1 October 2008

100-Year Events - Now Happening Every Day

Who knows, but once the present has turned into history today's rejection of US Treasury Secretary Hank Paulson's $700 billion bailout package by Congress may be seen as the final straw that broke the back of international capital markets.
100-year events are becoming common fare these days and central banks have no other idea than to turn the spigots wide open. In a concerted action the central banks of the USA, Canada, the UK, Denmark, Norway, the Eurozone, Switzerland, Australia, Japan and Sweden expanded their FRN swap lines from $290 billion to a whopping $620 billion, the Federal Reserve announced on Monday morning.
This came after the financial crisis made further inroads into Europe.
Over the weekend ECB president Jean-Claude Trichet hammered out an agreement that Belgium, Luxemburg and the Netherlands would partially nationalize Fortis Bank and injected roughly €10 billion in order to save the bank as a going concern.
German taxpayers will remember September 29 for getting milked to the tune of €26 billion as their share in a €35 billion bailout package for lender Hypo Real Estate.
In the UK taxpayers will pick up the bill for the nationalization of Bradford & Bingley.
In the USA, Citigroup's throat got stuffed with Wachovia.
And all this happens in a matter of hours only.
Bank shares in Europe (and then later in the US) tumbled across the board as conscience gains ground that Europe will not be spared by the ongoing desintegration of the US financial system.
Wall Street's descent by some 6% was only topped by the Vienna stock exchange, where plunging real estate and bank shares led the ATX to a close more than 8% below Friday's levels. This was the second biggest plunge in the history of Austria. Austrian shares have begun to fall out of favor with investors because of their exposure to suddenly ailing East European economies which were the primary profit driver in this decade.
ECB Stays on Inflationary Course
The European Central Bank appears to try to avoid another bank failure by running its printing presses even hotter. On Monday the ECB announced more basically unlimited special refinancing operations in order to keep bids close to the official rates. This comes only 3 days after the ECB had announced more FRN repos - which were topped up again today.
As a general note I would say that central banks act like headless chickens since a year. With their boundless monetary creation at warp speed that is running into the trillions by now central banks will only be able to delay the oncoming European financial Tsunami, but the inevitable - a massive deflation of asset prices - will happen anyway.
Wall Street's deep dive today will echo around the world tomorrow. Expect Asian and European markets to open markedly lower.
In times of a true crisis gold again proved its safe haven status. In contrast to all other commodities (crude oil fell 10%) the oldest currency of the world shot up to $920 after the US congress rejected the bailout package. It may not take very long and we will see huge advances of gold once the financial wizards discover its unchallenged role as a store of value in times when all other paper assets see dramatic markdowns.

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