed was thinking.

This morning, it looks like the rate cut buzz has already worn off… the Dow opened down 80 points.

“The Federal Reserve wants us to believe,” opines GoldMoney’s James Turk , “that the sole problem reverberating throughout the world is simply a lack of liquidity, but it is nothing of the sort. It is in one of solvency. Most banks and many consumers and companies are overextended, and their precarious financial position cannot be put right with newly created dollars.

“Many loans were made recklessly and imprudently, and the borrowers as well as the lenders are suffering the consequences. Low interest rates and easy money will not make economic those houses built on speculation, those shopping malls built unnecessarily and those companies whose business models rested upon ill-founded assumptions about the health of the U.S. economy. The debts of imprudent borrowers cannot be repaid in a timely way because they own assets acquired in the boom that with the benefit of hindsight are uneconomic even with zero interest rates.

“What’s needed today is the same medicine that has over time inevitably cured every other bust. It is capital and savings, and unfortunately, they are in short supply in today’s America. But the Federal Reserve will not be deterred from pursuing the reckless path it is on. They seem to think that they can avoid the bust, and further, that the economy can emerge unscathed from years of imprudent and reckless credit extension by the banks.

“History says the Fed is mistaken, but history also tells us something else. The consequences of the Fed’s actions will debase the dollar, perhaps irreparably so.”

The U.S. dollar has been falling all week. After a big step down Monday, the dollar got slammed again yesterday following the Fed’s cut. Roll the videotape:

The dollar index has fallen about 1 point every day over the past five… huge moves for the typically sluggish index. This morning, the index is once again battling with 80.

The euro soared after the Fed’s announcement, up a full 5 cents, to $1.41. The pound rose 2 cents, to $1.54.

And the yen found itself a new 13-year high at 88. And why not? Now that lending rates in I.O.U.S.A. are essentially the same as in Japan, what’s to stop the dollar from becoming the new carry trade currency of choice?

(BTW, we’re working on another way for you to profit from the falling dollar… we’ll fill you in Friday.)

But the good news… gold. Our favorite metal is up again today, to around $850.

Oil didn’t get much of a kick from the dollar’s fall yesterday. The front-month crude contract stayed put at $44. Even after OPEC announced they would cut back production twice as much as expected this morning, oil fell. It’s around $41 as we write.

Still, it looks like the bottom may be in for gas prices. The national average price at the pump has been inching up all week, to now $1.66.

50% of American companies are currently planning on reducing labor costs, says a recent survey by human resources firm Hewitt Associates. Companies that tell Hewitt they will be cutting back say the average pay raise for 2009 will be less than 3%… the lowest average hike in the study’s 32-year history. Of all industries, auto-related workers can expect the worst raises — about 1.4%, the survey said. Those in construction and engineering will do best, averaging a 4.5% bump.

So how can you come out on top? Hewitt reports that business will be probably focus on performance-based rewards next year. 69% of companies polled offer incentive-based pay, while 24% say they’ll add such plans next year.

Facing a $15 billion budget gap, New York Gov. David Patterson called for 88 new fees and taxes in his newly revised state budget. Included in this reform are new taxes on movie tickets, taxis, soda, beer, wine, massages and cigars. All kinds of motor vehicle licensing, registration and ticketing fees will rise… there’s even an “iTunes tax” that will nickel and dime “digitally delivered entertainment services.”

“We’ve made too many promises and asked for too few sacrifices,” said Patterson. “We’re going to have to change our culture as we know it.”

Whoa, David… you want to tone it down a bit? This is America. Home of the brave. Land of the free (and easy credit).

So the former chairman of Nasdaq bilked investors of $50 billion dollars… what’s the big deal?

The sum pales in comparison to the unfunded liabilities of the government. And at the very least, “investors” had a choice whether to give him their money or not.

