Stocks Collapsing in Almost All Time Zones

“Crash!” says one tabloid.

“Black Monday,” proclaims another headline.

Yesterday saw stocks collapsing in almost all time zones. It was the worst one-day fall in Britain since September 11th, says the Financial Times .

“Panic sparks plunge in global markets,” says today’s FT headline.

This morning, markets in Asia are still falling. Stocks in Indonesia are off 8%. Shanghai is down 4%. Hong Kong shares fell 8%. And in India, they had to close the Mumbai stock exchange after shares fell 9.8% in the first minutes of trading.

Oh say does that share-strangled banner yet wave

O’er the land of the free lunch…?

We’re talking about our own “Crash Alert” ensign…the one in black and blue colors…with a skull and crossbones on it. The poor flag is a bit tattered. A bit faded. A bit lonely. But there it is…

What is most astonishing about the current meltdown in stocks is the astonishment with which it is greeted. Don’t people know that stocks go down as well as up? Guess not…

But one time zone – Eastern Standard Time – was spared yesterday…thanks to Martin Luther King. It was a national holiday in the United States of America. So, Wall Street missed the panic…at least, for 24 hours. But today is a different story all together…

The Fed cut rates 75 basis points a week before their regularly scheduled meeting next week. This is the biggest cut since 1982, after rates had been driven up to 20 percent to fight inflation.

“The committee took this action in view of a weakening economic outlook and increasing downside risks to growth,” the Federal Open Market Committee said in a statement.

The Dow was down 450 points this morning – but our Trade of the Decade prevailed. After hitting a three-week low yesterday, gold rallied after the Fed announcement, up to $874.64 an ounce – up ten dollars from yesterday. Other commodities didn’t do so well though…oil and based metals took a tumble, as did agricultural commodities.

Yes, dear reader, the top in the credit cycle was reached – probably about nine months ago. Now, we’re on the downhill run. The goal is not to make money on this slope…but to avoid accidents. Watch out for trees and rocks…check the brakes…put on your seatbelts…and try to arrive at the bottom in one piece. Then, you can begin to make money again. At least, that’s the traditional formula.

Typically, assets go down in price during a credit contraction; as the mistakes of the exuberant period are corrected, things turn out to be worth less than people thought. Relatively speaking, the value of money goes up. People have less faith in business plans, in anticipated rates of return, in earnings estimates, in credit ratings, and in sophisticated financial instruments…and more faith in cold, hard cash.

But that’s where this story gets a little fishy. The cash people know is not as cold and not as hard as it once was. And now…surely, this jolt to equity markets is going to put more pressure on both Bush and Bernanke to come up with ways to heat up…and soften up…the green paper. Today’s Wall Street Journal tells us that more and more economists are saying the coming recession could be “severe.” And the head of the IMF came out and said that the international financial crisis had become “serious.”

It’s no surprise that the Fed cut rates before their regular meeting later this month. Congress may get behind Bush’s fiscal stimulus quickly too. Neither initiative is likely to restore the glory years of the boom…but they could do great damage to the dollar.

Asian exporters and the oil exporters in the Gulf have trillions of dollars. Until now, they took the decline in the value of the dollar with grace and good humor. First, they believed the fall in the greenback was gradual and limited…and second, they saw how it enabled them to increase sales to North America. But now, things are changing. They are going to see the feds acting in desperation…and they are going to worry about a big, uncontrolled decline in the value of their reserves. Plus, with America entering a recession, they can expect to see no further sales gains.

This suggests to us that that dollar in particular…and paper currencies, generally…may not be the cold, hard cash you want to hold. Maybe gold won’t be so bad, after all…find out how to buy gold from our friends at Bullion Vault.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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