Saturday, October 25, 2008
U.S. and global equity indices are low – the Dow closed at 8,379 on Friday, marking its lowest point in 5.5 years. What many do not know, is the recent crash – a high of 14,164 on 10/9/07 to a low on Friday 10/25/08 of 8,379 – marks a 41% drop over the year. And that is the ninth biggest crash since 1901 (click on chart to enlarge).
Second, the Fed is taking its own unprecedented measures to tackle the banking crisis. As it acquires an ever-growing stock of illiquid assets – it’s balance sheet has doubled over the last month – the banking system is breathing a very slight, but nevertheless positive, sigh of relief. There is so much liquidity in the banking system that the effective federal funds rate (the interest rate that banks pay when they loan to each other) is down to 0.93%, which is 0.57% below the Fed’s 1.5% target. That money will eventually flow through to consumers and businesses; however, loan growth will slow as is the usual case in a recession.
I know that I sound particularly sanguine about the future of the U.S. economy – especially against a backdrop of negative outlooks, but that is just what I believe about the foundation on which the U.S. economy is built. Our labor market is solid - adding jobs in sectors with high productivity, our current policy makers are credible – initiating expansionary measures when needed, foreigners continue to flock to our asset markets – the $US is off-the-charts strong, and inflation has remained stable over the last 20 years.
There’s a lot of spare capacity building in the U.S. economy – with more to come in the fourth quarter – and once the labor and housing markets stabilize, the economy will take off.