Emerging Economies May Not Save Us

As the US economy, as well as the Canadian and much of the European economies, sinks deeper into recession, many are pointing (maybe partly with great hope) that the emerging markets will bail-out the rest of the world by driving overall demand. Unfortunately, that doesn't seem to be the case with emerging markets not only showing signs of weakness, but showing signs of even more drastic declines than what the developed economies are currently experiencing.

This graph is sourced from Charles Schwab's latest webcast and presents a diffusion index of developed (lower chart) and emerging (upper chart) economic forces. Essentially, a downward sloping line is a bad thing and an upward sloping line is a good thing. What I find most interesting about these charts is the leader-follower dynamic that appears to be taking place. While most analysts and market watchers have been pointing to China and India as possible saviors of the global economy with their fabulous growth rates, it now looks as though the declines in demand from the developed economies is beginning to take its tole on their markets. Moreover, it would appears as though the declines that they are now experiencing are more severe than what the developed economies have seen. 

Inflation appears to be the culprit here. While we've seen low single-digit rates, the developing markets (the blue, in the left-hand chart) are showing near-double-digit rates. More importantly, their pace of inflationary growth (the slope of the line) is noticeably more steep. This is primarily due to wage-pressures. While the US and other developed markets have not seen wages rise, this has not been the case in the developing economies. The rest of the world is facing much greater inflationary pressures than we are at home and this spells great trouble for them in the future. 

So what does this all mean for us at home? Well, put simply, we can't rely on any other economy to help bail us out. We are in a global economy, to be sure, but that economy is by no means uniform. The rest of the world, especially the developing parts of that world, are only beginning to enter their own recessions and everything points to their troubles being worse than anything we will see domestically. On the whole, of course, this suggests a very slow and long recovery. While the developed markets may be better prepared to recover sooner, we are no dependent on emerging markets just as they are dependent on developed markets. As they are likely to sink deeper than we are, their economic pains will most certainly ripple through the rest of the world.

The Interpretation of Polls

CNNMoney is reporting here that their latest opinion polls suggest 3 in four Americans believe that the economy is in recession. Besides the 'duh' factor that goes along with such a headline, I almost laughed when they continued to compare the 75% statistic with the 79% result that they got in a an April poll with the same questions. You guessed it, the article is positive wherein they suggest that the drop of 4% is a good sign of ...something.

Why is this laughable? Well, first off, this is an opinion poll and doesn't actually represent anything about the current state of the economy. Moreover, a drop of 4% in public opinion could be nothing more than an anomaly - especially a differential of only 4%! I do understand that the media is working its spin doctors to turn absolutely every bit of news into a positive headline, but this is getting to be a little ridiculous. Almost every business leader has not only been referring to the current recession as a given, but has gone on to suggest that we're in it for the long haul. 

Competition & Deregulation Fight Stagflation Part 2

Sometimes it seems as though there's a counter-argument for every argument; isn't it great! I just finished writing how competition and deregulation was working to prevent inflationary pressures from spiraling out of control and then I read this article that made me rethink my position, again. I still believe that competition and deregulation are in-fact working to keep those pressures under control, but I neglected to consider the effects of rising fuel prices on the extent to which that competition can take place.

There's no doubt that communications technologies enable for a great deal of competition in the services sectors, but that's going to have a lot less of an impact on the manufacturing side of the economy. Ultimately, manufacturers have too get their goods into a market before they can sell them there and the rising cost of oil has made that far more expensive. The result is that domestically produced goods are just a little more attractive and the demand for those goods, as a consequence, is just a little higher. This higher demand for domestic manufacturing empowers laborers just a little more and makes wage-hikes just that much more likely. As I've written before, rising wages is the key influential factor driving inflation.

So where do the scales balance? Good question; it's anyone's guess really. I will say that the forces of competition and deregulation are not going away, but the oil price bubble may very well disappear. What happens then?

Competition & Deregulation Fight Stagflation

I just finished reading an interesting article that has caused me to rethink my position on the state of the economy and where it may be going. I've written before on how the current slowdown resembles what we saw in the '70s and earl '80s, but after reading this article, I'm reconsidering the affects that global competition may have on the ability of the U.S. economy to ever see the sort of rocketing inflation that we say a few decades ago.

