The Fed Begins to Raise Rates
Posted by Jody Eisenman | Filed under Uncategorized
Although Bernanke alluded to this recently, the Federal Reserve raised the discount rate by 25 basis points after the market closed yesterday. The discount rate is the rate that the Fed charges banks for temporary loans. With three month treasuries yielding 0.17%, it has been very easy for large banks to simply borrow money from the Fed at very cheap rates, and lend it out for huge profits. Look at it this way: If banks take in money from depositors at money market rates which average around one per cent, and then give mortgages for six percent, they make an enormous spread on their money. They make lots more from credit cards, where balances can be charged rates from the upper teens to over twenty per cent. Essentially, the Fed is signaling that the banks no longer need this assistance as their balance sheets have improved since the crisis of 2008-9.
As a practical matter, this may mean the beginning of the end to historically low rates. This will help depositors, but could signal a negative to the stock markets, which tend to thrive on low rates. As such, the market is looking a bit weaker. Over the next few days, I will discuss the effect of the US debt situation vis a vis interest rates.
The Obama Banking Plan
Posted by Jody Eisenman | Filed under Uncategorized
For a good video explanation of Glass-Steagall and the proposed Obama banking plan, please see the video on the Financial Times website:
http://www.ft.com/cms/s/0/8c6665d2-11a6-11df-bceb-00144feab49a.html
Meanwhile, the markets continue to churn around the Dow 10,000 mark. Thus far this year, the DJIA has traded between a range based on closing prices of between 9908 and 10,725. This is a range of about 8 pct. During the same period last year, the range was between 9034 and 7888, a range of 13 pct. Of course, last year the selling really accelerated until the second week in March. Many traders remain focused overseas, where the 2 main issues are Greece and China. The European Union appears to be ready to bail out Greece, which led to a 100 point gain yesterday. Today, China announced that they are raising the bank reserve rate for the second time in a month in order to slow growth. The reason this is done is that China fears a boom and bust economy. However, many economists fear that this could hurt the global economic recovery. Eventually, traders here will turn toward to Washington, to see if the Federal Reserve will begin to raise rates. Chairman Bernanke has indicated that this could happen later this year.
Sovereign Debt and the Markets
Posted by Jody Eisenman | Filed under Uncategorized
Over the weekend, I discussed the US debt situation. I will now get into what’s going on in Europe. Last November, the markets showed some instability over the Dubai World debt crisis. Now, it appears that several European Union countries, led by Greece, are facing a similar crisis. The ECU has a cap that permits members to take its yearly deficit to a maximum of 3% of that nations’ Gross Domestic Product (GDP). Greece is now looking at a number of 12.7%. In addition, their total debt is now slated to increase to a staggering 135% of GDP, according to EU estimates. Portugal is looking at 91% and Spain is looking at 74% by 2011. As the case with our country, these numbers are not only incredibly high, but could threaten the overall stability of the euro. Default is definitely a possibility in Greece, and there are fears this could spread to other ECU countries. When a country’s debt gets too high, they must either cut expenses or raise revenues via taxes. Needless to say, neither course is politically popular. Strikes have broken out in Greece over proposed wage reductions, and Greek bonds have been dumped by investors. Overall, as debt rises, rates should rise as well in order to compensate investors for the increased risk of lending. Of course, as rates increase, the amount the country must pay on its debt service increases as well. As the record US debt reaches historically high levels of GDP, that same fear exists here as well. The biggest fear is that the US will lose its’ coveted AAA rating.
I don’t see the US losing its’ AAA rating anytime soon. The US is still considered to be one of the safest, if not the safest country to invest in. However, as Lawrence Summers, (Obamas’ chief investment advisor) stated, “ How long can the worlds’ biggest borrower remain the worlds’ biggest power”? Will the US begin to lose influence in the world ala Japan in the last decade? It could happen. At the end of the day, you cannot live your means for an extended period of time. Sooner or later, it becomes time to pay the piper.
As a result of this potential crisis, US financial markets are beginning to weaken. The Dow lost almost 104 points today to close below 10,000 for the first time since last November. The selling intensified late in the day, as most of this loss happened in the last 30 minutes of trading. So far this year, we are down over 500 Dow points, and over 800 points since January 19. Bulls are saying that this is a natural correction since the huge runup last year off the March lows. However, Bears are pointing to the very real potential debt crisis, which could overshadow everything else. I remain cautious here, and I would not be in a hurry to buy until I see more positive signs.
