Sunday, September 09, 2007

Market moves

On Friday the market told us what it had wanted---a rate cut for market reasons, not economic ones. The usual bad news equals good news response to an economic report(jobs) that could foreshadow a rate cut definitely did not happen. Stocks were down sharply and the dollar took a tumble as well. The markets were saying, "Oh no, we don't just have credit excesses to clean up, it's more than that. But we wanted liquidity without pain".

This is beginning to look very much like LTCM in 1998, August, September and early October 1998 coincidentally. This is worse you say. Past crises seem contained in hindsight because they are. In 1998 it did not feel contained at all. In fact it was more frightening, and hopefully it stays that way in comparison. Credit markets seized up, and big financial institutions were all suspect as everyone tried to figure out who was a counterparty to whom and on what. The time line is interesting. In mid August an immediate crisis developed and investors were looking for the billions of losses. Where were they. The Fed huddled with banks on a rescue plan, central bankers reassured, market spokespeople tried to put things in perspective, but uncertainty was rampant. Every other day in September was up or down, but fear continued to grow. It was October 7 when credit markets had almost stalled out completely. And then in just a few days Fed actions, a stabilization of LTCM, and then the beginning of earnings reports that were better than the markets feared, and it was over. Rally.

If there is any basis for comparison, just in terms of the time it takes to get through a market crisis and how bad it really has to feel before it can pass, then we still have more of this turmoil to come. If layered on top of this there is actually a real economic downturn the crisis may pass but the market could just flatten out. No Rally.


Anonymous kf said...

Either way the sooner we know the better Give me no rally but stability and we can get back to business.

11:44 AM  

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