Thursday, September 22, 2011

Just another run of the mill 5% dip

European markets are off sharply today, down 4-5% across the board, as result of the lingering effects of the Fed announcement and a slew of ugly data out of Europe.

1) Twist! Well, the Fed announced the expected Twist program yesterday and it was a bit larger than expected at $400 billion.  There was a fair amount of incorrect reporting around this story calling it a "$400 billion stimulus from the Fed" which I suspect is probably politically motivated.  The reality is that the Fed is selling $400 billion of short term debt (6mths to 3 years) and they'll take the proceeds from those sales and buy $400 billion of long-term debt (6 yrs to 30 years).  Again, this is like you cashing in a 3 month CD and using those proceeds to buy a 30 yr T-bond.  You're balance sheet doesn't change, you are just changing the composition of your assets.  Now if you had $400 billion to shift around you could impact interest rates in the market which is the Fed's main goal.  The hope is that with lower long-term rates businesses will be more likely to borrow and invest for the long run.  We'll see about that...

2) Initial jobless claims FALL! scream the headlines today.  Ugh.  Someday, we'll get everyone to write stories that represent reality. Jobless claims were revised higher for last week and remain well above 400,000 which is very troubling.  Also, note an additional 103,000 people fell off the unemployment rolls last week.  For the most part these are people that joined the other 1.6 million who are no longer receiving any benefits.

3) There seems to be a growing consensus that Europe has re-entered a recession and I've heard more than one economist say that the US probably entered a recession in the past couple of weeks.  If true we're looking at a very tough environment for the US economy over the next 2-4 years.  We've exhausted almost every possible fiscal policy tool, spent trillions on stimulus/bailouts/war and we're still slipping back into a recession -- ugly might not be adequate enough to describe the situation.

4) Finally, just because I was feeling so cheery today, I thought I'd mention that Bank of America is looking very Lehman/Bear Stearns like as people are starting to talk about counterparty risk after a downgrade of the bank yesterday.  Remember, Lehman wasn't a scam along the lines of Enron.  Lehman was a bank who's partners lost confidence in their ability to survive.  Since no one wants to be the last one off a sinking ship everyone rushes for the exits at the same time.  Then things get interesting.



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