It comes down to wages. If wages don't begin to rise (accelerate, actually), then inflation will remain relatively under control. This is an important fact to remember when you consider that a global economy means that nearly every sector, industry and individual business competes with international vendors willing to cut prices and snatch-away customers. The article uses the airline industry as an example, but the same logic could be extended to almost any market. Whereas airline ticket prices rose by more than one-third in the early '80s, they've seen less than a 2% rise even with the unprecedented rise in the cost of fuel. The reason? Competition and deregulation.

There are more airlines, even with all the trouble in the sector, than ever before. Travelers have more choice than ever before. The result is that airlines are left sitting between a rock and a hard place. With the rising cost of inputs to their operations, the decision is no longer whether or not to raise prices, but rather whether or not to continue operations at all. They are no longer able to raise prices because their competition won't. One of any competitor airlines that had been fortunate enough to hedge the cost of fuel earlier will have a cost advantage and will simply assume all customers should its competitors increase their prices. In economic terms, it suggests an inelastic short-term supply curve. What's interesting about this argument is that nowhere have I mentioned wages, which is traditionally considered to be the primary driver of inflationary pressure.

There's competition for jobs too. Just like there are more airlines fighting over travelers, there are more people fighting over jobs. Workers are less able than ever before to request a wage increase. There are fewer labour unions and those that do still exist are less powerful. Moreover, the ability to outsource leaves employers not with the decision to increase wages or lose employees, but rather whether or not to keep employees or outsource operations oversees where costs could be a fraction of what they are locally. The consequence of all this is that rapidly rising inflation may really be a historical artifact.

We've Only Seen One-Third of Writedowns?

According to John Paulson, founder of the hedge fund company Paulson & Co., global writedowns stemming from the credit crisis may top $1.3 trillion, surpassing the International Monetary Fund's estimate of $945 billion. Who is Paulson, you ask? He's the guy who placed a bet on the speculative bubble in the sub-prime lending market, which has netted his fund a gain of a whopping 591% in the past year. This is the guy who saw the storm coming so you could say that he's got a fairly good insight into the breadth and depth of the sub-prime market.

$1.3 trillion in writedowns is three-times higher than the writedowns already reported. That's both a staggering total figure and worrying prediction for what the future holds for the global economy and financial markets. The U.S. economy has certainly taken the brunt of the immediate downturn, but as economic speculators are working diligently to maintain a positive attitude in the business press, the reality is that the downturn we've seen thus far is only the tip of the proverbial iceberg.

In a survey of hedge fund managers conducted at a meeting in Monaco last week, more than 80% said that the see the current credit crisis persisting for some time yet so Mr. Paulson is certainly in good company. Moreover, as much as 23% of those surveyed see the current situation worsening further before it gets better. What's interesting, is that it appears that these same hedge fund managers are watching the financial stocks like vultures circling; they waiting for the best time to buy the stocks that have been beaten-down by as much as half. If you're anything like me, then you will be watching the actions of these firms to insights into when, exactly, will be the right time to jump back into the banking waters where the opportunity appears to be astronomical.

Inflation, excluding the inflation.

No one will be surprised by the fact that I, along with tens of millions of others, believe that inflation is being underreported by the government; I've written on it countless times in this blog alone, and if we've ever talked economics, then I'm sure the subject came-up. It's probably why this article really caught my attention and I'd recommend it to all of you who would like to know more on the subject.

The long and short of it is a comparison of the US economy with that of a couple dozen other countries - including many of America's trading partners. What's surprising is that US inflation rates have been a relatively consistent 3% to 4% lower than that represented by this benchmark group. Of course, economists would argue that this differential can be explained away as a result of greater productivity in the US, but do we actually believe that the US economy is more productive than India or China, for example? 

Many of you know that there are two commonly-quoted inflation rates: the headline rate and the core rate, or what the author of this reference article calls the inflation, excluding inflation. Guess which one is the official rate? What you quickly notice after glancing at a graph such as the one below is that the difference between the official 'core' rate and the more realistic headline rate is growing - the greater the separation between the two, the more unrealistic are the figures being reported by the government, and more importantly for us investors, the less reliable are the valuations used to compute a stock or bond price!

Anyone who's taken a class in finance understands the importance of the inflation rate in the calculation of the price of any asset; it's absolutely critical as a starting-point including the risk-free rate to determine a real rate of return on investment. Without an accurate measure of inflation, we have no real idea of what our real return is - i.e. what the purchasing power is of our investment upon maturity.

The thing that I like most about this article is that the author doesn't present any of this as a conspiracy theory, but rather as an alarming warning to investors - cautioning us all about keeping this discrepancy in the back of our minds when making our valuation calculations and investment decisions. Now go... read it.

