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How desperate is the economic and financial situation in the US? More importantly, how bad is the situation compared to the rest of the world? Considering the dollar's (and nearly every other currency and asset class') reaction to the Fed's policy announcement on Wednesday, the outlook is bleak and growing worse.
The Economy And The Credit Market
How desperate is the economic and financial situation in the US? More importantly, how bad is the situation compared to the rest of the world? Considering the dollar's (and nearly every other currency and asset class') reaction to the Fed's policy announcement on Wednesday, the outlook is bleak and growing worse. The FOMC's decision to keep the benchmark rate in a spread between zero and 0.25 percent wasn't market moving; but the announcement that they would actively pursue quantitative easing was. While policy officials have given considerable forewarning to such a move, it nonetheless raises concern about the health of the US economy and its assets. This is yet another step that the US policy authority has had to take and that will not be matched by many of its global counterparts. While conditions in these other major economies are just as dire, the possibility that conditions can improve world-wide without these governments having to extend themselves is seen as a boon that can leverage their own recovery. Of course, if circumstances worsen, investors will call the Fed's efforts essential.
A Closer Look At Financial And Consumer Conditions
Despite the bailouts, guarantees and stimulus packages from US and other officials around the globe, financial conditions are still on the edge of panic. Despite the effort that is being made to improve the flow of money and credit around the world; the presence of toxic debt, the still over-abundance of leverage and development of the worst recession in nearly six decades is preventing the tonic from taking effect. Sentiment was further depressed after the G-20 meeting this Saturday ended without a much-needed coordinated response to what are obviously global problems. A more formal summit is scheduled for April 2nd, but should we expect anything more?
The US economy is falling deeper into recession; but most market participants have long realized the slump is far from finding a bottom any time soon. Nevertheless, confirmation that such an aggressive contraction has not yet broken its pace will leverage pessimism. Considering the consistency of deteriorating in economic activity, the surge in unemployment and the unique troubles in banking and lending, we are nearing the point that economists and market commentators begin using the term ‘depression.' With data last week showing consumer sentiment holding near a 28-year low and factory activity dropping the most in 75 years, it seems warranted.
The Financial And Capital Markets
The Fed's decision to join the Bank of England by adopting a policy of quantitative easing was taken initially taken as a sign that the government has not run out of options for turning the economy around. However, the purchase of $300 billion in longer-dated government notes helps little more than the Treasury market at this point. A rebound from the capital markets is more than likely a mixture of sentiment and traders taking advantage of burgeoning inefficiencies. From a confidence perspective, the bullish drive in the market is a necessary rebound that breaks the pace of an otherwise consistent and spent decline - there are certainly rallies in bear markets. Another factor in the rebound from equities specifically is savvy investors and traders taking advantage of the government's presence in the markets. With so much money floating around, it is bound to trickle down to speculators.
A Closer Look At Market Conditions
Taking a critical look at the stock market's reaction to the Fed's announcement Wednesday, it is clear that this move did little to encourage. In fact, it may have hampered what was otherwise a steady advance that had developed over the previous week. Plans to buy T-notes as well as an expansion of their MBS and GSE purchasing puts money back into the market and takes more untradeable debt off the banks' books; but it does little to answer the momentum in behind the United States' deep recession. However, the US isn't the only major industrial economy that could recharge the globe. Relatively positive projections for China may help to fuel a commodity rebound.
A rebound in underlying price action does not translate direction into an improvement in sentiment; and the market's many risk indicators are testament to that. The traditional volatility indexes aside, we have seen risk premiums for investment grade debt (through junk bond spreads), default insurance (credit default swaps) and basic lending (the 3-month euro dollar / T-bill spread or ‘Ted Spread') all continue to trend higher. While the government's additional steps may placate some investors, it generally speaks to how dire the situation truly is. If the next G20 meeting doesn't produce a promising global policy, momentum will inevitably carry growth and sentiment much lower.
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