All Trick and No Treat

Posted November 03, 2008

October was a difficult month for global economies and investors due to the sudden collapse of the mortgage market. Investors are now looking back and re-assessing how they can protect their investments from this point forward.


Many countries celebrate Halloween where children go door to door yelling “Trick or Treat”.  That is a good metaphor for what happened in October in the financial markets except investors were yelling, “Trick!” only.  There really were no treats in October. 

There were plenty of RE-treats though…

In other words, October was a monster month that spawned a monster financial disaster for many people.  Private investors lost millions in their retirement accounts.  Global economies faced financial disaster that was thwarted only through enormous injections of liquidity by governments in developed nations.  Emerging markets are still standing with their proverbial hands out at the International Monetary Fund because they have no other options.  And it is not over yet. 

The fact is that no one really knows how deep the global recession is going to go.  In the US, Federal Reserve Chairman Bernanke’s comments have already been moved to the back pages in the newspapers.  People have mentally adjusted to the idea that a large amount of their investments were based on “air” and have blown away forever.  So it’s back to the routine. Right?

Wrong!  It’s wrong, because the fallout from the monster month of October is not done yet.  The influx of cash into the markets around the world has stopped the bleeding, but there are only band-aids on the wounds.  So while people wait to see if the equity additions to the banking systems are going to unfreeze credit markets, the experts are analyzing the past events.

In October, the monster stomped on stock values.  October 2008 is now officially the 17th worst month the Dow Jones Industrial Average has ever seen.  The DJIA dropped 27% at one point and had only 3 days in October where the basis point fluctuations were less than 100.  The monster ate its way around the world too.  The FTSE fell 10.7% in October and that was after a 13% decline in September 2008. 

The world financial markets have been propped up and patched up.  Credit is beginning to show the first tentative signs of loosening.  The dollar is gaining strength against the euro and the sterling.  Global interest rates have been cut several times. 

Now here is the conclusion at this point: there is no conclusion. 

In other words, no one knows if the bottom has been hit yet in the stock markets.  And no one knows how things are going to work themselves out yet.  And no one knows how long the recession is going to last.  And no one knows what the long term damage to the financial systems has been.  Some financial experts believe the recession is going to be the worst one seen since World War II.

That is why Bernanke has moved to page 7 instead of page 1.  He doesn’t have much to say right now about the future of the financial markets except to let everyone know that the revised mortgage market needs safeguards in place to prevent this monster from roaming the earth again.

Well…I think we have all figured that much out on our own.

In currency news, the biggest changes in October were in the pound.  The British pound fell 9% against the dollar.  It also dropped to the lowest it has ever dropped against the euro. 

In terms of US dollars, the euro ended the month of October at $1.2705; the British pound at $1.6101; the Canadian dollar at $.8267; the Australian dollar at $.6692; the Japanese yen at $.0101; the New Zealand dollar at $.5845; and the Swiss franc at $.8640.

The monster had fun eating up market values during October.  But beware!  The monster is still loose and still looking to do more damage.  And there will probably be plenty of additional opportunities for investors to yell “Trick!”