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The Bear is Starting to Sink In His Claws

By: Steve Johnson

1/23/2008 - 64 Comments

Markets are going down all over the world.  The Dow fell 465 points yesterday at the open, but recovered to -120 points after the Feb lowered rates by ¾ point. The biggest rate cut in 24 years.

The hope is that this is just ‘panic’ selling and the markets will return after everyone realized that the fundamentals are solid – as the administration continues to tell us. This may be true in Asia and Europe, but not so in the U.S. 

Reference Article: EU blames US debt for economic turmoil

We have problems on top of problems – the collapsing housing market, the falling dollar, high consumer debt, and a large national debt, social security obligations, major financial institutions teetering on bankruptcy, a credit crisis and rising unemployment. Any one of these problems is enough to tackle, but the combination is deadly.

U.S. consumers are entering this recession in the worst shape ever. On the bright side, it’s a richer world than it was in the ’30s. We are not going to starve and we have plenty of housing. But when it comes to money – never have so many people owed so much to so many.  And when the creditors try to collect - there’s going to be Hell to pay.

Merrill Lynch is the world largest brokerage and a cornerstone in the U.S. financial industry.  Last week, Merrill reported its’ worst quarter in history, with a write-down of $16 billion in mortgage-related adjustments.

Reference Article: Merrill posts worst quarter in its history

Fed Makes a Desperate Rate Cut

This was not a ‘regular’ rate cut. This was an unscheduled desperate rate cut. The Fed meeting was the first emergency meeting since Sept. 17, 2001, following 9/11.

With the interest rates at 3.5%, they only have 3.5% left before they get to 0%.  But, before they get to 0%, the long term interest rates will more than likely increase.  Because they are supported by the bond market, which is primarily funded by foreign nations – who believe the US government is a worthy and secure investment.  Once they lose their faith in the value of the falling dollar, the bond market is sure to dive – sending interest rates up. So, if you are going to refinance – now is the time, we may only have about 6-months of low interest rates before the fed is forces to increase them.

A major fear for the Fed was that a big rate cut would send our dollar into a tailspin. This has not happen yet, but this is definitely going to put ever more pressure on foreign nations and continue to create inflation for them.  The Fed is running out of time and will soon be forces to increase interest rates – which will stop the U.S. economy dead in its tracks.

Forgive Our Debt

Maybe we should consider asking our debtors to forgive our debts.  Why not, the world has forgiven the debt of many other nations throughout history and Russia and Iraq most recently.  Maybe China will be willing to just give us the 1.3 trillion dollars they have back – in exchange for America to continue consuming their products.  The alternative is looking more and more like the largest financial crisis since the Great Depression of the 1930’s.  If China says no, we will just keep printing dollars until their 1.3 trillion dollars are worth 10 dollars.  Either way, they are probably never going to get their money’s worth from us.

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A Good Hard Kick in the Ass

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