Uh-oh… keep this off Capitol Hill, too: According to a USA Today survey, 67% of potential car buyers would consider buying GM, even if it entered bankruptcy. The newspaper’s poll (in conjunction with Gallup) flies in the face of the data we hear touted by congressional Democrats almost daily… 80% of their respondents said they wouldn’t buy from a bankrupt auto biz.

“I don’t think,” writes a reader, “the results we have seen so far in this downturn are anywhere near as bad as they are going to get. My partner and I have been traveling quite a bit recently, including three weeks in India, and we have found Fortune 100 companies for the most part all acting the same way worldwide. No new hires. No raises. No bonuses, no parties, no kickoffs. Basically, battening down the hatches. This is going to have a huge impact on all the service- and support-related industries — conventions, party planning, hotels, advertising, etc. And once the fallout from the bad retail Q4 sales kicks in, bankruptcies, etc., commercial real estate bubble will be caving in.

“There really isn’t going to be anywhere to hide. All the industries that have been fueled by the easy-credit binge are going to be seriously effected, and quite a few will go by the wayside. It is the companies that have strong balance sheets and CASH that are willing to invest in themselves and keep their heads down and grind out their particular value that will survive and, once we come out the other side — and we will — flourish. Innovation and value are the keys to survival.”

“Thanks for the snapshot,” writes another, “of the govt. income statement and balance sheet . Love the quirky accounting. I would suggest, however, that all is not as bad as it seems. I am a commercial banker by trade and enjoy the ‘hidden value’ analysis often used by Chris Mayer when making his recommendations.

“Although it in no way excuses the ridiculous spending spree our government has undertaken, I would venture to say that the asset side of our balance sheet is seriously understated. There is probably enough ‘hidden equity’ in the good ole USA to offset the negative equity position shown. Again, not trying to justify what is happening, but instead of being ‘really ugly,’ it’s just ‘ugly.’”

The 5: We’d like to agree with you, but wonder what — and whose — assets you might be referring to. Who is “our” in your assertion?

The quirky accounting, by the way, comes compliments of the U.S. Treasury.

“This CBS News 60 Minutes segment ,” writes a reader, “does a really good job of explaining some of the mortgage problems that wait for us in our very near future. You guys should include a link to this in The 5 Min. Forecast. They state that the worst has yet to come, but still contend stocks are a great buy right now. I would be interested to hear your comments on this.

The 5’s comment: They’ve got 60 whole minutes to forecast, and that’s the best they can do? We commented on this Credit Suisse data in May and again in June.

Source: Fed “Shock & Awe,” What 0% Means, 2008 Pay Raises, Controversial Auto Survey and More!

The dollar fell anew against the euro and yen while yields on U.S. and European government debt traded at or near historic lows on Wednesday, a day after the bold credit easing by the Federal Reserve to combat a worsening recession.

Oil prices dropped as much as $3 a barrel after dealers said a record supply cut by the Organization of Petroleum Exporting Countries would not be enough to counter slumping energy demand brought on by the global economic downturn.

Equity markets on either side of the Atlantic slid as the initial enthusiasm over the Fed’s surprisingly aggressive interest rate cut on Tuesday gave way to weak financial results at key banks and European data reinforced a dismal outlook.

Despite yields already at historic lows, investors piled into debt. Short-term government bonds still offer a safe-haven for investors fearful that a deepening recession will lead to further losses in other assets.

The yield on 30-year U.S. government bonds led a rally in the United States, touching a series of record lows to yield as little as 2.58 percent. Yields move in the opposite direction of bond prices.

“We are trading in no man’s land and expect this will continue into year-end,” said Thomas di Galoma, head of government trading at Jefferies & Co. in New York.

The benchmark 10-year U.S. Treasury note was up 36/32 in price to yield 2.14 percent.

Two-year German government bond yields hit their lowest level since the euro zone was created, with the two-year Schatz hitting 1.842 percent , according to Reuters data.

It was the lowest level since the rate-sensitive Schatz was launched in 1991.

The Fed’s surprisedly large cut further eroded the U.S. currency’s appeal against the euro, which has gained a staggering 11 percent so far during the month.

