Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Some Quick Opening Comments, October 17thThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Asian and European markets generally followed the US upwards after the big late afternoon rally on Wall Street yesterday afternoon, showing that some buyers are finally probing the market for bargains. This sentiment is no doubt fortified by the improvements in the interbank and commercial paper markets, which have finally, after several weeks, shown signs of revival, albeit of a frustratingly tentative sort so far. Then again, it's a bit much to expect confidence to return to these markets amidst volatility of unprecedented levels and a bleak economic outlook that gets bleaker daily, and is in fact spreading geographically at a phenomenal rate. Other causes for concern: US mortgage rates have spiked, as holders of US agency (the recently nationalized Fannie Mae/Freddie Mac) debt have, in response to US plans to recapitalize the banks, sold off and piled into riskier, higher-yielding bank assets. As US recovery seems predicated on the eventual revival of the housing market (so that house prices will find a floor, and repossessions/payment defaults stop), this rise, as the Financial Times noted in breaking the story, is a pernicious effect of the plan to recapitalize the banks, and shows how complicated, and risky, this plan can be. Also, hedge funds are selling their assets at a rapid pace to pay off investors headed for the exits, creating a spiral of losses and further sell-offs that has led to a number of funds being closed, and this trend is set to accelerate at a potentially alarming rate. That means downward pressure on stocks, though hedge funds' unwinding of their huge speculative positions in oil and commodities should keep inflation falling, barring a brutal Northern hemisphere winter or geopolitical event of some magnitude. Still, the fact that the funds are in this trouble partially because they are having problems cashing out of failed banks like Lehman shows how delicate all bank-related finance still remains, and more turmoil in hedge fund land will only exacerbate these tensions. Finally, US industrial production statistics show a decline the likes of which hasn't been seen in decades, and September housing figures just came in and are poor. So the economic gloom element may be the dominant factor as US trading starts today, even as the extraordinary measures taken by Central Banks and finance ministries worldwide starts to show signs of having an effect (though, as was the case with US mortgage costs, as we saw above, these effects are far form straightforward and completely serendipitous). Also: watch the situation in South Korea: the currency there fell some 9% yesterday, and its financial situation is dire, characterized by a large current account deficit, falling exports, stubborn inflation, and a banking sector heavily reliant on short-term debt (interbank and commercial paper problems again). And though they accumulated huge reserves in response to the Asian crisis ten years ago (and the subsequent, masochistic IMF structural adjustment program imposed on it), its position is very fragile, especially given the rapidity with which the crisis is now infecting emerging markets, even ones considered only weeks ago to have "decoupled" from the western world's messes. Also watch Eastern Europe: Ukraine and Hungary now, but possibly Baltic countries which borrowed heavily in euros from Scandinavian and Eurozone banks now feeling the pressure. Labels: Fannie Mae, financial crisis, Financial Times, Freddie Mac, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
