The Devil’s in the Details

Posted October 27, 2008

The credit markets are slowly responding to the injection of liquidity into the financial systems. But the benefits are being offset by fears of a global recession.


There is an old expression that says the devil is in the details.  On the surface the trillions of dollars injected into the banking systems around the world looked like gifts from heaven.  The new funding was not intended to be merely plugs in leaky balance sheets.  The banks were supposed to use that money to begin extending credit again.

When you look at the details of what is unfolding though, there is a lot of devil to be found.  Unemployment in the USA continues to rise.  The number of housing foreclosures is accelerating and no one knows where the end will be found.  The banks are extending credit but only to the safest and most secure borrowers which are not your average consumers.  Trying to get a car loan in the USA right now is quite difficult unless you have almost perfect credit.

On a global scale, the troubles in the emerging markets are having an enormous  impact on the financial markets.  In effect, countries like Hungary and the Ukraine are asking for billions of dollars of relief from the International Monetary Fund.  No one really knows how Iceland is going to survive the problem is so severe.  In stable markets such as the UK, a recession is going into full swing.

And everyone has their hand out.  In the US the financial bailout is now being extended to regional banks and corporate concerns are also asking for help.  The auto industry has been particularly hard hit at a time it was already in trouble before the mortgage meltdown.   Around the world, everyone is looking to the governments to print more money to create more liquidity.

Do we dare talk about inflation yet, or should we wait to address that problem in 6 months?   You can almost hear the hum of the printing presses.

The point is the investors are worried about the bailout working in the credit markets and they are even more worried about emerging markets.  Savvy investors are looking ahead and seeing the flood of liquidity is barely budging the financial markets into stability.  What is particularly concerning is the fact the principles behind the capital injection should have worked to stabilize markets.

Investors have almost no confidence in the market yet and on Friday, 24/October/2008, continued their search for safe investments.  That fact alone continues to explain the continued strengthening of the US dollar against major global currencies except the yen.  Stated in US dollars, the euro fell to $1.2569; the Britain pound fell to $1.5825; the Canadian dollar fell to $.7834; the Australian dollar fell to $.6185; the New Zealand dollar fell to $.5593 and the Swiss franc fell to $.8555.   On the other hand, the Japanese yen rose again to $.0106.  The rise in the yen is worrying markets because of the profound effect it will have on exports.

All of the devil’s details led to major drops in the stock markets on Friday.  The Dow Jones Industrial Average (DJIA) fell 3.5% to 8,378.95.  The FTSE dropped 5% in one day to 3,883.36 and the NIKKEI fell a whopping 6.36% to close at 7,162.90.  What is really frightening for many investors is they have no idea what is going to happen on Monday, 27/October/2008.  Analysts have stopped trying to make predictions.

What the experts are saying now is the financial markets will not rise again until investors have confidence the global economies are stabilizing.  It is becoming an incantation meant to drive out fear and bring in confidence.  The general conclusion is the markets are going to continue to see some rough days and no one knows where the bottom may be found at this point.

The devil certainly is in the financial details at this point.