Fear and the global debt problem

 

The huge stock market drop is discounting a long-lasting and deep recession. And it may, as well, have a hand in creating that recession. Nothing engenders fear like a stock market crash. And fear causes economies to slow to a crawl.

The headlines of a 600-point drop in the Dow Jones industrials are shaking public confidence even more than the debt ceiling debacle or the S&P ratings downgrade. In fact, the one positive result of the market slide might be that Americans unite in protest against this very visible loss of wealth — and pressure both parties to come to a sensible agreement to deal with our debt problems. That would be the surest way to start restoring the more than $1 trillion lost in the broad stock market Monday.

This is not just a problem with U.S. markets. There is a global debt problem — and it is creating concerns about European banks, country debt, and the ability of central banks to keep the global financial system intact. Part of that fear of currencies is apparent in the rush to gold — now trading over $1,720 per ounce. Gold may ultimately trade much higher if it is used to form a basis for a new, more trusted global currency. But meanwhile it is as volatile as the stock market, and equally risky.

There is a lot of scared money sloshing around the world, making markets extremely volatile. Selling will likely continue, in order to meet margin calls, and because mutual funds will have to sell stocks to accommodate fund shareholders who are switching to cash.

But cash is costly these days. Money in the bank, though safe, pays no interest. Large depositors are even being charged fees by some banks. Having “chicken money” on the sidelines is always a good idea for people who can’t afford the risk of loss. However, this is no time to decide you’re chicken and join the panic.

At some point the world will notice that America is not going away, though business may slow. And large U.S. companies will continue to have earnings and pay dividends. That will be the signal for the market to turn — but no one can tell exactly when that will happen, or from what level One thing is sure: If the new Congressional budget committee could meet and come up with a quick budget and debt agreement, it would inspire a lot more confidence — and higher stock prices. And that’s The Savage Truth.

U.S. Stock Futures Gain After S&P 500 Dropped

 
U.S. stock futures rose, indicating the Standard & Poor’s 500 Index will rebound from its biggest loss since 2008, as investors awaited a Federal Reserve meeting.
Contracts on the S&P 500 expiring in September gained 1.1 percent to 1,123.6 at 7:53 a.m. in London after earlier falling as much as 3.2 percent. Dow Jones Industrial Average futures rose 99 points, or 0.9 percent, to 10,825.
U.S. stocks tumbled yesterday amid concern S&P’s downgrade of the nation’s credit rating may worsen an economic slowdown. All stocks in the S&P 500 retreated for the first time since at least 1996 as the index’s 10 main groups all tumbled more than 5.3 percent.
Fed policy makers are meeting today. By a 52 percent to 48 percent margin, respondents in a Bloomberg News survey said the central bank would ease policy this year through monetary tools or statement language. If the Federal Open Market Committee acts, 59 percent said it would communicate that the federal funds rate, balance sheet or both will remain especially stimulative for a longer period or more specific amount of time.
The FOMC plans to issue a statement at about 2:15 p.m. New York time.
Economic data today showed China’s inflation accelerated to the fastest pace in three years in July, limiting the scope for monetary easing as risks to the global economy mount.
U.S. Credit Rating
S&P lowered the U.S. long-term rating one level to AA+ after markets closed on Aug. 5, while keeping the outlook at “negative” as the company becomes less confident that Congress will end Bush-era tax cuts or tackle entitlements. S&P also said the U.S. rating may be reduced to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.
The S&P 500 is valued at 11.3 times estimated income, the lowest since March 2009, according to data compiled by Bloomberg. The price-earnings ratio reached as low as 9.52 in 2008. The S&P 500 has dropped 18 percent since April 29. The Russell 2000 Index of small companies slumped 8.9 percent yesterday, entering a so-called bear market, down 25 percent from its April 29 high.

EC opens probe into Deutsche Börse-NYSE merger

The European Commission (EC) has opened an expected in-depth investigation into the proposed merger between Deutsche Börse and NYSE Euronext.

Following an initial investigation, the commission says it found ‘competition concerns in a number of areas, in particular in the field of derivatives trading and clearing’.

The EC is concerned because the deal would bring together the two largest derivatives exchanges in Europe.

Rivals, such as the London Stock Exchange (LSE), have already voiced their opposition to the deal. The LSE said last month the merger would ‘eliminate competition’ in the derivatives market in Europe.

The initial investigation also raised concerns about the impact on equities trading, settlement and index licensing, says the EC.

The in-depth investigation can last up to 90 days, until December 13. The opening of the in-depth inquiry ‘does not prejudice the final result of the investigation,’ the commission notes.

‘The proposed merger would remove a strong competitor from the market and would give the merged company by far the leading position in derivatives trading in Europe,’ says Joaquín Almunia, the commission’s vice president in charge of competition policy, in a statement.

‘The commission needs to make sure markets that are at the heart of the financial sector remain competitive and efficiently deliver to users.’

In response, Deutsche Börse and NYSE Euronext have released a joint statement announcing that they remain confident the transaction will be approved.

The investigation by the commission is seen as the biggest hurdle to the deal, which must be approved by competition authorities on both sides of the Atlantic.

Both exchanges have already received overwhelming support for the proposed merger from their respective shareholders.