October 7, 2008

Global Market Comments for October 7, 2008

1) There was a pretty dramatic improvement in credit spreads today after the Fed announced its entry into the commercial paper market. We saw it in LIBOR, TED spreads, and a stronger euro. One month Treasury yields rocketed up to 0.35%. The Fed is now massively flooding every credit market of any description. While I believe this will solve our problems short term, over the long term they are laying the foundation for the next crisis. That will be an explosion in inflation in a couple of years.

2) Despite all of the Fed efforts, the stock market still sold off 500 on a run on Morgan Stanley stock, which fell $10 to $14 on a rumor that the bail out financing from Mitsubishi Bank had fallen through. Also, the ban on short selling comes off tomorrow night.

3) $260 billion in cash is sitting on the sidelines waiting to buy distressed mortgage assets from banks once a price is set by the government. $129 billion is from hedge funds, $63 billion from private equity, and $50 billion from a Goldman Sachs fund.

4) Credit comes from the Latin word 'creer' which means 'to believe'. The fundamental problem with the credit system is that no one believes in the creditworthiness of any counterparty, except the US government.

QUOTE OF THE DAY

'The word 'politic' comes from the Greek 'poly', which means 'many', and the word 'tics', which means 'many blood sucking insects'. Former labor secretary Robert Reich.

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