Active investors, like everyone else who tracks economic news, received two major surprises in less than a week. Despite obvious differences, they are not unrelated.
Last Tuesday the Federal Reserve staged a surprise half-point cut in interest rates. On Monday the United Auto Workers staged a strike against General Motors.
Here’s what the events have in common:
– Both reflect observable economic stress. But, once again, the experts were wrong. In each case conventional wisdom predicted a less radical outcome: The Fed would cut by a quarter point, and the UAW would not strike.
– In the weeks leading up to the news shocks the two principals in these developments — Federal Reserve Chairman Ben Bernanke and UAW President Ron Gettelfinger — gave no hint of the action they took.
“You have to make decisions based on the facts and based on the circumstances in which you find yourself,” Gettelfinger said at a press conference Monday, after his members declared “down tools.”
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“Recent developments in financial markets have increased the uncertainty surrounding the economic outlook,” Bernanke told Congress after the Fed rate cut last week.
– You can’t say that the Federal Reserve in recent years has lost as much influence over economic events as the labor movement. But in the opinion of many analysts both have become more irrelevant to the global economy. But both institutions asserted power and caused us to take notice.
– Critics of the Fed and UAW moves pounced immediately. The loudest of complaints came from the same laissez faire camp of economists and market pundits represented by The Wall Street Journal editorial page.
Yet, concerns about the Fed and UAW actions were more widespread. In both cases even-handed critics worried that both had suffered self-inflicted wounds: a flare-up of inflation fears, on one hand, and bankruptcy for a major UAW employer, on the other.
– In both cases supporters of the surprise decisions wore their self-interest on their sleeves.
Commercial and investment banks appreciate a lower cost of funds prompted by a Fed rate cut. Their ability to lever lower-cost funds into higher profits has improved.
Union sympathizers see leverage as well, in a more muscular UAW. A major strike of any length enables the labor union to ask the current crop of presidential candidates the age-old question, which side are you on? Until now the question was unlikely to bother the 2008 campaigns.
– Finally, the main question in both cases is, what happens next? Betting is hot and heavy as to whether the Fed will cut interest rates at its next policy meeting, scheduled for Oct. 31.
Most analysts expect a quick end to the GM strike. As a result, market reaction has been muted. Shares of GM slipped 20 cents, to $34.74. But GM debt securities gained.
“While a strike means short-term pain for GM and its suppliers it could lead to long-term gains like it did with Goodyear, which endured a three-month strike and ended up with a trend-setting health-care deal and significant savings,” wrote corporate bond analyst Shelly Lombard of Gimme Credit.
But if the UAW is still out when the Fed meets again, the link between these two surprises will become more apparent.
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