Letting Go of the Panic Button

Posted October 21, 2008

The downward freefall of the US stock market has reversed direction as traders respond to details of efforts to save financial markets from failure. But the euro continues to decline, because lack of unity caused Europe’s details to be announced too late.


The US Dow Jones Industrial Average soared yesterday, 13/October/2008, as traders began to show faith in the ability of the government to prevent the failure of the financial systems.  This came after additional details about the actual implementation of the $700 billion bailout plan were announced by the US Treasury department.  In addition, European governments also explained the financial commitments they are willing to make in order to shore up the euro.

The Dow Jones Industrial Average (DJIA) increased by a whopping 936.42 points or 11.08%.  It rose to 9,387.64.  You can hear the sobs of those US average traders who moved their money last Thursday and Friday out of the DJIA into safer funds to prevent additional losses of retirement funds. Oh, if they had just hung on one more trading day!  But that is why they invented the “hindsight is 20/20” expression.

But there is no 20/20 vision in these times of economic uncertainty.  The market fingers have been lifted off the panic button, but they continue to hover right over it.  The persistent prediction is there will be a global recession and the euro will continue to drop.

But how can that be when the Economic Union has revealed what they will be doing to shore up the banking system?  If you remember, one of the reasons the markets went into a rapid decline over the last 2 weeks was because traders felt the lack of unified response was a negative factor.  Now the leaders of the Economic Union have finally come to agreement, but the market response was “too little and way too slow”.  So the euro is now predicted to continue its slide to between $1.25 and $1.20 against the dollar by 2009.

The Economic Union plan details indicate that 1.1 trillion euro will be injected into the banking system.  Bank loans will be guaranteed and the governments will take stakes in the financial lender institutions.  But the interest rate increases put in place in the beginning of 2008 are now seen as a liability despite second half of the year cuts.  In addition, the International Monetary Fund announced there would be another $675 billion needed to be injected into the financial institutions over the next few years.

The fact the Economic Union nor the 15-nation euro financial group could not make a unified response to the financial crises before the markets closed on Friday 10/October/2008 has kept the markets nervous.

In the US, on the other hand, traders welcomed Treasury Secretary Paulsen’s announcement the government is ready to use $250 billion of the $700 billion bailout money to buy equity in the banking institutions.  Nine lenders will be targeted initially including giants like Citigroup and Goldman Sachs Group, Inc. (though Paulsen did not name names during the announcement).  There are some requirements put into place that limit the amount of executive pay and golden parachutes.  In 3 years, if all goes well, the financial lenders will begin buying back the equity at par.

So there are very different responses going on in the US versus Europe.
Yesterday, 13/Ocotober/2008, the euro closed at $1.3523 against the dollar.  The Great Britain pound closed at $1.7269; the Canadian dollar at $.8634; the Australian dollar at $.6808 and the New Zealand dollar at $.6073.  As the US dollar gained strength, the Japanese Yen began to fall, closing at $.0098 against the dollar.

The crisis may appear to be stabilizing but its long term effects are yet to be known.  So the fingers are off the panic button, but like in the game show contests you see on television, one wrong move and that button can be pressed in a heartbeat.