October 29, 2008

Global Market Comments for October 29, 2008

1) The Fed cut rates by 0.50% to 1%, justifying yesterday's monster stock rally. But doesn't 1% sound familiar? Isn't that the rate that Greenspan targeted that planted the seeds of the current crisis? Beware of the unintended consequences!

2) On Monday, when the commercial paper market reopened, Treasury bought $61 billion in paper, ten times the normal volume in that market. M1 is now growing at a red hot 20% rate. A tidal wave of money is hitting the financial system. LIBOR has fallen every day for three weeks, and 30 T-bill rates have made it all the back up to 0.45%. But as the Japanese learned in the nineties, you can make all of the money in the world available, but there will be no takers without business confidence. It's like pushing on a string. You can lead a horse to water but you can't make him lend. Am I mixing metaphors here? Faith in the future, which Treasury secretary Hank Paulson managed to destroy in a mere week, could take years to rebuild.

3) The S&P Case-Shiller home price index for August produced its usual horrific result, showing a 16.8% decline for the 20 largest home markets. Only Cleveland and Boston where up marginally. If you add in closing and carrying costs, every buyer of real estate since 2000 is now underwater.

4) Sweden announced a $200 billion bail out package to rescue its banks for the second time in two decades. Iceland raised its key interest rate to 18% to defend the kroner.  Every day a new country drops like a piece of rotten fruit off the credit tree.

5) More than 90% of the world's economic growth in 2009 will occur in emerging markets, with the largest portion coming from China. The average growth rate is expected to be 5%. The US and Europe are expected to show no growth at all. Many emerging markets with huge reserves are going into this recession in better shape than the US. In China the savings rate is 40%, compared to zero here.