Teeter and Totter

Posted November 18, 2008

Stocks and currencies bounce back and forth all day as investors try to interpret economic news. US Federal Reserve Chairman Bernanke is asked to explain why mortgage foreclosure prevention never happened as part of TARP.


Like a child on a teeter-totter, the stock markets and currency rates shift continually throughout the day with no one being able to truly predict the end of day results.  For example, the Dow Jones Industrial Average has seen many days when the market rose by triple digits only to have a rush of sell-offs in the last hour before the market closes.

In another example of the inability to predict rates, the British pound was projected to continue its decline to as low as $1.30. Yet at the close of the US markets on 17/November/2008, the British pound had once again strengthened to $1.5028 reversing a trend downward.  Other currency results were very mixed.  The euro weakened to $1.2678, whereas the Japanese yen strengthened to $.0103.  The Canadian dollar weakened to $.8182 as did the Australian dollar to $.6557.

In the stock markets, the Dow Jones Industrial Average continued its teetering and tottering.  It closed on 17/November/2008 at 8,273.58 for a 223.73 point decline.  The FTSE also declined to 4,132.16 at the close of US markets on Monday.

Japan officially announced it is in a recession primarily due to the drop in export orders.  That is to be expected as the world economies continue to struggle to maintain financial stability.  There are some good signs in the emerging markets though which is hopeful.  For example, Hungary was once on the “totter” side of financial stability, but is now projecting a recovery in 2009.  Of course, the fact the IMF gave Hungary a $25.1 billion rescue package is the reason.  But Hungary has reminded the world that its continued progress towards recovery relies on direct foreign investment in its credit markets.

It kind of makes you wonder what, if anything, has changed? 

The US continues to experience a series of bad financial news except that much of the news affects other countries.  For example, the giant bank Citigroup announced it will be eliminating  another 53,000 jobs in the US and Great Britain.  In addition, there are millions of US homeowners still facing foreclosure which leads to the next “totter” discussion.

Americans thought the original financial bailout plan would help homeowners faced with losing their homes during this economic disaster.  As the $700 billion package was sold to the US congress, it seemed the public was allowed to believe the mortgage industry would be the primary one to be “bailed out”. 

Now Federal Reserve Chairman Ben Bernanke is trying to explain to congress that the whole point of the TARP program was to restore financial market stability.  It was not an economic stimulus package.  It was a financial stability package.

Ooohhh….now we get it. 

The US congress that approved the TARP package is asking why the number of foreclosures has not been reduced.  Bernanke is saying, “Not my job….”

There are some early signs that credit is loosening finally which is good.  But the problem is that the risk spreads are still elevated and retail sales are drastically lower compared to the months through August.  The US issued a report that industrial production increased by 1.3%, but it was mostly due to an anomaly.  There has been restoration of oil mining on the US gulf coast after having been closed due to hurricane damage. 

The message from Chairman Bernanke is clear.  This teeter totter called the financial markets is still wobbly and in need of additional support.  Until there are clear signs the markets are stabilized, investors remain wary and ready to jump off at a moment’s notice.