US stock markets have been on a weak footing since their Santa Claus rally, rattled a sharp contraction in the ISM manufacturing index to 47.7, and a 0.3% increase in the jobless rate to 5 percent. The collapse of key financial stocks, such as Bear Stearns, Citigroup, Countrywide Financial, and MBIA, are all linked to the sub-prime mortgage meltdown, and have been a relentless headwind for equities.
The Standard & Poor’s 500 Index fell 5.3% in the first five trading days of 2008, the worst start to a year since 1926. In the same five-day period, the Dow Jones Industrials tumbled 676 points, the worst ever start to a year in point terms, and in percentage terms, the DJI-30’s 5.1% drop was the weakest start to a year since 1978. Nasdaq had its worst five-day start since its launch in 1971.
The United Nations warned on January 9th of “clear and present dangers of the world economy coming to a near standstill this year,” because of US housing and credit problems and the weak dollar. In its annual report, the UN forecast global economic growth at 3.4% for 2008, only slightly lower than last year’s +3.7%, but said under a pessimistic scenario it could be as little as 1.6 percent.
“The bursting of a housing bubble in the United States last year and a crisis over sub-prime mortgages could trigger a worldwide recession and a disorderly adjustment of global imbalances. The recent global financial turmoil has heightened these risks and shown them to be clear and present dangers. US economic growth could be virtually wiped out if US house prices fell by as much as 15%,” the UN said.
“The economies of Japan and Western Europe, already operating near capacity production, could not take up the slack,” the UN added. The S&P 500 and Dow Jones Industrials might be the deciding factor in whether the US economy tips into a consumer-driven recession this year. US consumers can withstand one serious blow to their wealth – lower home prices. But a double-barreled assault can be disastrous, so if stocks keep sliding, spending may finally buckle under.
On January 4th, just hours after the release of the dismal US jobs report, President Bush convened the “Plunge Protection Team” (PPT) for a meeting in the Oval Office to discuss the plunging Dow Industrials, which was tumbling to key long term support levels on the charts. The PPT is led by commander in chief Hank Paulson with connections to Goldman Sachs, and Federal Reserve chief Ben “B-52” Bernanke, who has control over the money spigots in the US economy.
Image cannot be displayed
To prevent the onset of a bear market in the Dow Industrials and S&P 500, the PPT is prepared to utilize all tools at its disposal to jig-up the stock market, and bail-out “free market capitalists” on Wall Street. A favorite PPT tactic is to buy DJI futures contracts in the final hour of NYSE tradingto put the squeeze of bearish short sellers. After the noose is tightened, “B-52" Ben pumps massive injections of liquidity into the hands of Wall Street agents or signals big rate cuts.
“In light of recent changes in the outlook for economic growth, additional policy easing may be necessary. We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” Ben “B-52” Bernanke declared on January 10th. He said inflation expectations were “reasonably well anchored,” with crude oil trading at /barrel, up 60% from a year ago, soybeans at .50/bushel, up 80% from a year ago, and gold bumping against 0/ounce, up 34%, and he pledged to monitor these markets closely.
Bernanke denied accusations that he is playing politics ahead of presidential elections later this year by hyper-inflating the US M3 money supply, already expanding at a 16% annualized rate, its fastest in history. “Political considerations will play no role and I assure you as strongly as I can that we will be objective and analytical, and we will do what’s right for the economy,” Bernanke said.
Yet Bernanke is a political appointee of Mr. Bush, and got the job as chief because of his reputation as a radical inflationist, and his willingness to drop dollar bills from helicopters if necessary, in order to prevent asset deflation. The Bernanke Fed is expected to slash interest rates and flood the markets with cheaper dollars at a time when inflation is already elevated at multi-decade highs. The US producer price index is 7.7% higher from a year ago, it’s highest in 34-years.
The consumer price index, heavily doctored by Labor apparatchiks, is 4.2% higher on annualized basis, and import prices are 11% higher from a year ago. Fed rate cuts designed to bail-out Wall Street banks and brokers carries a big risk of guiding the US economy into a “Stagflation” trap, or worse yet, the nightmare of hyper-inflation, which can easily get out of control and destabilize the broader economy.
Robert Rubin, former US Treasury Secretary and the current executive chairman of Citigroup Inc, is in a state of panic, with his bank holding billion of toxic sub-prime mortgages. Rubin is calling on Washington to enact a fiscal stimulus package of about 0 billion, especially for sub-prime borrowers. “The package should temporarily provide funds to families who need it most and are most likely to spend the money,” he said on January 10th.
Image cannot be displayed
Expectations of a half-point Fed rate cut to 3.75% are no surprise to traders in the US Treasury market with 2-year yields pinned at 2.70%, far below the rate of inflation. “If the US federal funds rate continues to fall, this will certainly have a harmful effect on the US dollar exchange rate and the international currency system,” warned Hu Xiaolian, director of China’s Administration of Foreign Exchange. Beijing keeps a large portion of its $1.4 trillion in reserves in US Treasury securities, and any change in China’s investment strategy could affect exchange rates.
On the flip side, the European Central Bank left its repo rate unchanged at 4.00% on January 10th, but President Jean-Claude Trichet said the ECB is ready to take pre-emptive action against inflation if needed. “We are in a position of total alertness. The Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialize,” he said, ruling out any rate cuts in the months ahead.
