The Economy Guy

What an interesting Christmas season we are having in the markets.  The stock market was open last Monday, Christmas Eve, but was a short trading day.  On Monday, stocks climbed about 100 points, and today stocks climbed 2 points.

Today every other market started to move.

Bonds are the market to watch.  Today, the 10 Year Treasury ended at 4.28%.  It has been climbing steadily, and bond market players are sensing that there is a risk for bonds in the future.  That risk is inflation.  Generally people move money from stocks to bonds as a “safe haven.”  I don’t think you will see that happening as much in the future because bonds are getting the sense they are not so safe anymore.

All other commodities and the dollar started moving too.  Oil and Gold starting going up, and are both at significant points in their price.  The Dollar has started to fall again.

Health Warning – this is a light trading season, and movements in all markets can be exaggerated.

Here is a great headline coming from Europe.  Bank Crisis Could Be Worse than ‘29 Crash.

“The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard.”  ”They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don’t think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park,” he adds.

The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. “We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other,” he says.

New York‘s Federal Reserve chief Tim Geithner echoed the words, warning of an “adverse self-reinforcing dynamic”, banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.

Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.  Section 13 (3) allows the Fed to take emergency action when banks become “unwilling or very reluctant to provide credit”. A vote by five governors can – in “exigent circumstances” – authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.

This is a great write-up of what is going on globally in the financial systems.  The US Fed is caught between a recession and an inflation.  Europe is seeing a massive illiquidity crisis.  The last time we saw this type of crisis was 1990 in Japan when inflation was 4%, and interest rates moved from 6% to zero % –  and zero % interest rates were NOT LOW ENOUGH!!!!  It took years for Japan to claw itself out of that mess. An interesting observation is that the “healthy” stock markets of the world are ignoring this reality.

Wednesday’s Closing Details
DJ30 – 13,552 (Up 2 points)
10 Year Treasury Bond – 4.28% (Up 0.07%)
Euro – $1.4493 – just starting a fall in the Dollar.
Gold – $830/ounce (Up $13)
Oil – $95.97 (Up $1.84)
Gasoline – $2.45 (Up $0.07)