As the US Federal Reserve does its impersonation of some sheriff in a Glen Ford western riding to the rescue of all that capitalism stands for there are some slightly worrying things that still remain to be answered.
The Sub Prime problem arrived in an economy growing at over 3%, it is disturbing to speculate on what on earth is going to happen to the already weakened banks if there actually is a recession and the vast bulk of medium rated mortgage risk and possibly even the huge Junk bond market comes under not just the current valuation problems but also pressure from actual defaults.
Added to this, the Fed has cut rates to 2.25% in an attempt to loosen up the liquidity of the cash markets but this has not had the desired effect yet and even overnight lending between the banks is at 3%. I am also slightly bemused as to the logic of cutting rates to encourage people to lend money. If I was sitting on my pile of dosh I would hardly be encouraged to lend it at the same risk for less return.
The final brick in their wall has been the 'bail out' of Bear Stearns. An indication of their willingness to be the creditor of final resort to an implosion of not just the domestic banks but also the investment banks. The problem with this is that it is all very well when all you are doing is 'guaranteeing' the paper involved as has been the case with the vast majority of the $30bn promised to JP Morgan (ie they are just insuring it). But if this does not work and further whispers start to impact the financial credibility of another investment player and then another what do we do then. There has already been a significant deterioration in foreign participation in the US T-bond auctions, the prospect of vast new calls for cash would make the current dollar weakness seem like a picnic.
There is little more that the Fed can do. Its armoury is almost depleted so the triple pronged barrage must be successful. We may well stagger on through this crisis but the structural problems of too much debt and huge public and trade imbalances are unlikely to go away. The asset values of much of the collateral that props up this debt has also been severely impacted with equity, property and currency falls all weakening one side of the equation whilst the other only has the Fed rate cuts to help it along.
The steady stream of financial crises over the past 10 to 15 years seems to show no signs of abating and each one raises increasing prospects of a complete financial meltdown. Trust in institutions is the corner stone of the financial wellbeing of the entire globe. It is this trust that the central banks are striving to maintain.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'The Federal Reserves Triple Pronged Barrage' edited by DB, updated 03-Apr-08
Trading the Banking Sector, updated 17-Jul-08
An exceptionally strange day with European markets pluming the depths in the morning only for the US to come in and completely alter the sentiment. Markets are expected to open substantially to the good this morning with financials especially favoured (for once). RBS hit 144p during the morning session with the board presumably thankful to have the rights issue out of the way already. No such luck for the underwriter of...read article: Trading the Banking Sector.
Banking Sector Problems Continue, updated 15-Jul-08
The belief that the good times would go on forever has now cost us two banks with a third clinging on for grim life. Santanders audacious bid for Alliance and Leicester looks to be going through on the nod to the relief of all concerned (shareholders, Treasury, BOE and FSA) and little will be made of the fact that they are paying a valuation that was...read article: Banking Sector Problems Continue.
Taylor Wimpey, M&S and US Data, updated 03-Jul-08
And the pain continues. M&S and Taylor Wimpey produced a real shocker yesterday morning but initially, somehow, the FTSE actually managed to shrug off the disastrous news and at one point was trading 80 points up on Tuesdays close. It was not until the US joined the fray that a bit of sense seemed to drift into proceedings and down we came once more to close 53 lower. This morning the opening level is forecast to be another 30 points lower at around 5390 having been as low as 5365 in late Futures ...read article: Taylor Wimpey, M&S and US Data.
Investing in Construction Companies, updated 26-Jun-08
Looking at the disaster which has been the UK centric portion of the FTSE 350 it is tempting to wonder if the whole thing has been rather overdone. Yes we know that people are feeling the pinch, that retail sales are down, that banks were sucked into the huge mortgage fraud over in the States, that petrol is now almost as expensive as...read article: Investing in Construction Companies.
Weakened Banks and House Price Forecasts, updated 25-Jun-08
The 'vulture funds' appear to be sniffing around the smaller banks and weakened Boards are struggling to justify not talking to them. Bradford and Bingley's curious attitude to their shareholders over the past month coupled with their outright rejection of a deal that seems, on the face of it, to be rather better than...read article: Weakened Banks and House Price Forecasts.
Reality Retail Sales Figures, updated 20-Jun-08
Retailers, like farmers, are always pessimistic and will describe any situation as a 'tough trading environment' but the idea that spending was up a rather ludicrous 8% had many coughing into their tea. I did wonder if...read article: Reality Retail Sales Figures.
The Great Short Selling Debate, updated 17-Jun-08
For all of the fireworks over the last two or three months who have been the ones proved to be a) correct and b) truthful? Firstly, most of the Banks denied point blank that they would need capital injections and then (it would appear) deliberately mislead on the size of the cash call required before...read article: The Great Short Selling Debate.
Risk Warning: Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
The contents on CleanFinancial.com are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice.
Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.
* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.