coordinated rate cuts are inevitable in October – almost too late

The ECB and FED signaled they are ready and just wait for Congress to act, but I am afraid they have to cut in any case (soon), for now inflation is not at risk and you cannot ride on both horses. Jobless claims at 7 year high implies serious deterioration of the Economy. It’s even worse in the fixed income markets putting incredible pressure on the corporate system and undermining earnings going forward.

Excerpt:

http://www.bloomberg.com/apps/news?pid=20601087&sid=azi5ZFVQ4iic&refer=home

Libor Soars, Commercial Paper Slumps as Credit Freeze Deepens

By Bryan Keogh

Oct. 2 (Bloomberg) — Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that’s paralyzing businesses around the world.

The London interbank offered rate that banks charge each other for loans rose for a fourth day, driving a gauge of cash scarcity among banks to a record. The biggest drop in financial short-term debt outstanding since at least 2000 caused the U.S. commercial paper market to tumble 5.6 percent to a three-year low, according to the Federal Reserve.

The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system

The other problem increasing the turmoil is a very high redemption of funds from Hedge Funds who run also leverage and may be poised to liquidate even more than they anticipated in this kind of market is the worst possible thing to happen. All these things add up and finally market participants realize that these are times they have never seen – even W. Buffett admitted that the fear in the market is the highest he ever saw. I do not agree, March 2003 the basic panic was bigger. The difference is that people were ignoring the signs this time and some people made comments which were not appropriate in order to calm down the markets. Paulson and Bernake created expectations, which they were never able to deliver. President Bush’s reiteration of the strong underlying economy and the media supporting the Goldilocks mantra far too long including this ‘Mad’ Cramer, Kudlow and people like Abby Cohen. Let’s hope.

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~ by behindthematrix on October 2, 2008.

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