Back to the Future: Stagflation

The economy growing had been growing at 5%+ prior to the continuing rise in commodity prices; the country is engaged in a wildly unpopular war, which helps to worsen the growing budget deficit and ever-expanding foreign borrowing; the Middle East is in turmoil; the American dollar is in a free-fall with no bottom in sight due to a lax monetary policy; commodity prices are surging - oil having quintupled in the past half-decade alone. That's right, it's the early 1970s all over again!

The similarities between the current state of the economy and that of three-decades ago are eerie indeed; Dick Cheney is even in the white house - just as he was then under President Ford as his chief of staff and, as then, is often blamed for America's pursuit of so-called stability in the Middle East to help assure the flow of oil. Of course, with no oil actually emerging from Iraq, that's a whole other story. Thirty years ago we were in a very similar situation - it was called stagflation: slowing growth, rising unemployment and inflation. We recovered then at significant cost, which led to slow growth, high interest rates and high inflation for the better part of the following fifteen years. The question now is how will we get out of the current state of economic woes?

Fortunately, there is a growing consensus about what the solution is to get the global economy out of its current doldrums: technological advancement. Although it is an admittedly simplistic analogy, imagine if the cost of the war in Iraq had instead been invested in sustainable technologies - whether in food, energy, water or even climate change. 

Assuring the flow of energy to America need not be as expensive as it has been. The cost of the war in Iraq is estimated at nearly one-half trillion dollars; yes, trillion! The cost of a nuclear power plant is less than $10 billion per reactor - not even counting the fact that the investment wouldn't be flowing across the border and would instead create jobs both during the construction and the following operation and maintenance. Of course this is just one example, but you get the idea.

The sheer numbers involved open the doors to tremendous opportunities for technological advancement. America is currently spending on its war in Iraq the sorts of dollar sums that could quite literally solve problems and answer questions that have caused impediments to scientific progress or, at least, slowed its progress. Science and technology can improve yields per acre - resolving any concern over food shortages. Science and technology can clean not only the drinking water, but also clean-up our lakes and rivers and prevent future pollution. Imagine how much better the world would be, let alone America. Imagine further how admired America would be as a leader in technological advancement.

Bonuses & the U-Shaped Recovery - What to Expect

On the bright side, the job losses on wall street are far less than they were following the dot-com bubble burst earlier this decade. While financial institutions shed about 17% of their forces, those same institutions have only cut about 3% during this latest downturn. Unfortunately, there's a downside to this story.

The downside is that many, if not all, are expecting many more cuts to come. You may have heard people referring to a U-shaped recovery; well, were only still on the left-side, the downward side, of that 'U'. It will essentially be a very slow downward slide that will see an increasing number of jobs lost before we hit the trough of this business cycle. Worst yet, it will be an equally slow climb back up. So, who among us are the most at-risk?

You guessed it; the higher your salary and/or bonus, the more likely you are to get a pink slip. It's no secrete that wages are the #1 expense for financial institutions and they're losing money like a leaky rowboat. To hedge those losses, their first act is to cut their expenses proportionally and the story seems to be that there are many more write-downs to come - more paper losses at these firms necessarily mean more job losses for those working there.

The best thing to do is to stay focused on your long-term career goals. Your career is not your job; it's the union of your experience and education. Losing your job does not represent a loss of your career; it provides you with the opportunity to explore areas that you haven't had the time to review in the past. Use every opportunity to enhance your experience and education and your career will continue to excel.

Europe Feeling the Economic Pinch

The headlines today scared me a little bit. First, I read that Germany's consumer confidence index has fallen, again, as a result of the relatively stronger dollar and fallout from the slowing the US economy. Similarly, Marks & Spencer, the premium UK retailer, has reported slowing growth and staff cuts in response to the same growth concerns. Likewise, Morgan Stanley is reporting that it's planning job cuts for its Japanese offices. If there's any doubt that the world economy is only beginning to slow down, then reports such as these should give you second thought. That, however, is not what scared me this morning.

What continues to worry me is the American investors' apparent refusal to see or believe any of it. Whether it's the report of inflationary pressures right in their own backyard or the many companies reporting lower earnings, investors are ignoring the bad news and looking only for the good stuff that confirms what they already hold to be true. Yesterday's rally and today's headline stating lower volatility is representative of growing buy-pressure only further America's case of the blind following the blind.

