The Economy And The Credit Market

Dollar traders know the Fed has run out of room through traditional monetary policy channels while the domestic recession seems to project new lows each day. This leaves few options for a crucial and active response that can turn the tides before the world's largest economy sinks into the next Great Depression. Central Bank Chairman Ben Bernanke has expanded his unorthodox policy efforts aimed at thawing credit markets and in turn revive consumer spending and capital investment. However, liquidity injections, debt guarantees and buying stakes in major financial institutions has not yielded the results the central bank had hoped for. What's more, Bernanke has also expressed doubt that the proposed financial stimulus package alone could make a serious dent in the economic slump. So, while the economy passes from a moderate to sever recession, policy officials find their hands tied. At this pace, it will only be a matter of time before the dollar loses its 'safe have' status and loses the lone pillar for its strength.

A Closer Look At Financial And Growth Condition

The financial markets are still in dire straights – from both an investment and infrastructure perspective. Yield is still a secondary consideration for most traders. Instead capital preservation still dominates. The flow of money is essentially choked up with banks. A few prominent bankruptcies, near failures and massive write offs have led the life blood of the capital markets to horde cash. However, in building their reserves, these institutions have inadvertently stunted the government's efforts to revive growth. Until the Fed's string of cuts and liquidity injections are passed on, a lack of confidence will prevent a genuine economic rebound.

Readings on US economic activity have been dismal over the past weeks; and the forecasts that have developed around this data are even worse. Without doubt, the most notable trend for recession watchers has been the steep decline in the consumer sector. This past Friday, the non-farm payrolls reading for December printed another 524,000 net loss. This closes out the year with a staggering 2.59 million job cuts – the worst trend since 1945. Furthermore, with no more easy access to credit, consumption trends have taken the brunt of the pain. Retail sales through December dropped 2.7 percent, confirming the worst holiday shopping season in four decades

The Financial And Capital Markets

There is one thing that is keeping the markets depressed: confidence. Investor confidence has essentially dried up as the domestic and global recession bears on any hope for returns and further threatens to cut into capital that has been parked in even the safest corners of the market. While this broad concern may not be at the panic levels that turned many asset classes to record-breaking declines through October, the constant drone of risk nonetheless wears at the market's foundations. For an outlook, personal wealth is vanishing as the housing market continues its collapse and national employment contracts. This will naturally shrink the floating capital the markets have to work with. What's more, banks are also severely limiting the availability credit, which curbs leverage and prevents firms from growth charging investment.

A Closer Look At Market Conditions

For the capital markets, this past week has certainly brought a swift end to hopes that the New Year rally was ushering in a genuine rebound in confidence. Equities were particularly hard hit as revenue forecasts were weighed by consumer-related indicators. Policy officials would also play their part in driving sentiment lower. Fed Chairman Bernanke's projections suggested current efforts made towards stabilizing the financial markets and the government's stimulus plan would not turn the economy around by themselves. With yields tumbling and growth fading, both financial and hard assets are now plunging.

Risk aversion is once against swelling among investors. Over the past few months, the combination of year-end accounting and the cumulative efforts made to rescue major financial players helped the markets recover from October's panic-based selling. However, with fundamentals in the same condition they were during the worst period of last year's declines, capital preservation is once again top priority. The VIX has bottomed out and is now just below 50 percent. For institutional money, credit default premiums have reversed their steady decline and the spread over junk bonds continues to rise – sure signs of risk.