Anticipated Federal Reserve rate cut tomorrow

Today, three major US market indexes ended higher as Wall Street bet the Fed will cut rate by at least 0.25 points tomorrow:

Dow Jones Industrial Average: up 0.5%

S&P 500: up 0.4%

Nasdaq: up 0.5%

Sure, this may seem like a rosy picture; a Fed rate cut is great, right? 

Not entirely. Let's look at some of the pros and cons of a rate cut. 

Pros

Fed rate cut will lower interest rate on loans. This is great for people/companies who need to borrow money or refinance existing loans. Since people have easier access to money, they are more willing to spend the money, thereby providing liquidity to the market which is needed to boost the economy. Similarly, companies can borrow money for their own investments (e.g. to expand business) as well as to complete transactions (e.g. mergers). Healthy companies lead to a healthy economy by providing employment and income for individuals (i.e. trickle-down theory).

Cons

Lowering the interest rate will further weaken the value of the dollar primarily because investors will not want to invest in a currency that is not yielding an attractive return. As of today, the exchange rate is approximately 1.44 euro: 1 dollar. Clearly, the European Central Bank (home of the euro) is a much wiser investment than the Federal Reserve (home of the dollar). Since the dollar is worth less, your buying power is reduced. A trip to Europe will be much pricier than before. It will cost you more to fill up on gas since the price of gas is pegged to the dollar. In other word, when the dollar weakens, the price of oil is cheaper for global investors since their currency remained the same. 

The declining dollar will help US exporters (since their goods will be cheaper in the global market) and harm importers (since they will have to pay more for the same items). In case you have not noticed, US imports heavily. Just think about how much of the stuff that Americans consumed were made in China. 

So there you have it, some basic points to keep in mind when thinking about the Fed's rate cut (I haven't even gotten into inflation yet!).

Now comes the big question, in anticipation of tomorrow's rate cut, should we cheer or fear?

Movie: Tony Takitani

I'm starting my blog over because I accidentally deleted my two previous entries.

Over the weekend, I watched an old Japanese movie titled "Tony Takitani." You may have already guessed, Tony Takitani is the main character in the movie. Tony is an artist, an illustrator to be exact. His mother passed away three days after he was born, leaving him with his father, a freelance musician.

As a child, Tony was a loner. His father, rarely home, spent most of his time traveling to and performing at various night clubs. Tony did not have any friends. Many people were suspicious of him because of his American name, an uncommon occurrence in post-Word War II Japan. It's no wonder then that Tony grew up all alone. However, Tony never thought about his loneliness, it just never occurred to him. And why should it, he's living like he's always lived. He was satisfied.

One day, Tony met a beautiful woman who was 15 years younger than him. He instantly fell in love with her and for the first time in his life, he realized how incredibly lonely he was. He was no longer satisfied with his life; he wanted her, he needed her. Although the woman was hesitant at first, Tony's persistence prevailed. They got married and were very happy together. Life was beautiful.

Unfortunately, Tony discovered that his wife was addicted to shopping for high end couture fashion. Tony's wife relishes in the presence of expensive clothes and accessories. Every day, she goes shopping and buys new outfits. Before long, they had to convert an entire room to a wardrobe for his wife. Finally, Tony approached his wife and asked if she could possibly stop shopping this frequently.

Tony's wife promised to control her addiction. For an entire week, she stayed at home, fearing that she would be tempted to buy things if she were to go out. She started spending more and more time in her wardrobe, staring at her large collection of clothes, shoes, and accessories. The more she stared, the more she yearned to buy new outfits. Finally, she could not take it any longer; she went shopping. She bought more clothes and returned home, satisfied.

Then, the guilt weighed in. She did love her husband. Did she love her husband more or her clothes? Of course she loves her husband more. She headed back to the store to return the purchased items and proceeded to drive back home. But alas, there she was stuck at the red traffic light. Why did it so long for the light to turn green? Why was it that all she could think about was the clothes that she had just returned? She was suffocating and could think of only one solution, to return to the store. Without further thought, she made a U-turn. The car hit something. She died.

As time passed, Tony learned to forget the entire episode. He never had a wife, he never fell in love.

The movie is a tragedy, or is it? True, Tony experienced a tragic loss at the end, but in exchange, he lived the happiest days of his life with his wife. Is Tony better off being a loner and never achieving bliss? Is it better to live a balanced life with ups and downs or is it better to live a flat life?

Perhaps the best answer to the first question comes from the answer to this question: is Tony dwelling on the past by repressing memories of his deceased wife?