Lower volatility, over the period of one day, does not mean that there is less uncertainty. Any statistical change over a period that short cannot be interpreted to mean anything - it's just not relevant. It's really time for Americans to wake-up and smell the coffee; Europe is only now beginning to feel the pinch from what's been developing on this side of the bond for the better part of this year and that too will take time. This is only the beginning folks and the sooner that we realize this as a country, the sooner we can 1) save to give ourselves some recovery insurance, and 2) truly plan and prepare for a recovery.

The Media & Lying with Statistics

I'm continually amazed at how the media manipulates economic data to present whatever picture it feels will best attract viewers, listeners or readers. Today's housings statistics are a perfect example of just such manipulation.

All morning, the news has been a buzz with the jump in housing starts - everyone clamoring to talk about how this may represent the rebound for which we've all been waiting. With no more than a glance at one article on Bloomberg, however, it's easy to learn of the whole picture. This is an example of the statement to which everyone has been referring:

Total housing starts jumped 8.2 percent to a 1.032 million rate as construction of multifamily units rose 36 percent following a 35 percent drop in March.

Here's the paragraph that immediately precedes it:

... a Commerce Department report showed construction of single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded. Builders broke ground on 692,000 single units at an annual rate, the fewest since January 1991.

I know; I shouldn't be surprised. In some ways it is a positive thing that those with a voice work to rally the rest of us into a [hopefully self-fulfilling] belief that the economy is indeed OK. However, when we folks like Mr. Alan Greenspan, the former Fed Chairman, and Mr. Myron Scholes, the winner of the Nobel prize in economics for his work on option valuation, both referring to the current state of the economy as the worst since the great depression, it's time to face reality.

When news reports focus only one the one part of the housing segment that is doing well and neglect to mention that the industry as a whole is declining to almost two-decade lows, then something is amiss. With the average American saving less than ever before and average American debt at record highs, the rising unemployment figures spell doom for those who fall only hear the headlines and continue to spend themselves into future financial ruin. It's time for those with a true understanding of what is going on in the economy to help those who do not.

Housing Market Outlook

I'm still sitting on the fence, waiting for the right opportunity to buy my first home-sweet-home. With all the trouble in the housing market, I'm sure that my opportunity is not far away, but the question now becomes how low can the prices really go. As with any declining market, an investor wants the most bang for their buck and seeks to time their purchase for the absolute lowest low. With foreclosures being reported up by 65% this month compared with the same month last year, however, the supply of homes on the market is still very much on the rise. Consequently, prices are still very much on the decline.

Watching Jim Cramer's Mad Money on CNBC last night I heard the mention that the first real estate markets hit by the slow down in Florida are beginning to show signs of life. As with the recent bull runs in the stock markets, it's likely just a head-fake. The underlying problems in the economy haven't gone away. Business bankruptcies are still mounting. Unemployment is still rising. Foreclosures are, well, you get the picture. Before these underlying factors are addressed, there isn't going to be any rush to buy any homes. People certainly aren't going to be bidding against each other in this market and that's a necessary condition for prices to rise.

We will continue to hear about some homes being sold and some real estate markets around the country rebounding. I would tend to suggest that this represents localized feelings of a trough; this is unlikely to be representative of a more broad-based recovery. Too many things are just ugly right now and people are stuffing those bills into the mattresses to insure against more rainy days. I, for one, am still waiting for when I can un-tuck some of those bills.

Is the CPI a scam?

The latest consumer price index figures were released yesterday and they showed a less-than-expected rise in the prices the average consumer pays for goods ranging from food to medical expenses. Of course, with the news dominated by the high cost of fuel and food prices continuing to rise, it's difficult to believe that inflation is not still higher than what is being reported. Consequently, I'm not surprised when asked how the CPI could possibly be an accurate reflection of the changes in the prices we really pay.

The reality is that it's probably not too far off from the truth. Sure, there are likely to be some estimation errors that come from the fact that not every single product can be monitored, but - on the whole - the Department of Labour is most likely reporting the figures it actually does record from in the marketplace. So, then, what is the discrepancy? Why is it that it seems as though our prices are rising faster than what our government is telling us?

The answer, unfortunately, is unlikely to satisfy many who are pondering the question. For one, the media isn't helping matters. The fact that we hear so much about commodity prices and the cost of oil on the rise and hitting record levels tends to overwhelm the public consciousness as it relates to prices. 

