Monday, August 13, 2007

Welcome to the "Credit Crunch"

In just a few short but grueling weeks, we have gone from an environment where liquidity was king to a "credit crunch", the antithesis of liquidity. Volatility has replaced predictability in the markets and the European Central Bank, their counterparts in other parts of the world, as well as the Fed pumped billions of dollars into money market funds last week to calm nervous markets and provide short term funds. Futures markets are even betting on the Fed to lower interest rates in the near future, to increase liquidity and bail out some of the bad bets on derivative investments, which have been magnified by the use of over the top leverage. Let' hope the Fed doesn't cave.

With interest rates at 5.25%, oil and gasoline prices in decline and the rest of the economy still growing, the interests of the overall economy would be best served by allowing for the liquidation of some of these bad investments and the subsequest pain being felt by the very individuals and institutions who initiated this newest bubble. There is credit available for other sectors of the economy, besides the private equity and subprime mortgage crowds, and while confidence may be shaken somewhat, by an end to easy credit, it is important for those who make bad bets with leverage and create asset bubbles to learn the Fed will not bail them out. Lowering interest rates at this juncture would only reinforce the over leveraged hedge funds and private equity managers to continue their risky ventures and to overpay for assets.

Look for continued volatility in the markets this week as investors try to ascertain whether the subprime debacle has been contained. It is entirely possible the Dow could slip below 13,000 as the market searches for a bottom. Thankfuly, this is also vacation time on Wall Street, so there should be a slowdown in volume after this week as we head into the last two weeks of August and the Labor Day Holiday. This is traditionally the time of the year with the slimmest volume in the markets and many hope that by September, the extent of this latest crisis will be better understood. My hope is that the Fed stays firm with interest rates and uses monetary policy prudently over the next few weeks.

John Kaighn

Jersey Benefits Advisors

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