By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Renowned investor George Soros said Friday the world financial system has effectively disintegrated, and there’s no near-term bottom to this financial crisis in sight.
Speaking at a dinner at Columbia University, Soros actually compared the current situation to the breakup of the Soviet Union, and said that the whipsaw effects of the crisis are actually more severe than the Great Depression.
"We witnessed the collapse of the financial system," Soros told his audience. “It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
He said the bankruptcy of. Lehman Brothers Holdings Inc. (OTC: LEHMQ) in September marked a turning point in the functioning of the market system.
His comments echoed those made earlier at the same conference by former U.S. Federal Reserve Chairman Paul A. Volcker, who is now a top adviser to U.S. President Barack Obama. Volcker said that overseas industrial production was declining even more rapidly than it was in the United States, which is itself under severe strain.
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.
Market Matters
Nothing has been able to get this economy (and stock market) back on track. Congress passes – and President Barack Obama signs – a near-$900 billion stimulus package and the U.S. Federal Reserve revises (negatively) its economic outlook for the remainder of 2009. Major financial institutions get significant (bailout) assistance from the government and Bank of America Corp.’s (BAC) chief is subpoenaed for misleading investors over Merrill Lynch & Co. Inc.’s (MER) (excessive) bonuses.
Automakers beg Congress for (and receive) a bailout of their own and General Motors Corp. (GM) and Chrysler LLC come back for even more as part of their restructuring plans. Investors try to look past the unscrupulous practices of Madoff and the U.S. Securities and Exchange Commission (SEC) brings suit against billionaire Alan Stanford’s global enterprises over an apparent $8 billion fraud through its high-yielding CDs (with Venezuelans particularly hard hit).
Stanford Financial manages assets of $50 billion in 140 countries, with the primary bank operations in question based in Antigua. With the Dow Jones Industrial Average hitting a six-year low and falling below the perceived floor set in November, investors are left scratching their heads.
So much for the “challenging” times setting a tone for bipartisanship in Washington. As the stimulus package passed with only token Republican support in the Senate, its party leader called it "a missed opportunity, one for which our children and grandchildren will pay a hefty price." He then revealed that not one House member even took the time to read the bill. The Obama administration also announced a plan to help millions of homeowners avoid foreclosure, while attempting to stabilize the housing market (to the tune of another $275 billion). As long as the Treasury’s checkbook is out, GM wants another $16 billion and Chrysler could live a few more days with an additional $2 billion.
Oil rose (briefly) late in the week as the U.S. Department of Energy revealed a surprising decline in crude inventories and a slight increase in the demand for gas now that prices at the pumps have fallen below $2 a gallon and stayed for a while.
After taking the Dow down more than 300 points following Presidents’ Day, nervous investors sold all the way to a new six-year low and the worst week for equities since October.
Financials continued to be hammered as talks of bank nationalization picked up steam. Global stock markets followed suit with Japan’s Topix closing at a 20-year low. With investors shunning equities of all shapes and sizes (and U.S. Treasuries offering little in the way of returns), gold became the safe-haven recipient and futures climbed above $1,000 an ounce. For now, investors just talk of “values,” “opportunities,” “rallies,” and “rebounds,” but few seem willing to follow-through with any real buying.
|
Market/ Index |
Year Close (2008) |
Qtr Close (12/31/08) |
Previous Week |
Current Week |
YTD Change |
|
Dow Jones Industrial |
8,776.39 |
8,776.39 |
7,850.41 |
7,365.67 |
-16.07% |
|
NASDAQ |
1,577.03 |
1,577.03 |
1,534.36 |
1,441.23 |
-8.61% |
|
S&P 500 |
903.25 |
903.25 |
826.84 |
770.05 |
-14.75% |
|
Russell 2000 |
499.45 |
499.45 |
448.36 |
410.96 |
-17.72% |
|
Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
|
10 yr Treasury (Yield) |
2.24% |
2.24% |
2.88% |
2.77% |
+53 bps |
Economically Speaking
With U.S. Federal Reserve Chairman Ben S. Bernanke and friends trying any and all tricks in their arsenal to jumpstart the economy, the central bank chief admitted that the efforts to date have resulted in very limited successes. The Fed negatively revised its outlook for the remainder of the year and now projects that unemployment could reach 8.8% and the GDP may shrink by as much as 1.3% in 2009. Meanwhile, our global trading partners are struggling with problems of their own. Japan’s economy experienced its worst quarter in almost 35 years as its manufacturers suffered through substantially declining demand for their goods.
The domestic economic data confirmed that the Fed’s new (weaker) projections may be right on target. Housing starts in January fell by almost 15% and activity now stands 56% below the pace of construction last year. Industrial production tumbled more than expected last month, and automakers face even more shutdowns as part of their recently proposed restructuring plans.
The labor market remained incredibly weak as new jobless claims rose again in the most recent release and the number of workers receiving unemployment benefits for over a week stood around a record high 5 million people. On the inflation front, the cries of deflation can be put on hold for the time being. Both the producer price index (PPI – wholesale) and the consumer price index (CPI – retail) experienced their biggest gains since July 2008, as energy prices actually rose last month.
Still, consumer prices remained flat (no real increase) on an annual basis, the lowest level of price change since August 1955.
Weekly Economic Calendar
|
Date |
Release |
Comments |
|
February 16 |
Presidents’ Day |
Markets closed |
|
February 18 |
Housing Starts (01/09) |
7th straight monthly decline |
|
|
Industrial Production (01/09) |
Larger than expected decline in January (& revised Dec.) |
|
February 19 |
PPI (01/09) |
Biggest increase since July 2008 |
|
|
Initial Jobless Claims (02/14/09) |
4th straight record-setting week |
|
|
Leading Indicators (01/09) |
Surprising jump in index |
|
February 20 |
CPI (01/09) |
Annual rate of inflation falls to 55 year low |
|
The Week Ahead |
|
|
|
February 24 |
Consumer Confidence (02/09) |
|
|
February 25 |
Existing Home Sales (01/09) |
|
|
February 26 |
Durable Goods Orders (01/09) |
|
|
|
Initial Jobless Claims (02/21/09) |
|
|
|
New Home Sales (01/09) |
|
|
February 27 |
GDP – 4th quarter |
|
News and Related Story Links:
-
Money Morning News:
Stanford Scandal Ignites Bank Runs in Latin America. -
Miami Herald:
Billionaire Stanford's troubles cause a tropical headache on Antigua. -
Reuters:
Soros sees no bottom for world financial "collapse.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.