Is This Normal or Is the World Crazy?

Posted October 21, 2008

Major global stock markets rose on Monday, 20/October/2008, as credit markets began to show some signs of easing. The dollar rose against the euro, the British pound, the Swiss franc and the Canadian dollar as economies continue to deal with the financial crisis.


One of the fascinating points to consider about the economic shifting going on right now is the fact no one really knows for sure anymore what “normal” will be when the dust settles.  How high will the stock markets rise, for example, once the recession begins to fade?   At one time the US stock market was predicted to rise to as much as 15,000 and now everyone knows that even at close to 12,000 it was a house of cards without much to support it.  The sub-prime mortgage market had no substance.

So normal today is seen as an upward trend in markets that does not include volatile swings throughout the day.  That means Monday, 20/October/2008 was quite normal.  The Dow rose 4.67% to 9,265.  The Japan Nikkei stock exchange rose 2.52% to 9,233.  Britain’s FTSE 100 rose 5.41% to 4,283. 

The impact on currencies has been a strengthening of the dollar against the euro, the British pound, the Swiss franc, and the Canadian dollar.  The dollar weakened considerably against the New Zealand dollar.  The euro closed at $1.3319 against the dollar; the Great Britain pound closed at $1.7125; the Canadian dollar closed at $.8382; and the Swiss franc closed at $.8687.  The New Zealand dollar value rose from $.6156 to $.6238 between Friday and Monday.

It was fairly quiet on the European side of the ocean as governments continue to watch for signs the input of capital into the financial markets is going to work.  Sweden, South Korea and Dutch governments announced they are going to also be shoring up their financial institutions and that added some additional stability to the global markets.  The emerging market currencies are relying on the continued funding of their deficit accounts with international funds using stable currencies.

In the US, where all eyes are watching since the source of the financial collapse is found in this country, there were glimmers of hope that the extreme period of financial volatility has settled down.  This does not mean talk of a recession has been eliminated.  It just means the credit markets are loosening and traders are acting more rationally.

There were several indications the financial crisis is under control.  First, Federal Reserve Chairman Bernanke has hinted at another interest rate cut before the end of the year.  Second, Bernanke is promoting another economic stimulus package which would return money to consumers who would then spend the money and revive the sagging economy.  Third, as mentioned, the credit markets are easing and the stock market rose.

On the international front, the interbank lending rate, called the Libor, fell by 36 basis points to 4.06%.  The Libor rate has fallen for 6 business days in a row.  In addition, oil rose to $73.65 a barrel which indicates suppliers are not as worried about less oil use due to the recession and tight markets.

So what is normal now?  That depends on your viewpoint.  If you lost a lot of your investment value over the last month, any rise in equity markets is considered more normal activity.  If you hope to eventually recover all of those losses, then normal is a very long way off. 

But at least things are looking a little brighter than they were just a week ago.