Monday, October 06, 2008

A week of global rate cuts?

"Don't appoint the people to get you out of a problem that got you into it in the first place" - John Loeffler, Financial Sense Newshour.

So do the markets love this recently passed bailout plan or what? I mean, it's 1:00 pm (CST) and the Dow is only down around 541 points. Success! Update: make that 800 points...

And the global stock markets are loving it too (sarcasm alert). The FTSE 100 just had its biggest ever one-day point decline and its third largest decline in percentage terms, as global markets plummeted on fears of a spreading credit crisis.

More from Bloomberg:

"Stocks tumbled around the world, the euro fell the most against the yen since its debut and oil dropped below $90 a barrel as the yearlong credit market seizure caused bank bailouts to spread. Government bonds rallied.

The Standard & Poor's 500 Index retreated 5.9 percent, extending the worst weekly slump since 2001, as concern slower global growth will curb demand for commodities sent Alcoa Inc. and U.S. Steel Corp. down more than 7 percent. The MSCI Emerging Markets Index headed for its biggest loss in at least two decades and exchanges in Russia and Brazil halted trading. Europe's Dow Jones Stoxx 600 Index had its steepest decline since 1987.

Today's plunge erased about $2.5 trillion from global equities after the German government was forced to bail out Hypo Real Estate Holding AG, overshadowing the $700 billion U.S. Treasury plan to revive credit markets. The euro weakened 6 percent against the yen, the most since 1999."

Last week's 777 point drop in the Dow Industrials helped scare the US House of Representatives into passing a quickly revised, and grossly enlarged, version of the $700 billion bailout bill they had previously rejected.

Now that a new week is upon us, it seems the world is waking up to the idea that this bailout and all the "liquidity injections" in the world may not work to solve the US' current financial mess. The problem is too large and the proposed government solutions fail to address (let alone acknowledge) its root causes.

Here's how Kevin Depew put it:

"Meanwhile, there is only one thing necessary to understanding what is happening and it is this: no one at U.S. Banks, no one at the Federal Reserve and no one in politics can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged.

It is that simple.

TAF, TSLF, SuperSIV, TARP, none of that matters. No matter what acronym is created to disguise the fact that assets are overpriced, or what government intervention is created to prop up those asset prices, the market will inevitably overpower it. This time is not different."

So, as Edward Chancellor concurs in his latest FT comment piece, big bailouts are unlikely to stop the rot.

Still, reasoning and historical arguments proving this point are probably not enough to keep politicians and central bank officials from tampering with the workings of the market.

Regulators in many of the world's leading financial markets have recently enacted bans on short selling in a blatant attempt to shoot the messenger (short sellers) and keep stock prices elevated.

Now that the global share markets continue to head lower, many traders are expecting a large rate cut from the Fed and the possibility of coordinated rate cuts from leading central banks.

We'll see what the week has in store for us. As always, your comments and thoughts are a welcome addition.

3 comments:

David said...

Forbes has a wrap-up of the closing action in key global markets.

Predominant phrases in today's share trading news: "biggest one-day drop", "trading shut down", and "market fell to its lowest level since...".

Montrose (aka) TROSE said...

junk people were given junk loans and they leveraged dem hyperinflated home prices in da form of "helocs" to buy plasma tvs, escalades, and what have you. we gotta give all dat money back now and den some. gonna be ugly. remember one ting, said hes gonna be..shorty gonna be a thug
Love,
MONTROSE

David said...

Excellent stuff. I think you need to drop some wisdom on the sucker MCs in Congress.

Peace,
Fullerton Ave.