The dollar hit a fresh 2-1/2 month low versus the euro and fell towards a recent 13-year low against the yen, in a plunge that stoked speculation Japanese authorities may intervene to rein in its climb, which is hurting the nation’s exporters.

“The underlying story in the FX market remains yield. The fact that the Fed made this major policy move yesterday really changed the balance of power towards the euro for the time being,” said Boris Schlossberg, director of currency research at GFT Forex in New York.

The dollar fell against a basket of major currencies, with the U.S. Dollar Index off 1.48 percent at 79.011. Against the yen, the dollar fell 1.21 percent at 87.85.

The euro rose 1.65 percent at $1.4331.

U.S. and European stocks fell. Morgan Stanley shares slid after reporting a worse-than-expected $2.2 billion quarterly loss as the credit crisis caused more write-downs.

BNP Paribas revealed an 11-month loss at its investment banking unit, hit by exposure to an alleged fraud by U.S. financier Bernard Madoff.

“Weaker company data are back in focus,” said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Bonn, Germany.

“The news about BNP is the main trigger regarding European banks, while Morgan Stanley’s results only seem to seem to have a marginal impact,” he added.

Apple Inc was a major weight on the Nasdaq after the iPod maker said Chief Executive Steve Jobs will not deliver the keynote address at the Macworld trade show next month, reviving concern about his health.

Apple’s shares tumbled about 7 percent.

Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey, said investors were initially enthused after the Fed’s moves on Tuesday made it clear it would do whatever it takes to get the U.S. economy back on track.

“This morning we awaken with a hangover and the realization of how many bullets do they have left?” Arnuk said.

Before 1 p.m., the Dow Jones industrial average was off 41.50 points, or 0.47 percent, at 8,882.64. The Standard & Poor’s 500 Index was down 3.55 points, or 0.39 percent, at 909.63. The Nasdaq Composite Index was down 6.67 points, or 0.42 percent, at 1,583.22.

The FTSEurofirst 300 index of top European shares closed down 0.76 percent at 828.53 points.

OPEC announced an agreement to cut 2.2 million barrels per day of output starting Jan. 1 — the biggest single reduction on record — adding to previous cuts of 2 million barrels since September.

U.S. light sweet crude oil fell $2.36 percent to $41.24 a barrel.

Spot gold prices rose $8.00 to $864.70 an ounce.

Asian stocks rose overnight, supported by sectors sensitive to interest rates in anticipation regional policy-makers will take more aggressive steps to support growth after the Federal Reserve’s easing on Tuesday.

The MSCI index of Asian-Pacific stocks outside Japan rose 2.3 percent to the highest since Nov. 11. But Japan’s Nikkei share averagE shed early gains to end down 0.5 percent as the yen’s strength walloped exporters.

Herbert Lash
NEW YORK, Dec 17 (Reuters)

Now, as oil prices break though ceilings faster than they can be rebuilt and the US inflation rate rises, the Fed’s frenzied rate cuts are coming under closer scrutiny.

“Investors who are looking to the Fed for guidance are driving with their rearview mirrors,” says Keith Fitz Gerald in Money Morning.

“The Fed’s data is almost always delayed more than the markets, which means that the smart money has most decidedly and almost certainly priced in the Fed’s ‘news’ months ago … The Fed isn’t running the show and never has, despite what the media and most people seem to think.”

But if we can’t rely on Bernanke & Co to navigate us safely through increasingly murky financial waters, what can we do?

First, when the markets get sideways and uncertain, it’s important to realize that having the proper portfolio structure will save the day – regardless of who’s at the helm (big money) and who might think he’s at the helm (Fed Chairman Ben S. Bernanke),

And by “structure,” we don’t mean individual stocks or allocation. Instead, what you need is an assemblage of stocks concentrated on the trends of the time, such as energy and inflation, for example.

