An excellent recap of the Financial Times of the global government assistance in recent weeks. Please go to the following web page to review it.
http://www.ft.com/cms/s/0/251d855a-8ef7-11dd-946c-0000779fd18c,dwp_uuid=11f94e6e-7e94-11dd-b1af-000077b07658.html
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Paulson told reporters in Washington yesterday that legislation Congress passed last week to rescue financial institutions gave him broad authority that he intends to use, beyond just buying mortgage-related assets on banks' balance sheets. He indicated that an option available may be boosting companies' capital with cash infusions. ``It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,'' Paulson said. ``We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.''
This is good news for the banks. It is clear that the Treasury wants and needs banks to be profitable. This is an absolute necessity if we want our economy to recover. It seems a superb investment theme.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Fidelity Investments's retail and institutional money market mutual funds will participate in the Temporary Guarantee Program offered by the Treasury Department, Fidelity said late Tuesday. "Even though it is highly unlikely that the insurance will be needed for any of our funds, we expect the program to reassure our investors that their money market funds will continue to provide safety and liquidity for their cash investments," said Fidelity. The Treasury's program, which is in effect for three months, provides coverage to shareholders for amounts that they held in participating funds as of Sept. 19.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The markets will stabilize when credit spreads across all maturities decline in a visible way.
Until then, volatility will be the name of the game as the economy struggles shackled by the sagging housing market.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Q. If the banks are flooded with money, why there is a liquidity problem? Banks should have enough money from the government to lend consumers and corporate and create credit. So where does the money go?
A. There is a time lag between when the banks receive liquidity from the Fed and the time the banks lend the money and the time the economy finally recovers. The time lags could one to two years.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
There is an inverse relationship between the spreads of the yields of low-grade bonds and Treasury bonds and the economy. The relationship is very simple. Rising spreads are followed by weaker business activity.
Why? Because rising spreads reflect rising financial risk and rising financial risk makes borrowing more costly for business and consumers. And the economy stalls. This is exactly what is happening now. I will show you the evidence in the next issue of The Peter Dag Portfolio.
Bottom line. The economy cannot recover until spreads decline in a visible way.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The rescue plan was passed and this is how the markets reacted.
-- The Dow lost 1.5%. No surprise, the market is a discounting mechanism.
-- Employment was down sharply. The economy remains weak.
-- Commodities were weak, responding to weak demand.
-- The dollar paused.
-- The volatility index VIX soared. Can it go much higher?
-- Long-term bond yields declined. Flight to safety and expectation of lower inflation.
-- Bond spreads keep rising, signalling rising credit risk due to lack of liquidity.
What does it mean? The markets are forcing Washington to act. Short-term interest rates will have to fall further. Banks are being flooded with cash. There is no question this policy is inflationary over the long-term. In the near term we have to face a weak economy and a government pumping money into the system with a vengeance. And this will be bullish for stocks....eventually. Only when financial risk declines. But you have to be in the right sectors. Sectors that are strong in a weak economy.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
The manufacturing sector slumped last month. The ISM report shows the manufacturing index falling deep into recession territory (click on image to enlarge).
The protracted weakness of the business cycle is now followed by weak commodity prices and lower bond yields. Inflation will eventually head down.
There is only one major problem. Real interest rates are unusually low and this will cause more problems when the business cycle strengthens again.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
* Manufacturing tanked to deep recession levels last month .
* All commodities, and I mean all commodities, collapsed due to sharply deteriorating global economic conditions.
* Long-term Treasury bond yields tumbled (and bond prices rose), reflecting flight to safety and lower inflationary pressures due to declining commodities.
* Low-grade bond yield spreads soared reflecting rising risk.
* The VIX index jumped to 45.26, a level never seen at least since 1990 -- another sign of fear.
* The stock market sank 4%.
* The dollar remains very strong. This is good news.
Bottom line? These trends are well entrenched with stocks unlikely to rise until yield spreads decline in a visible way. Some sectors look much more attractive than others. You guessed it -- they are those doing well in a slow growth economy.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
There is a common thread in European responses to America’s troubles. It goes like this.
We always knew that unbridled free markets were a mistake, yet we were derided for saying this; and now we are all paying the price for your excesses. In the face of popular consternation at capitalist decadence, the activist state is newly in fashion—and Europeans are taking the credit for it.
Are they right? I am afraid we are moving in their direction in terms of government role in our affairs. Bureaucracy becomes bigger and bigger as we ask for more safety and comfort because we are not tolerating risk anymore. There is no going back.
Until another nation, possibly China, reminds us that we need to change.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
