Don't Harm the Patient

Posted February 24, 2009

The US stock market slid to an eleven year low while the Japan yen weakens against the US dollar on news of a widening Japanese trade deficit. The deteriorating Japanese economy led to a weakening of the Australian and New Zealand dollars against the yen.


There is an old saying that goes like this: “Doctor, please don’t harm the patient.”  In other words, the person who is supposed to be healing the one with the illness can do more harm than good if the wrong decisions are made.  This is a perfect metaphor for what is going on in the financial markets today.

Except in this case the doctors are politicians and the patient is the global economy.  It is difficult to ignore the fact that every time the politicians start talking the stock markets go down, gold prices go up, and currency prices get more volatile.

A perfect example is the stock market blood bath that hit the Dow Jones Industrial Average yesterday.  Even as the US government spoke about nationalizing Citigroup, Inc. and revamping the bank rescue plan, the market fell to an eleven year low.  Closing at 7,114.78 after losing 250.89, investors are turning to the safer investments again. 

One of the big problems is there are still no details on how the toxic assets are going to be re-priced and/or removed from bank balance sheets.  Until that happens, banks are not going to ease credit restrictions in place.  This is a scenario playing itself out around the world including in the UK, Scotland, Japan, Mexico, and all the other countries with banks foolish enough to have purchased the toxic assets sold by the US banks. 

For currency traders, the message has been, “Stay alert!”  No one really knows yet which economy will be the first to show signs of recovery and this is largely due to the toxic asset valuation problem.  Right now the yen is weakening against the US dollar as the Japanese economy continues to deteriorate.  The safe haven appeal of the yen is dissipating as a currency investment refuge.

The yen weakened to 95.94 yen per US dollar.  It also weakened to 120.10 yen per euro which marks a five-day streak of declines.  The Japanese trade deficit widened in January 2009 indicating Japan is once again faced with a long and deep recession like it saw in the 1990s. 

The Australian dollar and the New Zealand dollar weakened against the US dollar and the yen.  The biggest factors leading to these declines are the indicators showing continued deterioration of the US and Japanese economies.  The Australian dollar weakened to 64.75 US cents while the New Zealand dollar fell to 51.29 US cents.  The Aussie fell against the yen to 61.65 yen and the kiwi fell to 48.72 yen.  Both countries are expected to cut benchmark interest rates in March.

Hungary has indicated plans to increase the country’s benchmark interest rate which is an action not seen much right now.  The increase is planned as part of a strategy to prevent foreign debt payments from rising.  The forint weakened against the euro by .04% yesterday.

The US President, Barack Obama, and the US Federal Reserve Chairman, Ben Bernanke, have plans to do a lot of talking this week.  The President addresses the US Congress later in the week while Bernanke is questioned today in front of a Senate Banking Committee.  

These “doctors” are trying to find the cure for a very sick economy, but let’s hope they don’t talk too long.  The US Treasury Department is still hoping to establish partnerships between the government and private investors to purchase the bank toxic assets.  But the problem is that no one can really seem to come up with a reason why anyone would want to assume an asset which is already known to be overpriced.  It’s like that old saying, “Not my problem….”

The US dollar is predicted to strengthen against most major currencies over the next weeks if the global recessions continue their downward slides.

Let’s hope the doctors do no more harm to the patient over the coming days.