Traditional diversification, while better than nothing, is just a proxy for having no clue about how to select smart investments. It’s like rearranging the deck chairs on the Titanic. It might look pretty, but it doesn’t work when the entire market goes down at once, as so many investors found out between 2000 and 2002 and again recently.

Structure, on the other hand, is a deliberate attempt to manage risk. That’s why famous investors like Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman Warren Buffett, George Soros, John Templeton and Jim Rogers concentrate their risks, rather than just spread their money around willy-nilly.

Not only do certain sectors bounce faster but they also fall less. And those same sectors can kick off huge income as they go, which means that investors who “buy” into this argument are ahead of the game far sooner than those who don’t.

Second, pay particular attention to unstoppable global trends. Then place money squarely in front of where they meet. This is not rocket science. For instance, the world’s electrical systems are antiquated or nonexistent, which means they need to be updated and simply built in the first place to meet demand. Which is why there’s an estimated $16 trillion behind the trend.

Other “unstoppable trends” include the emergence of China, inflation, energy, and even war, which, in a sad testimony to our times, is a growth industry.

Third, think like a plumber. A little water in the wrong part of your house can do a lot of damage, so it’s important not to let it get out of control in the first place. We’re not referring to micromanaging a longer-term portfolio here, but unless you’re a day trader or even a swing trader, there’s no reason to be constantly tweaking your portfolio in search of smaller profits when it’s the bigger picture that matters.

Earlier today the Federal Reserve said it would lower interest rates by a quarter percentage point.

CNN reports: “US light crude for June delivery fell $2.17 cents to settle at $113.46 a barrel on the New York Mercantile Exchange. Just before the central bank’s announcement, oil was 93 cents lower at $114.70 a barrel.

The Fed rate cut is expected to the last for a the moment after the Fed suggested it will watch inflation.

“This seems a good time to mention that you should be selling your house and buying gold with all your money,” says the Mogambo Guru, “and if the kids have to miss a few meals or if they have to sleep in the car because I cannot afford an apartment big enough for all of us but it is perfectly cozy enough for me, that is the price you are willing to pay.”

Just about everyone is predicting another rate cut, but will this rate cut be the last for a while?

CNN says “trading in futures markets predicts the Fed will cut its key fed funds overnight lending target by a quarter-point, to 2%, and hold the line there in coming months.”

The BBC says: “Fed ready to cut interest rate.” “Rate cut seen,” says Reuters.

“The interest-rate reduction could set in motion a series of diverse global events that will impact such seemingly unrelated areas as European inflation, global food prices, the US. dollar, American exports, and the already chilly relationship between the European Central Bank (ECB) and the government of France,” says Jennifer Yousfi in Money Morning.

Chuck Butler in The Daily Pfenning says thoughts of another rate cut by the Fed “has the dollar swinging the hammer again… And every currency has taken a hit from the hammer overnight… Except for Chinese renminbi…”

Bill Bonner has Paul Volcker in mind (and his warning that a painful adjustment is coming) but all he sees is “Ben Bernanke promising to drop dollars from helicopters, if necessary, in order to keep the economy bubbling along.

Bill says, “the Fed is unlikely to fall victim of a sudden attack of monetary integrity. The dollar is unlikely to rise very far against gold.”

According to the paper: “David Nason, assistant secretary for financial institutions, said the Fed could even use its proposed ‘macro-prudential’ authority to order banks, hedge funds and other entities to curtail strategies that put financial stability at risk.”

Meanwhile, all eyes are on the Fed and whether it will cut rates yet again to juice up the ailing US economy.

“US Federal Reserve policymakers will have to grapple with a moral choice that is well beyond the pay grade of central bankers,” says Martin Hutchinson, “choosing between the financial stability of US homeowners and world hunger.

“That’s not an exaggeration. Interest-rate policy normally only affects the world economy at the margin, but it has now been so expansionary for so long that the Fed’s interest-rate strategy has turned into a moral dilemma of sorts. In short, the central bank’s monetary policy will likely determine whether millions of U.S. homeowners lose their homes or millions of the world’s poor starve.”