UPDATE: Wish we’d been wrong about this one, after a brief rally in the morning, the market’s headed down. The move addressed the liquidity problem, but not the fundamental problem–which, unfortunately, nothing can address.
EARLIER: The world’s central banks pumped $180 billion of liquidity into the world financial system last night. Will this mark the bottom in the stock market?
In the short-term, possibly. In 1929 and other financial crises, massive liquidity injections often turned short-term sentiment. But when the fundamentals are bad enough–as they are today–the market usually quickly returns to trend.
The current sentiment has gotten so negative (understandably), that the market is poised for a sharp rally, one that will likely persuade many people that the crisis has passed. If we get this rally, this will give Morgan Stanley (MS), Goldman Sachs (GS), WaMu (WM), and other firms a chance to shore up their capital or merge in a less-panicked environment.
But liquidity won’t fix the underlying problem, at least not immediately. In the US, the collapsing housing market and stock markets and weakening economy will continue to put more pressure on consumer spending, the main engine of the economy. With banks still focused mostly on saving themselves, moreover, credit will still be scarce, which will make it harder for consumers to get loans and provide another reason to cut back.
As investors flee financial assets, moreover, commodities have spiked (see oil and gold). This spike, too, is likely only temporary–demand destruction from slowing economies could return prices to a downtrend in a hurry–but in the meantime, higher prices will reduce the amount that consumers can buy with their dollars.
The US government is doing everything it can, and it’s actions have no doubt helped. But in some market environments–including, we suspect, this one–even massive coordinated central bank actions aren’t enough to get the job done.
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