Cyberwanderer’s Blog

January 22, 2008

World Stock Market Continue to Plunge

Filed under: economy — cyberwanderer @ 2:51 am
Tags: , , , , , , , ,

Asian stock market have opened and continued to fall sharply for the second day. This comes even after Bush announced economic stimulus package of $150 billion on Friday. There is a sense of panic in the market and a belief that Bush package won’t be enough to stop the slide into recession. The huge drop is a bit worrying and bring back memory of The Great Depression on October 29, 1929 for those who were alive to witness it. That day came to be known in history as “Black Tuesday”. Canada was severely impacted by the Great Depression and suffered more than U.S. and other European countries. Canada took longest to recover and not until World War II. That event gave rise to minimum wage and unemployment insurance. Although there is no ecological disaster now like there was “Dust Bowl” back then, the constant disaster (like Katrina and big storms hitting U.S. one after another) is increasing the strain on an already fragile U.S. economy. The Great Depression was triggered by stock market plunge which put sudden break on the economic boom of the 1920s.

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The crash set off a chain of events that plunged Canada and the world into a decade-long depression. It was the beginning of the Dirty Thirties.
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During the stock market crash of 1987, economist explained that what happened in 1929 won’t be repeated because we are better prepared than before and unemployment insurance now exist. All eyes will be on U.S. stock market as it opens again today (Tuesday January 22nd). The real risk that could worsen the problem, and cause a domino effect, is if people panic and start saving up instead of spending.

Root of the Problem

Source of unease originated from U.S. sub-prime losses that up to this day, nobody can put a real value on. Sub-prime was introduced by Alan Greenspan to keep U.S. economy going when it seems to be slowing down. They provided mortgage to people who won’t normally be approved by the bank. They failed to tell the borrower that after 2 years their mortgage rate would double.

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Consequently, a wave of repossessions is likely to sweep America as many of these mortgages reset to higher rates in the next two years. And it is likely that as many as two million families will be evicted from their homes as their cases make their way through the courts. closequote.jpg
BBC News – How the sub-prime problem evolved

The bank was less stringent because the debt was passed on to the bond market and appeared with other good assets such as credit cards loan. Credit crunch develops as bank panic and stopped lending funds to each other, reducing liquidity (cash flow in the market). World Central bank intervene and things calm down a bit. Stock market remains very volatile but there does not seem to be sustain drop and big plunge until this week.

Foreign investment to the rescue ?

There’s blame going around including accusation that China have to let their currency appreciate more to make U.S. economy more competitive. But in order for them to do that, they would have to reduce their huge reserve of U.S. dollar which would lead to fall in U.S. dollar. U.S. is running on huge deficit and also relies on China’s investment in their treasury bond to keep them afloat.

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Without China’s purchases of dollar-based assets — a key element of its efforts to manage the renminbi in accordance with its financial stability objectives — the dollar would undoubtedly be lower and U.S. interest rates would be higher.
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The Globalist.com

Time have long passed since Central bank of the world use gold as their reserves (“the gold standards”). Most, if not all now uses U.S. dollar as reserves. So it would appear to be in their best interest to continue to keep the U.S. economy afloat. Just few weeks or days ago, there were musings that the world might not be affected by U.S. recession, but this week event seems to suggest otherwise. Odlum Brown’s Murray Leith on Globe and Mail states:

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To think that the United States and the developed world can have a slowdown and it will not have any impact on emerging markets is really ridiculous. A big part of this correction is the world waking up to that reality.
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Update: Jan 22, 2007 5:00 pm EST

The Federal Reserve cut the benchmark interest rate pre-emptively before the market in U.S. opened today. The Fed cut interest rate by three quarters of a percentage point to 3.5 percent from 4.25 percent. This is the biggest cut since interest rate was used as monetary policy tool in 1990.

AP Business writer reports:

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The Dow Jones industrial average, down 465 points shortly after trading began, bounced around throughout the session before closing with a milder drop of 128.11, or 1.06 percent, at 11,971.19, according to preliminary calculations.
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Pressure on stock market is expected to continue.

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Investors are well aware that housing worries remain: Many adjustable-rate mortgages — similar to those that went bad last year — will still be adjusted higher, and home prices are expected to keep falling this year. Financial companies have lost billions due to those mortgages, retail sales are falling and companies in general aren’t on a spending spree…. The market also needs to hear that financial institutions like Citigroup Inc. and Merrill Lynch & Co., which have lost billions due to investments in failed mortgages, are on their way to solid earnings as well.
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Yesterday, Bank of American reported that their earning declined by 95% due to mortgage related writedown. Unlike the tech stock bust, this crisis involves people losing their homes.

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A recovery might take months or years. After the technology bust of 2000 and the terrorist attacks of Sept. 11, 2001 sent Wall Street into a deep bear market, the market took several years to turn around — and at that time, Americans had something sure, something physical, to put their money and confidence in: their homes.
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A news article on December 20, 2007 showed tent city springing up in California consisting of people who became homeless due to the sub-prime crisis. The article compared it to life in depression era as depicted in the book “Grapes of Wrath”.

An AP business report on January 16 indicates that the crisis might be spilling over to other loan (such as credit card).

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Problems in the subprime mortgage market are rapidly spilling over into other areas of the economy. No matter what the experts call it — a recession, slowdown or even the makings of a depression — it’s clear banks are under mounting pressure to be more cautious about lending.
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Meanwhile in Canada, after suffering big drop yesterday, the stock market recovered today and saw its biggest gain since 1998.

Toronto Star article: Anatomy of a credit crunch


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1 Comment »

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    Comment by stock education programs — July 18, 2013 @ 3:28 pm | Reply


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