0001 EDT Thursday Aug 10, 2006

Good Morning: Just as we intimated days ago on the dangers of the Fed doing what they have done so exemplarly since inception, failing to factor in unforeseen economic dangers and potential negative economic influences beyond their control. Summarily raising rates for what appears to be an unprecedented 17 times, without thought for the unacceptable levels of unemployment in Europe and parts of Asia and the dangers of what could become 400 - 500 Million unemployed in China, should there be an implosion there not to mention unacceptably high and what are more likely to now be increasingly higher levels of poverty in Africa: We had high hopes for Ben Bernanke perhaps as the great one, who would not follow the Greenspan mould and would strike out to change this World for the better in the 21st Century, that is so troubled by terrorism and the daily scourge we now have to live with, such as has just emerged out of the UK overnight. The one saving grace might now be, that if they were to start lowering rates in light of new developments, that the impact of the most recent rate hikes that have yet to take effect, could in fact potentially be negated buying the Fed some extra room to maneuver. Looking at the chart below, there is some comfort in the fact that the 5.0% ~ 5.25% Fed funds rate is up against the underside of the levels that existed in 1998 and thus, it would seem that there we might just be under the threshold of the difference between sustaining a reasonable rate of continuing economic growth and quelling or killing it. Just a month ago lawmakers were grilling the Fed Chairman on those fears of an economic slowdown that might follow one of the greatest periods of sustainable growth in history over 14 quarters with a pretty respectable average that finally really did deliver on those perennial pinings by lawmakers all through the 90's for the US Economy to grow at a near 4% rate. If the Chinese can grow their economy 28 years straight at a 9% rate and Russia something similar over recent years, perhaps we could learn a thing or two from these two dynamically emerging economies. Our best hope now may be for weaker US Dollars to restimulate US growth and exports.

AP Photo: Chart shows the federal funds rate. (AP Graphic)

And, as for stocks, this could have an enormously salutary effect for equities in the coming years leading into the end of the decade and in all likelihood would have a similar impact on Gold and Silver prices and commodities in general as we enter Phase II of a resources boom. Unfortunately, stocks appear vulnerable in the short term because of the compounding effect and impact of the Fed's actions, but should the Fed be forced to intervene unexpectedly, in light of new developments emerging overnight, which may only be the tip of the iceberg, the Fed may have to take urgent measures as they did post 911 needing to restore investor and consumer confidence could now be warranted. And, as we stated yesterday... Although it may be hard to see compelling reasons to dramatically lower rates in the near to intermediate future, with everything going on in the World, many things could happen to pre-empt the necessity to drastically lower rates, from a Chinese economic train wreck, to Federal Reserve Chief Ben Bernanke being forced to bail out the US Economy, for a myriad of reasons, including some kind of major oil disruption.

Trade Well From the Desk of Savant