The Economy Guy

Wow. What a day. The FED finally acted. I wonder if there was a political push. They dropped the Discount Rate 0.5%. This won’t do a thing to solve the liquidity crisis that has been occurring. However, it did appear to make the financial institutions in NYC very happy, and investors became elated and drove the Dow way up, increasing 233 points. What a ride.

Well, I thought the 13,000 would be tested, but it was smashed. Will it last???

That will be determined this weekend. The bad news should continue on Sat and Sun, but the markets are closed, so you won’t see any affect. Monday is the important day to watch.

With £60 billion wiped off Thursday, Britain‘s 100 biggest companies have now seen £128 billion knocked from their value since last Wednesday. The index has lost 12.5 per cent in the past month. That means that the UK stock market has seen about $250B go to money heaven. So what? Well, what was that equity being used for? Maybe it was being used for collateral for loans, etc. Who knows. If it was collateral, and it is now gone, you can count on the call by the banks to pay the loan back. That’s how a downward spiral happens. And, the UK is only one market. There is a market in every major country around the world. This is going on everywhere – including here at home. Get the picture of how global this really is?

Here is another impact. The UK‘s 200 biggest final salary pension schemes had accumulated a £9 billion surplus by mid-July but that had now slumped to a £21 billion deficit. So this means that people’s pensions are being put at risk because of a stock market meltdown.

In Japan, the Nikkei stock average plummeted 5.42 percent as the yen continued its climb against the dollar, suggesting some investors may be pulling out of a trading strategy referred to as the yen carry trade — using the Japanese currency to acquire higher-yielding assets elsewhere. Here is a lesson for everyone reading this. There are a bunch of folks who have borrowed Japanese money at a VERY low interest rate “overnight”, and deposited it US Dollars or Euros at a HIGHER interest rate. And they borrow tons of money. This strategy works as long as the exchange rate doesn’t change. Well, guess what. The exchange rate is changing radically right now, and it’s being caused by these folks “unwinding” their positions in the currencies. The point is that clever investment strategies have their own risks, and can cause very nasty consequences for a lot of other people when they go wrong.

The Nikkei 225 closed down 874.81 points, or 5.42 percent, at 15,273.68 points on late Thursday night (or early Friday morning depending on your point of view.) The 5.42% drop is the biggest in 6 years. Japanese stocks fell despite Wall Street pulling off a dramatic late-session turnaround to close mixed Thursday after bargain hunters lured by weeks of massive declines returned to the stock market.

The dollar’s sharp decline against the yen was the main blow to the Japanese market Friday, sending exporter issues tumbling, traders said.
The dollar fell to 111.80 yen at 4:10 p.m. (0710 GMT), its lowest level since June 2006 and down from 113.11 yen late Get this into perspective. The yen dropped from 118 to 112 in one week. This is a dramatic increase in value. It recovered today back to 114, but this is still way down.

“The market is really worrying about the fast appreciation of the yen. The market is also worried about the U.S. economy,” Credit Suisse Chief Strategist Shinichi Ichikawa said. “The next couple of weeks will be a very tough time for global financial markets.” I want to divert slightly right now by pointing out how global the market really is. Did you pick up on Credit Suisse and Ichikawa???? A Swiss bank with a Japanese Strategist???

A higher yen makes Japanese exports more expensive and less competitive overseas, and the weaker dollar has prompted concerns among companies about a possibility to have to lower their earnings outlook. A weak U.S. currency hurts Japan‘s giant exporters such as Toyota Motor Corp. and Sony Corp. by reducing the value of their overseas earnings when converted into yen. A weak dollar also makes Japanese exports more expensive abroad.

Here are Friday’s closing details: (See Thursday’s summary below)

DJ30 – 13,079 (up 1.8%).

10 year US Treasury Bond – 4.67% (down 0.07%)

US Dollar – $1.3474/Euro. The Euro is now strengthening.

Gold closed at $667 per ounce. (Up $9)

Oil Closed at $71.98. Hurricane Dean is starting to make the markets nervous.

Gasoline is $2.04, .06 higher.