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Kass: Lower Interest Rates Are Not a Cure-All

Doug Kass

"Despair is a mortal sin."

-- William Buckley

I have argued in the past that the cost of avoiding a recession might be greater than the cost of enduring a recession.

Few agreed with this observation as calls for "shock and (monetary) awe" were plentiful in the media.

As well-documented in the Wall Street Journal this morning, the (unintended) consequences of re-inflating the domestic economy is seen vividly in the price of oil, gold (14 record highs in 2008), other hard and soft commodities and in U.S. dollar weakness.

I continue to see Fed policy of lowering interest rates as "pushing on a string." Again, I am in a small minority.

Lower interest rates will not have the desired results:

• It won't make banks lend, even despite a more positively sloping yield curve.
• It won't make builders build, even despite the possibility of lower mortgage rates.
• It won't make consumers spend, as they are levered and spent-up.
• It won't make businesses expand, as confidence ebbs and corporate margins and profits suffer.

The solutions are available on the fiscal and tax fronts, but, unfortunately, a too timid and unimaginative Administration, Treasury and Federal Reserve suggest that they are not close at hand.

The current despair (see Buckley quote above) should be looked on, in the fullness of time, as an opportunity.

And, as the wise man once said, this too shall pass. After all, stocks appear cheap relative to bond rates (long and short) and also based on a host of other metrics.

But not in the short term.

It seems appropriate to end with a passage from my last post on The Edge (my trading diary available only on RealMoney Silver) on Thursday:

"I remain deeply skeptical of all the nonrecessionary talk/writing I am seeing in the face of the complexity and extent of the U.S. economic and credit issues."

From my perch, the market's rise of nearly 10% from the SocGen market bottom in mid-January was nothing more than an oversold bounce and not the start of a meaningful leg higher.

To paraphrase Thomas Paine, a long habit of not thinking that anything can go wrong in the stock market has given equities a superficial appearance of being right and that every dip is a buying opportunity.

Err on the side of conservatism in these difficult times.

And consider your return of capital as much, if not more, than your return on capital in making investment decisions.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.