June 27, 2001

At 2:15 pm, EST today, we shall know what the Fed has done, and have hints of its thinking.

Very simply, a 1/4 point cut means that the easing cycle is winding down, and that the Fed believes the prior cuts are starting to have the desired effect.

1/2 point means things have not gotten appreciably better, and the Fed still believes that strong medicine is required.

I'm not a Fed watcher, and so I have no strong conviction of what they will do. "Gun to the Head" (pick one or die) I'd vote with the Fed Futures, which puts the odds of a half point cut at only 41% chance, and a quarter point at 100% -- so I'd go with the 1/4.

But what they do matters less than the perception of what they might do -- and that's what is going to impact the markets.

Quarter point and we sell off a bit, while half a point sparks a rally.

The many prognosticators have been making their calls, and their statements raise questions. One cannot help but have a sneaking suspicion that there is less of an incentive to get it right than to get it LOUD; Fed predicting is fast becoming a buzz generating contest for the analysts themselves and their firms.

Having watched analysts and strategists make various calls over the years, I have (cynically) started to question the motivations of their pronouncements. It started in the midst of the dotcom days when a then obscure analyst at CIBC Oppenheimer named Henry Blodgett put an outrageous target of $400 on Amazon.com (AMZN). The stock responded by racing up and through that number as speculators threw cash at the company's stock.

Blodgett (now a verb) was rewarded with a handsome, multi-million dollar offer from Merrill Lynch; Merrill Lynch clients were rewarded with portfolio recommendations which crashed some 75 to 95 percent. Oops.

But the riches awarded to Henry were not unnoticed by other analysts -- who also got into the act. One even Blodgetted a $1000 target on QCOM, which actually got close -- about $800, before a 4 for 1 split. It now stands about $50, or 80% off that split adjusted target. Oh, well.

What has all this have to do with the Fed meeting? Well, it appears that some economists and strategists have now gotten into the act.

A few months ago, Wayne Angell, the former Fed Governor who is now at Bear Sterns, attempted a "Blodgett" of his own. Getting way out in front of the pack, he called for an inter-meeting rate cut to cure the market of its malaise. The market responded with a rally so sharp that the underlying motivation of an intermeeting cut -- i.e., helping the market -- was eliminated.

When the cut did not materialize, the market gave back the gains and then some.

Wayne was wrong -- and very publicly at that. But that has not stopped him from getting back on TV regularly, promoting his firm. He was wrong, but LOUD.

The many calls over the past month for a half point cut have had the same feel -- being right matters less than being heard, and LOUDLY at that. Why make a prediction weeks in advance of the Fed meeting, before all the intervening data that the Fed will have at its disposal has been heard? Can you honestly predict in May what the Fed will do in late June without the benefit of that month's worth of fresh data? Of course not.

And, unlike when clients lose money with bad recommendations, there is no hard penalty for being wrong about public economic predictions. Merrill preannounced worse than expected numbers on Tuesday, and its stock sold off 11%, lopping off billions in market cap.

One cannot help but feel in watching the many calls over the past weeks that something else is at work. My suspicion is that its self promotion and marketing, as opposed to actual economic analysis. No wonder they call it the Dismal Science.

Which leads us to Schrodingers' Cat. For those of you unfamiliar with Erwin Schrodinger's 1934 thought experiment: Take a living cat and place it in a box with radioactive material, a hammer, and a geiger counter. Throw in a vial of cyanide and seal the box. Come back in one hour.

Until we open the box, we do not know if the cat is dead or alive. Formally, the cat is in "a mixed state between dead and alive before the box is opened."

The strangest aspect of quantum mechanics is the way in which observation makes concrete one of many statistical possibilities.

Since we do not know the cat's condition, Quantum Mechanics describes the cat as both dead and alive, in a superposition of states. Its all about probabilities; The cat is half alive, half dead UNTIL we break open the box and observe the condition of the cat. Then the superposition is lost, and the cat becomes one or the other (dead or alive).

The point of this gross oversimplification is that of observation - the act of observing something introduces an irreversible change into a system, thus affecting the outcome.

Which brings us back to the Fed. In a kinder, gentler, less media obsessed time, economists made their observations, which were quietly distributed within a firm. Now the observation process is a noisy affair, more concerned with PR than economics.

The danger here is that this cacophonous exercise impacts market participants. Sentiment and perception is often been more important than reality (i.e., valuation) in the marketplace. The many early predictions of a 50 basis point cut -- some loons have even predicted a 75 basis points - affects expectations.

What should be considered a pleasant gift to investors -- 25 basis points on top of the previous 250 -- is now looked at askance as disappointing.

After even a 46% drop in the Fed Fund rate, we are set up for a potential disappointment. The market has discounted a "mere" 1/4 point cut by selling off in advance of the "meeting."

So yet another random and unpredictable element is introduced into the equation, making it that much harder for the Fed to do its job. Until there are market penalties for the grand standing headline grabs, we can expect more of the same nonsense going forward.

That's a shame for both investors and economists.

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