The Fed has cut rates. Oil Prices have come down. Why is the Stock Market Still Down?
August remains a volatile month with the stock market still trying to find a direction. The main focus of the month is on the olympics really. With Michael Phelps breaking world records after world records and Guo Jing Jing entrancing the world with her beauty and graceful twists and somersaults, it is no wonder that the traders are
distracted from their work. The main events during August are the Russia-Georgian conflict and news from the Euro-zone that France
, Germany and Italy have posted negative growth for the 2Q of 2008.
No Improvement Yet?!?.
Oil prices have tumbled again from $125 from the end of July to a low of $105 at the end of august. That is a 29% drop from the peak. Well, that's pretty good news considering that your petrol cost will fall by more than 25% in a couple of months. The US federal bank has cut the interest rates to a low of 2% and has implemented emergency lending measures in an attempt to stabilize the banks and the housing markets. However, the banks are still reporting problems after problems and the economy is still in a dump. Why is there still waves and waves of bad news and the market still refuses to perfo
rm.
The Last Factor: The US Housing Slum
The root of all problems still lies in the US market.
The sub prime which is the cause of the banking crisis is as the result of home owners unable to finance their mortgage payment. As long as the US housing market does not stabilize and continues to free fall, the cause of the global fl
u will not be resolved. In theory, the lower interest rates should fix a large chunk of the mortgage repayment problem. However, the
medicine did not reach the intended recipients.
We have to first understand the the Federal Bank interest rates is the rates which the central bank lent to the banks. However, this is not necessary the mortgage rates which the bank will lend to the consumers. The banks, which has been hurting from the sub prime crisis, is cleaning up their act by tightening their credit requirements. That means previous home owners, who has taken a loan before, may now be rejected as a customer. They will continue to hurt from the high 5-7% interest rates that they have taken previously. Major US banks also did not translate the cost savings from borrowing from the central banks to the consumers. This means that they are still keeping their mortgage interest rate at a high. Simply put, the economy has still have to wait for a while longer for the financial chaos to smooth over and let the positive effect spill-over to the larger economy.
The Power of the Press
The second real quarter growth of the US economy is reported to be at an annual r
ate of 3.3%, higher than the expected 0%-2% growth predicted by economists. The Dooms Day Economists, who consistently try to predict a dooms day scenario of zero or negative growth, and who has been consistently to be proven wrong, once again declared the data to be a flux. They believe that the next quarter will deliver the weakness, that will finally prove their theory to be correct. Well, they have been predicting this since last year.
The press naturally tend to report those that gives the most dramatic and extreme prediction. Happy endings as well as Doom and Gloom sells papers, not boring slow growth which the reality is reporting. The reality is that the real GDP of US may be between 2.5% to as high as 4%. The high commodities prices have created an adverse impact on the 2nd quarter GDP. So with the commodity prices coming down, the GDP for the 3rd quarter has a pretty good chance to improve.
The problem is that with the word "recession" splashing on the headlines of the papers everyday, it is hard for the world not to indulge in self fulfilling prophecy and swing towards extreme pessimism. When the oil prices are up, the press reported conflicted reports that the oil crisis is the result of demand and supply and not due to speculations. After a big drop of $40, we now know that it is indeed due to speculation! Today, as both stocks and oil prices fall, the press attempt to explain the phenomenon that the investors are fearful of falling oil prices because this explain that the economy is indeed slowing down! This, is a classic case of economics. Nobody in the world really knows what is happening.
The Waiting Game
The only tested and true economics the is fact that the markets go through boom and bust and will continue to prosper and grow after the sub prime crisis. Now, the only thing is to wait for the housing market in US to clean up. Invest in trenches and wait for signs of the improvements from the US housing markets. When will that be? It can happen tomorrow, or 2 years later. When it comes to economics, no one can really tell.
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