Friday, October 31, 2008

FED Pumps Money; How Long can these Money Last?

From the week of Oct 13 - Oct 20, FED has dumped a total worth of (43.6+54.3) = 97.9b USD to the market. At the same period, up to now the LIBOR-FED rate spreads have decreased from 309pts and 332pts (on Oct 13) for 1 month and 3 month respectively to 185pts and 219pts respectively. Temporarily the liquidity of banks and hence corporates can restore.

However, the longer term loan rates have climbed from 6.25% (5 year) and 7.50% (10 year) on Oct 13 to 7.39% (5 year) and 8.83% (10 year) on Oct 31; only by the interest cut on Oct 30 the longer term loan have mildly decreased to 7.32% and 8.79% respectively. But, comparing with the same rate 1 year prior (when the sub-prime has emerged but the market is still positive about soft-landing), at 5.11% and 5.16% respectively (and FED Target rate is 4.75% at that time; risk premium is only a mere 36pts and 91pts respectively), the mild drop is insignificant at all. Corporate will still face hardship on raising fund for longer-term projects. Only money for immediate survival is available.

Mortgage Rates have not changed from Oct 30 and remained at high point. Auto Loans also increased by 2 basis pts on average. Now 36 month new car loan is 6.84%, 48 month new car loan is 6.60%, 60 month new car loan is 6.62%, and 72 month car loan is 6.44%. In other words, the loan rates for consumption remains at high.

The only bizzare response is on DJI which makes significant rebound after the injection of 97.9b USD to the market. Yet, the rebound is only back to 9180.69 from 8451.19, by 8.63% only. Comparing with the closing at 2008 first trading date, 13043.96, the discount is still at 42.08%. Even if the FED continues to flood money at the same rate, to restore to the same level, even just by proportion method another 476b USD is needed. It has not included the already existing 700b USD offering by goverment on any single institution for bailing out.

Thus, the rebound effect due to the money pumping perhaps is only a short-term one. In longer term, recession is perhaps still unaviodable.

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