While the Standard & Poor’s 500 Index is up 23 percent from last month’s low (this indicates we are now in a bull market) and the Fed promised to use all tools at its disposal to end the longest recession in a quarter century, investors remain wary of any securities except Treasuries. As banks hoard cash, businesses are struggling to refinance debt and consumers can’t get loans. The LIBOR (London Interbank Offered Rate) has dropped dramatically over the past 3 months, yet banks are still wary of lending to each other and the consumers. The reason? They have became wary of lending to each other amid concern that the same securities that ruined Bear Stearns would cripple themselves. Financial institutions have reported almost $1 trillion in losses and write downs since the start of 2007.
To help alleviate the problem, yesterday, the Federal Reserve in the US cut rates to "historic lows". This statement best demonstrates where the Fed wants to go;
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.
Sounds good doesn't it. Here is something to think about - if you are a bank and want to borrow $1M from the federal reserve, the interest only loan would cost you $212 per month. Looks suspiciously like a sub-prime loan to me. Unfortunately, they are beginning to run out of bullets for their gun. It's not like you can reduce interest rates below 0%. At this point, the Federal Reserve will have to turn to other strategies to turn things around. Ben Bernanke has done literally all he can do to jumpstart the economy short of...(see picture).
The fear amongst US banks regarding lending has now begun to spill over our borders. The diligence that had always (for the most part) existed in Canada, has begun to creep into "everyday" life. Recently, several institutions suspended the ability for people to "leverage" (borrow money and invest), while other lenders have dramatically increased the borrowing costs associated with borrowing. The Bank of Canada has also cut rates dramatically - yet the banks have not always followed suit. Mortgage rates have not dropped along with general lending rates and when was the last time you read your credit card statement to see what interest rate they are charging you.
The mere fact that Canadian banks have had recent share offerings (at a discount in the case of one) to maintain their Tier 1 capital at 10% makes many people nervous. In addition, three of the six banks are still below that magic mark, and it's expected that they will be selling stock in the new year. Do they know something we don't? Is there more to come?
So where do we go in 2009? Looking into my crystal ball, I expect to see the following:
- Stock markets well above where they are.
- Dramatic market swings on a regular basis.
- Bailout of the auto industry with Canada leading the way.
- The Toronto Maple Leafs will not win the Stanley Cup.
My hope is that we look back in twelve months and that things not only look better, but that people wonder why they didn't invest more money when they had the chance.