Singing the Bailout Woes
10/09/2008 10:00 am EST
The US bailout bill passed by the House of Representatives and signed by President Bush last week sure hasn't been the panacea that Wall Street expected. Despite all the politicians making nice, the American stock markets are shrugging off their efforts. And their international colleagues feel the same way.
Markets have mostly tumbled for the last week, diving so far and fast that central banks around the world have taken a step not seen since the 9/11 aftermath-a middle-of-the-night, wholesale 50-basis-point cut in short-term rates. Joining the US Federal Reserve Bank in this effort to shore up confidence were the Bank of England, the European Central Bank, and central banks in Canada, Sweden, Switzerland, and China, a first-timer in cutting rates. Additionally, both Hong Kong and Australia announced rate cuts this week.
The crisis just keeps growing. Adding fuel to the fire was the grim report by the International Monetary Fund (IMF), which slashed its 2009 forecast for world growth to 3%. The IMF further stated that the US and Europe were either in a recession or on the brink of one, warning of a world slowdown from which a rebound would be unusually slow.
Additionally, third quarter gross domestic product (GDP) growth estimates were slashed by three of the euro zone's leading economic research institutes. Their forecast now calls for a contraction of 0.1% from a July prediction of a 0.3% increase.
Governments around the globe are running scared and taking unprecedented measures to show the world that although they may be a little late, they are doing everything necessary to halt the money drain.
Wednesday, British Prime Minister Gordon Brown announced a 50 billion pound ($87 billion) rescue plan to buy stakes in Britain's banks.
Italy is readying its own bailout plan, Spain is creating a 50-billion euro ($68 billion) fund to buy bank assets, and Germany, Ireland, and Greece are guaranteeing savers' deposits.
Iceland, facing a major catastrophe, has taken over two of its largest banks, and is going hat in hand to Russia next week to try to secure a loan of 4 billion euro ($5.4 billion). But Russia has its own very serious set of problems. Wednesday, plunging shares resulted in a shutdown of both Russian stock markets. Trading on the RTS index, down 69% from its May peak, was halted until further notice.
Global stock exchanges have been hit hard. Several pundits are forecasting Dow 7000 some time in 2009. In the last year, the sell-off has vanquished more than $12.4 trillion in equity, $7 trillion of that from the US. And looking at the market capitalization loss on Morgan Stanley Capital International's main world equity index, in just the last three weeks, $4.6 trillion of global stock market wealth has disappeared.
The FTSE 100, Britain's top equity index, closed at its lowest point in over four years, and has slipped more than 32% so far this year. It may see its largest weekly decline since the 1987 stock market crash. Meanwhile, the Nikkei average dropped 9.4 percent Wednesday, its biggest plunge since the 1987 crash.
One bright spot is the continued decline in oil prices, down to less than $90 a barrel Wednesday, on reports of an 8.1 million barrel increase in inventories, considerably higher than the 2.3 million barrel forecast. Folks are cutting back their consumption, driving demand lower.
Another plus: Consumers are also beginning to make short shrift of outstanding debt. For the first time in ten years, US non-mortgage consumer debt declined, falling 3.7% to $2.58 trillion, according to the Federal Reserve. We can only hope that newly found fiscal responsibility spreads to governments around the world.
This week's global features showcase the wary stance of advisors during this financial crisis. John Snowden, editor of The IRS Report, joined us for our Q&A, shedding light on Great Britain's economy and markets.
Sam Hopkins, editor of Wealth Daily, discussed the repercussions of international bank bailouts. Tom Lydon, editor of ETF Trends cautions investors on ETFs in Canada and Russia, while Roger Conrad, editor of Canadian Edge, led the charge for investing in shares of a Canadian bank.
Global events of the past few months have demonstrated the wisdom of cautious investing. Chasing trends-like BRICs or commodities-rarely pays off for individual investors, as it's awfully tough to get out at the top. Right now, it's a time to hunker down, stay conservative, and not make rash decisions.
Nancy Zambell edits Global Investing for MoneyShow.com. Her opinions are her own and not necessarily the views of InterShow or MoneyShow.com.