Fight or Flight?

Posted October 21, 2008

The trading markets are quite erratic right now, because many people are still not convinced the European and US bailout plans will be effective. The financial experts are talking about increasing unemployment and falling retail sales indicate a continuing slide towards a recession.


When the human body faces a situation that produces fear, an immediate decision must be made as to whether "fight or flight" is the best option.  That is a good description of what is going on in the currency and stock markets.  The traders are still frightened by the unanswered questions related to the government bailout programs announced around the world.  This has produced market stress that is evoking the fight and flight response. 

The Dow Jones Industrial Average (DJIA) rose by 11% on Monday and then dropped almost 1% by the close of business in the US on 14/October/2008.  It closed at 9,310.99 having lost 76.62 points.  After the major gains on Monday, the investors decided it was time to recoup some losses and began selling. 

Fight or flight?

US President Bush appeared on television this morning with his cabinet in another attempt to calm the fears of the market.  The problem is there is an underlying worry the bailout package will not have an impact for a very long time and that credit will remain tight.  The US also has continuing concerns about government ownership of capitalistic financial institutions despite assurances the banks and large lenders will be able to buy back their stock within the next 3 years.  President Bush called the government plan as "passive investor" ownership and reassured investors that federal employees would not be sitting on the boards of directors.

Here is the most interesting fact about the injection of $250 billion into 9 major lending institutions in the US.  The government is worried the banks and lenders will use the money to shore up their balance sheets but will not actually use the money to ease tight credit.  The old expression, "You can lead a horse to water, but you can't make him drink" come to mind.  Apparently the federal government is giving the banks this money with very few requirements or restrictions.  Uh-oh….

One reason the US lenders are prone to hang on to the cash rather than loosening up current credit policies is the fact there will be a new US Treasury Secretary soon.  With US elections less than 3 weeks away, there is a good chance the federal policies and actions could be drastically different from current actions depending on who gets elected. 

Around the world, there have been interesting reactions to the market stress.  Crude oil prices went below $80 a barrel to $78.63 and who would have believed that was possible even just a month ago?  The euro is looking more and more vulnerable to falling rates.  Investors have been buying the safety of the Japanese yen and experts are predicting a continuing decline in the euro to yen markets.  This morning, 15/October/2008, the euro stood at 138.89 yen and yesterday, 14/October/2008, was trading at 139.04 yen. 

At the end of the day yesterday, the euro was $1.3642 against the US dollar; the Australian dollar was $.6986; the New Zealand dollar was at $.6217; and the Great Britain pound was $1.7429.  All of these numbers represent an increase to the dollar.  The Canadian dollar fell to $.8613 against the US dollar. 

With retail sales dropping around the world, and a grim prediction for holiday sales this year, the investors in both Europe and the US are very worried about the severity of the coming recession.  Between the worry and the unknown factors in this global financial crisis, it is very difficult to predict much of anything right now. 

So is fight or flight in the trading markets the right response?  The answer is: there is no answer yet to this question.  But get ready for a rough ride the next few months, because there are a lot of threats to financial stability still out there.