Furthermore, it's important to remember what the CPI actually represents: the average price paid for a specified bundle of goods by the average consumer in America. Now, ask yourself: are you average? To answer the question, consider the goods that you buy; are they representative of what the average person buys on a regular basis?

Although unsatisfying, the reality is that the CPI does probably represent a relatively accurate estimate of how prices change for the average consumer. Maybe what we should all be complaining about is the fact that there is no price index for the middle class, middle-upper class and so-on. All our concerns over gasoline prices are warranted, but does the average consumer drive an SUV or take the bus? While the 100% rise in the price of rice is undoubtedly troubling for developing nations, the extra $5 a month for the American household is, in all likelihood, going to go unnoticed as a change in the bank account balance.

Democratic foreclosure-prevention package - OK'd

With all the talk about the hundreds, yes hundreds, of billions of dollars made available each month by the Federal Reserve to help financial institutions survive the worst of the continuing credit crunch, it seems that the little guy may finally get something too. The U.S. House of Representatives approved a Democrat-sponsored foreclosure-prevention package that will essentially guarantee mortgages if banks cut principals so as to lower the payments on those loans. With foreclosures consider to be one of the key catalysts for the slowing economy and financial woes on Wall Street, this should certainly help everyone involved.

No one benefits in a foreclosure.

For the little guy, that's you and me, this means that banks should be just a little more willing to work with us to avoid foreclosure. The banks don't want to foreclose; besides all the transaction costs involved, it's just a hassle. They need to come-up with the paper work (both financial and legal) and ultimately boot some family out of their home. With their expectation to see only part of their loan returned to them given the current state of the real estate market, it's a lose-lose proposition for everyone involved. This new program gives them an out.

Assuming that banks are willing to do their part and cut the principal amounts on the loans, then those loans will be guaranteed - essentially eliminating their risk of holding-on to the mortgage and giving the borrowers (i.e. homeowners) a little more slack with which to retain ownership and make their monthly payments. The key here is that everyone needs to still do their part. The banks aren't getting something for nothing; they'll first need to make their own judgements as to who's mortgages should be cut and kept vs. those that they'll foreclose regardless.

Similarly, homeowners can't run away from their responsibilities. With news of people choosing to burn their homes or drive their cars into lakes and rivers so as to collect on insurance policies and avoid further payments, there doesn't seem to be a better time than the present to offer something to us little guys. The economic slowdown will continue for some time. More businesses will close and more people will lose their jobs. At least its nice to know that it's not only Wall Street that has the attention of our government.

The Real Price of Oil - Forbes.com Interactive Chart

There is, no doubt, a lot of talk about oil prices these days. Maybe more surprisingly, however, is the sometimes devil's advocate-like position that some take when discussing today's real price of oil relative to that of a decade or more ago. Similarly, in comparing the oil prices faced by American today with those faced by citizens of most European countries, some critics argue that we shouldn't by arguing at all. Well, for those of you still reading, you should check-out this link to a chart prepared by Forbes.com

The fight over the difference between nominal and real prices will continue to undercut some arguments when it comes to the CPI, but given the chart prepared by Forbes, it's difficult to see anything but a staggering rise in the real (i.e true) cost we face at the pump. In the last ten years alone we have seen almost a 10-fold increase in the price of oil and a similar rise in the prices of gasoline. That's a ten-times increase; put differently, 1,000 percent. 'nough said.

Unemployment Trending Upward

It's an election year and no one wants to admit it, let alone talk about it, but the reality is that the employment outlook is not pretty. Since early last year unemployment has been steadily rising and shows no signs of slowing down - regardless of what the politicians want us to believe. Oh, and if you think that unemployment can't go much higher than it is already, then look at the included graph as a comparison against what it used to be during this decade's first recession.

Unemployment, for the sake of unemployment, sucks. What makes this picture that much worse, however, are all the other factors that are still mounting an attack on the lowly consumer. Rising fuel costs; rising food costs; falling home prices... maybe worst of all, rising consumer debt. You can't really blame people for drawing on their lines of credit to make it through the tough times, but I'm sure that you too can guess what will happen when the cost of credit begins to rise as it is expected to do in the coming year. All that debt will suddenly become increasingly expensive leaving everyone scrambling with  even fewer options to cover their living expenses.

The picture is gloomy, I know. It doesn't need to be as bad as it is though. The most important thing that people can do is to recognize the true state of the economy and act accordingly. Yes, it's time to cut-back on spending and increase savings for those sure-to-come rainy days. Every business owner knows that to survive the troughs you need to lower expenses along with falling revenues; it's just too bad that not every person has the same business know-how to make similar adjustments in their personal finances.

