It has been many months since I did one of these, so the name hardly holds meaning. However, it is Friday, and a report is certainly overdue.
I'm sure the markets are all over the news. More important than the huge losses we saw yesterday is the extreme volatility we are seeing. After all, the major indices are up for the week, and well up for the year. But there is a lot of fear going around. Is it warranted? Probably not.
It was just a few days ago that the Fed decided to leave the target rate at 5.25%. If there really was a huge problem with liquidity, we would have expected to see a rate cut. Having said that, they did inject $38 billion in three separate moves today. Central banks around the world injected over $300 billion in similar moves. This was done to prevent a crisis in short term
liquidity. If these moves are not enough, the Fed may consider cutting rates in September, but I still doubt they will.
Instead, the Fed is saying that they will support the banks, that there is no reason to panic, but also that liquidity is a bit short. The overriding issue in all of this, of course, is the failing sub-prime mortgage sector in the United States. I have been tracking this problem since last summer when I realized that over the next couple of years, defaults would be commonplace, and the American consumer would be affected.
I still believe that in this interconnected world the sub-prime mortgage situation (I'll call it a crisis in about 6 months) will bleed into the larger economy and create a feedback effect that will affect everything. Am I saying the sky is falling? No. But this is not going to go away anytime soon. I suspect that we will continue to see this issue evolve over the next 12 to 18 months, and the full extent of the fallout won't be seen for a couple of years.
For the next six months, I expect the stock market to be unpredictable. The Dow will probably stay between 12 and 14,000, but will it be 12, 13, or 14? I have no idea. 12,200 looks to be very strong support, and with all the money people have made over the last several years, the bargain hunters should keep things afloat.
But the easy times are over. I feel sorry for the poor suckers who bought those high-yielding instruments thinking they were buying something safe. Well, maybe "feeling sorry" isn't really the word for it. But I pity them nonetheless.
"Forgive them Father, for they know not what they do."
And no one is going to inject liquidity into these peoples' bank accounts, unlike like the treatment that the financial institutions are getting.
And the financial institutions should have known better. Of course, they knew all the while that they would get bailed out, should thing go a bit sour.
Today's events prove they were right.