Boldly Go Where No Man Has Gone Before

Posted October 21, 2008

The currency markets have a certain surreal air about them right now because it seems no matter what steps the global government finance agencies take, the markets continue to decline. Yet the politicians in the US claim they are taking “bold steps” to prevent further declines.


Two days ago the traders were waiting for a sign of coordinated US and European effort to address the financial free fall.  They got it today and how do the markets respond?  They continue to fall with the US Dow Jones Industrial Average ending the day 2% lower at $9,258. Traders who have been trading for over 40 years were somewhat baffled. 

Is it possible to make traders happy or not?  It is, but only after they feel confident the efforts governments are making offer new solutions that will prevent a global recession.  So far the actions taken, including the US bailout and the coordinated global central bank interest rate cuts announced today, have been included in market prices already.  So when there are no new options offered, the traders continue to seek investment safe havens.

Some in the markets are whispering “US depression” instead of recession.  The International Monetary Fund is now claiming there will be a 2009 global recession for sure.  The IMF believes the approach governments are taking to restore credit and shore up banks is too piecemeal.  But the advice of the financial experts is for traders to not fall prey to panic and that is almost what seems to be happening.  Six central banks cut interest rates Wednesday. They were the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, Sweden’s Riksbank and Switzerland’s central bank all reduced interest rates.  

The next day Hong Kong, South Korea and Taiwan followed suit and cut their interest rates also.

This was an impressive display of global cooperation which was intended to slow the stock market declines happening on all major trading floors around the world.  The move was designed to tell financial markets that banking institutions would be shored up in a number of ways.  These ways include the reduction of interest rates, the infusion of cash into the banking system, and the partial nationalization of the banking system.

It is expected the Federal Reserve will cut interest rates again at the end of October.  The benchmark rate currently stands at 1.5% and it appears it will be approaching zero with additional rates cuts in the future.  Traders are being accused of thinking negatively which leads to irrational behavior in the markets.  If traders are convinced government intervention methods will not help the situation, they view all actions as ineffective.

The financial crisis has been called “long…broad….deep.”  US Treasury Secretary Paulsen said the bailout package has not been implemented yet in any way and so could not have had an impact on markets at this point.  The Treasury Department believes it’s important to do the bailout right rather than fast.  It’s not certain financial market traders agree as stock markets continue to fall. 

So where are all the bold traders going?  They are wandering the waste land of higher yield investments due to the interest rate drops and currency variations.

At the close of business today the pound was at an equivalent $1.7284 against the US dollar.  The euro stood at $1.3672; Canada dollars at $.8897; Japan at $.0099; and the Australian dollar at $.6748. 

The overriding goal of all government action is to restore trader and consumer confidence in the market.  Many experts believe a global recession is inevitable and all that can be hoped for now is further severe declines.  In the vernacular it’s called “damage control”.