It's All In the Details

Posted February 10, 2009

The anxiously awaited new US stimulus plan was not accepted graciously by the equity markets leading to investors fleeing to the US dollar and yen as safe haven assets. The US dollar and yen rose against major global currencies as the world responded negatively to both the US stimulus plan proposal and the US Treasury Secretary plans for spending the remaining TARP funds.


Countries around the world are dealing with recessions, declining exports, falling production, and increased unemployment.  But today the world was waiting for a series of announcements by the US government which was supposed to restore some investor confidence.

There is really only one word to describe the equity markets today: bloodbath.  The market slaughter began with US Treasury Secretary Geithner discussing plans for spending the remaining TARP funds.  The market started falling.

Then President Obama held a televised town meeting in Florida where he pushed the new stimulus plan the Senate was voting on as he spoke.  The stimulus package passed.  The stock market fell even more.

Then the US Federal Chairman Ben Bernanke appeared before a congressional committee to answer questions about the first TARP spending and how the money was spent.  The market fell some more.

People were watching all these speeches and had to be saying, “Please just be quiet before I lose everything.”  The Dow Jones Industrial Average slid by 381.99 points to 7,888.88 or a 4.62% decline.  This was an indication of investors fleeing the market out of concern the US spending plans had no details and thus were seen as being ineffective proposals.  This is despite proposing a plan which could exceed $2 trillion to loosen lending, sell toxic assets, mitigate foreclosures, cut taxes, increase infrastructure spending, and even give money to each of the 50 states. 

As equity markets dropped, the US dollar strengthened against most major global currencies as investors sought safe haven assets once again.  The disappointment in the lack of technical details made investors feel as if the government really has no idea how to “fix” the US economy and just spouted more of the same after 6 months of working on the problem.  This is not a way to inspire confidence.

The US dollar strengthened against the euro to $1.2863 and against the Australian dollar to US$.6539. 

The yen also strengthened due to being a safe haven currency in these difficult economic times.  The yen strengthened to 116.28 yen per euro and to 90.38 yen per US dollar.  The yen advanced against the Australian dollar also to 59.13 yen for loonie. 

The negative reaction to the proposed US stimulus proposals reverberated around the world.  The Mexican peso weakened to US$.0688 on fears the plans will not lead to economic recovery anytime soon.  Canada’s dollar also weakened against the US dollar for the same reason to US$.8022.

In fact, there is a litany of weakening currencies against the US dollar because the plans announced today were considered vague and left too many questions concerning investor involvement in the purchase of toxic assets from bank balance sheets.  The Columbian peso declined (US$.0004); the Swiss franc weakened (US$.8633); and the New Zealand dollar (US$.5199). 

The UK pound weakened against the US dollar also to US$1.4486 as the UK home sales continue to fall to levels not seen since 1978.  The UK recession is still deepening and there is enormous concern that a continued slide could lead to a depression.  The UK pound weakened to 88.86 pence per euro and to 134.31 yen per pound. 

Today’s activities are extremely concerning because governments are virtually out of ideas which some investors saw as the real message coming out of the US today despite political rhetoric.  The general reaction to the proposed stimulus plan is that the suggestions merely rehash stimulus spending to date which has proven to be a failure. 

The only really new proposal was the creation of a Public-Private Investment fund to finance the private investor purchases of government backed distressed securities.  But without details, the initial reaction to this plan is that it makes little sense.  If the government is going to back the securities, why sell them? Why not just back them where they sit now?

As more details emerge about the US stimulus plan, the Euro-Zones interest rate plans for reductions, the UK financial industry bailout, and the Russian debt restructuring, there is sure to be a lot of uncertainty and lack of confidence to be found in the markets.

It’s all in the details…