Bankruptcies up 49%! Yes, 49%!

Some days, when you listen to the latest equity market numbers, you wonder can't help but wonder where all the fuss about recession comes from. Sure, the markets decline some days, but for the most part we only hear about the rallies and bulls. The bears are sparse and far between. Then you come upon an article that shocks you with some numbers that bring your feet back on the ground... bankruptcies up 49% years-over-year.

We already heard about the foreclosures, but that's because of the sub-prime hoopla, right? If there was any doubt as to whether the economy was slowing, the rising number of businesses forced to closedown should shed some light on the matter.

1.1 million bankruptcy filings! Yes, that's 'm' for million. As in... if you had one dollar for each business that failed, you would be a millionaire with some change to spare. Sobering, isn't it?

What's driving the price of Oil?

We've all cringed at the sight of the prices at the pumps, but what's driving the staggering and persistent climb? Demand? Unlikely. If it were demand, then how could it have changed so dramatically in such a short period of time? Sure, China is certainly demanding more than before; China, as big as it is, however, is still not big enough to sway world demand to the extent that we've seen in the past year. So what is it?

Yes, I know, everyone's got politics on the tip of their tongue. The truth is, that that's probably a big factor. The even greater truth, however, is that this is really the underlying factor - the real cause of the rise in price is speculation. That's right; folks like you and I, investors, buying-up contracts in the belief that prices will continue to rise. The funny thing is that it becomes a circular and self-fulfilling prophecy. Although we all complain about the rising price, we too might be responsible for those very prices.

There is a silver lining, at least for those of us who are speculating. For said investors [speculators], they're hedging their increased pumping fees by profiting for those same rising prices in the capital markets. If you've ever studied economics, then you'll quickly be reminded of the Prisoner's Dilemma. Although its in our interest, collectively, to quit the speculation, we are best served individually by joining-in on the free-for-all in the futures market. Like the saying goes: if you can't beat 'em, join 'em.

A market disconnect indeed!

I just got through reading an interesting article in the Toronto Start (read it here). To put things in context, here's a little excerpt:

The headlines continue to paint a dire economic picture. The credit crunch has forced global financial institutions to take major losses and slash jobs. Meanwhile, the U.S. housing downturn and crushing oil and gasoline prices have clobbered U.S. consumers, which promises to dampen Canada's already struggling manufacturing sector.

That pretty much says it all. I personally believe that rumours that the current recession is nearing an end (yes, we're in a recession) are largely overstated. In Canada, especially, the worst is yet to come. The impacts of the economic slow-down in the U.S. have yet to really hit us north of the border and when they do (they will) things will tumble hard.

I recently read some stuff on technical analysts' approach to investing and found it quite enlightening. The reason: they seem to see opportunity in almost every market situation, and for good reason. Many people (myself excluded) have made a bundle while others stayed on the side-lines (myself included) waiting for this bubble to burst. I'm sure that I'll take some satisfaction in being proven right, eventually, but it's still a little frustrating to see potential profits fall into the pockets of others.

Is there really a difference between 2.25% and 2.00%

Ok, so I studied finance and I know that there is a 25-basis-point difference, but I think that you and I both know that that's not what I meant.

The Fed (the U.S. Federal Reserve Bank), via the open market operations, helps to manage the swings in the business cycle by monitoring various economic indicators and pulling various levers to flatten-out the bumps. One of these levers, the most important one actually, is the interest rate (the Fed Funds Rate, to be precise).

When the Fed reduces the interest rate, it makes money cheaper - it makes borrowing money less expensive because those who do borrow, pay less interest. You have to ask yourself, however, whether a 0.25% further reduction in the interest rate will stimulate those who have been holding-off on an investment decision (like buying a home or expanding business operations) to suddenly make the leap. The answer is likely no.

The Fed's actions are likely less important that the reasons for its actions. People watch the Fed to learn of what top economic minds think the economy will do next (or what it's doing now). With almost 300-basis-points down in the last 9-months, I think that we all can accept that the Fed and all those economic brains think that the economy needs help. We got the message, trust me. Sending the rate lower yet will not drive-home that message any further; moreover, it could cause problems for the Fed in the medium term should it really need to pull on that lever harder, later. It's going to be interesting to see what the Fed chooses to do; it will be more interesting to see if the markets react at all to whatever it is that they do choose to do!