Mopping Up a Mess

Posted December 03, 2008

The US auto makers presented their plans for the use of federal bailout loan money with General Motors saying the company would run out of cash by the end of 2008 and the markets did not respond much. The currency news was mixed with the dollar weakening against the yen and predicted to continue to decline.


When you mop up a mess, you have to keep wringing out the dirty water to continue cleaning.  That was the metaphor that comes to mind while reading the big three U.S. automakers ideas for turning their companies around with federal bailout money.  This is a situation that is followed by investors in equity and currency markets, because the collapse of any one of them could seriously affect the efforts of the federal government to turn the deepening recession around.

And as the US economy goes… often goes much of the rest of the world.

General Motors, Ford and Chrysler are asking for $34 billion in loans backed by the federal government.  This was a higher figure than was requested initially.  The dirty water the auto makers are now trying to throw out includes cutting production of autos that were not selling, reducing severely overpriced wages rates, and closing factories that are unproductive.  The pleas to Congress are desperate with General Motors and Chrysler trying to mop up as fast as possible, because both companies say they will be out of cash by the end of the year without help.

We will just have to stay tuned on this one, because whatever is decided will affect both the stock prices and the currency rates. 

The good news is the US mortgage market is giving the first signs the federal bailout programs are starting…maybe….possibly….to work.  Mortgage applications are up for the first time since the crisis began.   Also, General Electric said it will be able to pay its fourth quarter dividends.  And the US Federal Reserve said it will be extending the 3 bailout loan programs until after their current expiration date in January 2009.

So what did the US dollar do in response to this mixed bag of news?  It barely budged with a less than 1% change in value against the euro ($1.2683).    The dollar weakened against the yen with the yen strengthening to $.0107 by the end of the day yesterday, 2/December/2008. 

The US dollar also weakened against the Australian dollar ($.6388) after the Aussie rallied in response to the announcement by the Reserve Bank of Australia that it would be lowering its interest rates to 4.25%.  That represented a 100 basis point reduction.  Of course, this Aussie strengthening is not expected to continue over the next few months due to declining economic conditions in Asian markets most affecting the Australian economy.

The US dollar also weakened against the Thai baht ($.0280) as the airport siege crisis came to an end at the Bangkok international airports.

China is also busy mopping up some economic problems that could have very long range negative consequences on its trading problems if not handled properly.  China’s yuan renminbi has been allowed to decline this week ($.1453) against the US dollar in order to support exports.  China is trying to stimulate its economy as manufacturing reductions showed the nation is entering a period of economic slowdown.  But China cannot allow the yuan to decline too much, because its neighbouring trading partners would suffer and then respond accordingly.

It just shows how precarious this dirty bucket of water really is as nations around the world continue to respond on a day-to-day basis to negative economic news.  The mopping up will take a while, because there is not only a global recession in full swing, there is still very little investor confidence in any of the markets. 

So let's just hope no one kicks this bucket of water over in the meantime....