Posted December 10, 2008
The US dollar strengthens against all benchmark currencies except for the Japanese yen. Investors buy US Treasury Department bills with zero interest.
The Dow Jones Industrial Average dived again, because investors continue to react day after day to specific news as reported by governments and individual corporations. The US stock market fell 242.85 points in response to continuing concerns and confusion over the state of the economy closing yesterday at 8,691.33. Yes….confusion. The lack of responsiveness to most efforts to stimulate activity is probably the primary reason the markets are staying volatile.
One of the most interesting news reports to come out yesterday, 9/December/2008, said that investors are parking their money. They bought Treasury bills with 0% return. Yes…you read it correctly….no return. This is a tactic being used to keep money safe while watching and waiting to see what is going to happen next in the global financial markets and with the rapidly deepening recession. The US Treasury Department sold $32 billion of 4-week bills with zero percent interest. Last week the bills sold with .04% interest which isn't much more than zero but at least represents a slight level of earnings.
One newspaper report made an interesting comparison between buying zero interest t-bills and burying money in a coffee can. (AP report:10/December/08, Read and Crutsinger) You would get the same return…nothing…while getting comfort knowing the investment will not be eroded by declining markets.
By the way…many countries are now predicting the recession will last for most of 2009. Stimulus programs such as the infrastructure improvement program suggested by US President-elect Barack Obama and the domestic stimulus program introduced by the Chinese will hopefully shorten the recession period.
Currency markets have been a bit volatile also. The dollar advanced against almost all of the benchmark currencies. With the stock market sell-offs came a strengthening of the dollar and the yen. The name of the game right now is risk aversion so investors are moving money between equity markets, government securities, and currency markets on a regular basis. The stock sell-offs continue to occur in triple digit figures as corporations issue future earnings warnings on an almost daily basis. Investors are scrambling for safe places to hide their money until they feel comfortable entering a particular market.
The Canadian dollar weakened against the US dollar after the Bank of Canada reduced its interest rates by 75 basis points which was more than anticipated. Yesterday, the Canadian dollar fell to $.7914. The Bank of Canada made it clear it believes the global recession is going to be much longer and much deeper than originally expected. A long global recession will affect Canadian export levels.
The Australian dollar ($.6596) continued to weaken also, as did the New Zealand dollar ($.5410); the Swiss franc ($.8289); and the South Africa rand ($.0979). The yen, on the other hand, strengthened to $.0108 against the US dollar. In fact, the UK pound weakened against the yen like the US dollar. The strengthening of the US dollar and Japanese yen against other currencies is an indication that investors continue to seek safe haven markets for parking their money.
There is no way you can talk about the global recession and not make mention of the continued efforts to find agreement on how to rescue the big three US automakers. The current proposal recommends a short term US loan program in the amount of $15 billion. Once passed, discussions would immediately begin concerning long term financing plans. The loan program would be overseen by a government appointment manager who would be responsible for bringing together all involved industry participants to negotiate a long term plan for achieving profitability through better management of finances and by increasing competitiveness.