The Economy Guy

Issue: 8/20/07

Well, the dust has settled over the Fed’s cut in the Discount Rate. And, here is what they didn’t tell you on the news shows. This was a dramatic change in the way the Fed does business. Not only did the Fed change direction by 180 degrees – anti-inflation to “let’s get that liquidity out there.” They also rewrote their rules for the Discount Window. That’s the place that a bank goes to borrow money at the Discount Rate. Historically, the Fed made it know that they didn’t want banks to borrow money at the Discount Window. That’s because they wanted banks to make money using depositor’s money = the traditional banking method. Banks make money on the spread between short term interest rates and long term interest rates (Use deposits which are short term rates, and give longer term loans for cars, homes, personal, etc.) Well, last Friday the Fed made it crystal clear that they wanted banks to make loans at the Discount Window. One other bigger change is that these loans are for 30 days = a big NEW period to repay the loans. Before the period was shorter, and the Fed will reconsider the loans after 30 days. The idea is to let the market settle down and have a chance to value those silly bad mortgage packages that so many banks and institutions hold.

Here’s what happened over the weekend.

“I think, in the next five or ten years, the bias is for the dollar to weaken and all the basic economics suggest that it should,” GM Chairman and chief Richard Wagoner told reporters. American automakers have cranked up a major campaign focusing on the what they describe as the undervalued Japanese yen, Wagoner acknowledged. From GM’s perspective the yen at 114 is a lot better than the yen at 120, he added. “That’s good,” said Wagoner, adding the yen’s true value is somewhere in the range of 90 to 100 to the dollar.

Let’s put the GM Chairman’s words into perspective. He wants the Dollar to become devalued against the Yen by 13 to 22%. That’s a big devaluation, but isn’t outside sensible reason. He wants to export cheaper SUVs around the world, and wants the Japanese imports to become much more pricey. Equally important is one of the top US executives is stating that the Dollar will devalue in the future.

Germany’s publicly-owned regional bank SachsenLB admitted Saturday it had to be bailed out to the tune of 17.3 billion euros (about $20B) by the country’s savings banks because of the US subprime loan crisis. The bank, which is owned by the authorities of eastern Germany’s state of Saxony and had previously denied being affected by the crisis, said the savings banks had extended it a credit line. The weekly Der Spiegel for its part said that SachsenLB had lost at least 500 million euros (670 million dollars) after investing more than three billion euros in the subprime market through its Ormond Quay fund. SachsenLB is the second German bank to be caught up in the subprime turmoil which has hit stock markets across the world after the troubled IKB, which was rescued with an 8.1 billion dollar liquidity line extended by state-owned KfW, its main shareholder. Another German bank, IKB, was rescued earlier this week with an 8.1 billion dollar liquidity line extended by state-owned development bank KfW, its main shareholder.

Did you catch that interesting statement where a German government controlled bank purposely lied to the public?? It’s hard to miss a loss of $670B. That isn’t just wieners and sauerkraut their talking about.

Okay, that’s a great segway for me to say that you should “never believe a government statement, until it is officially denied.” You would be amazed how many times this philosophy is true. Just stay alert to what officials are saying.

RAMS’ share fall came after it said it had failed to refinance 6.17bn Australian dollars ($5bn) of debt – meaning it will have to pay more to borrow funds that it uses to offer mortgages, hitting its earnings. This is an example of the turmoil in the world’s markets hitting the bottom line of a company when under normal conditions, nothing would have happened.

Did you see the fun in the press over the “run” on Countrywide Bank? Well, people went to the bank to close their account because they were afraid that Countrywide would go bankrupt, and that would include all their ownerships, including Countrywide Bank. Wow. An old fashioned run on the bank.

Today’s market was a non event. Stocks went up, down and ended up. Gold and currencies didn’t change. Oil dropped a little. Bonds continued their strength in value (lower interest rate).

Here are Today’s closing details:

DJ30 – 13,121 (up 42 points).

10 year US Treasury Bond – 4.63% (down 0.04%) This showed the trend in future interest rates, and continues to be interesting to follow.

US Dollar – $1.3474/Euro. No change

Gold closed at $667 per ounce. No change

Oil Closed at $71.12. (Down 0.86) Hurricane Dean is going to hit Mexico, so its influence on oil prices is coming down.

Gasoline is $1.94, .10 lower.