Daily funnies
Wednesday, 29 October 2008 9:10am
People don't need to read the funny pages anymore to get their daily amusement fix. They only have to read the way the media interpret the daily movements in the stockmarket.
Wall Street rallied almost 11 per cent last night. Here is Bloomberg's interpretation, ‘Stocks rallied and the Dow Jones Industrial Average posted its second-best point gain as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing.'
Bloomberg interpreted the previous day's trading where Wall Street lost about 3 percent this way, ‘U.S. stocks tumbled in the last half hour of trading after shifting between gains and losses all day, pulled lower by commodity producers as investors speculated a global recession will damp demand for fuel and metals.'
Bloomberg is not the only one. Every other information media on the financial market echoed the same spin.
Stocks are up because valuation is low and the crunch on credit is easing. Stocks are down because investors are worried about the global recession.
The fact is both explanations are valid. Liquidity is loosening, equities are cheap and a global recession is in our midst. And these are exactly the same reasons causing the wild swings in the equity markets at present. Investors are slowly testing the waters. They dip their toes. No, too cold. Get out. They dip again. No, too hot. Get out.
This will continue until the temperature is just right. When this will be remains anyone's guess. The only certitude is that things would remain volatile for a while.
National governments are increasing their rescue packages and extending their alms to include other business concerns. And like Oliver Twist they are asked, "Please sir, I want some more."
And they shall have it. The US Federal Reserve started its two-day Federal Open Markets Committee (FOMC) meeting last night. By this time tomorrow, markets expect news that it has cut interest rates by 50 or 75 basis points.
But then there is nothing stopping it from reducing rates by as much as 100 basis points. This will bring the fed funds rate to 0.50 per cent, particularly given that inflationary pressures are no longer part of the equation.
The US central bank has a difficult task of turning the economy and confidence around. Credit conditions (although easing) remains tight, businesses are closing their doors, job losses are increasing, consumer sentiment has hit an all-time low, household spending continues to soften, house prices are still on a downtrend, equity prices remain weak and global growth is failing.
At the start of October, the Financial Standard Intelligence Unit (FSIU) postulated that the Fed would soon follow in the footsteps of the Bank of Japan and implement a zero interest rate policy - it is looking more likely now.
The lesson from the last global recession in 1990/91 could still prove effective in reducing the magnitude and length of the recession and assist in recovery.
It was only after US interest rates have fallen from 9.75 per cent to 3 per cent did we see the first signs of turnaround during the 1990/91 recession. Lower interest rates generated better yield spreads for banks, debtors saved on interest expenses as they refinanced their debts into loans charging lower interest rates.
This improved stock and bond market valuation as the savings found their way into retail spending and home purchases. Profits improved and business investment returned. Banks used this improved climate to accelerate their sales of bonds and stocks, thereby managing their capital positions. The recession became just a memory - a painful memory.
The problem this time is that the Fed is running low on ammunition --fed funds rate at 1.5 per cent -- and the best it could do is take interest rates down to zero. It took several years for the Bank of Japan's zero interest rate policy to significantly resuscitate its economy. For all our sake, let us hope the Federal Reserve will be more successful.
Benjamin Ong
