Update

The Fed is expected to cut their key rate by 50 basis points today (½ of 1% to 1%), this following the coordinated 50 bp rate cuts of Oct/8 (ECB, BofE, Fed & 4 others). Japan may follow Friday, then the BofE and the ECB most certainly next week. China cut its key rate today, the third time in six weeks, claiming it does not want to join the funeral march.

Over the near term, the stock market will remain a freak show, maybe fun to watch but providing little insight. World credit markets remain key and these continue to thaw gradually, today’s 90 day LIBOR rate at 3.42% indicating modest to fair activity in world inter bank lending. The commercial paper market is moving thanks to Fed purchases of this short-term business credit. These are good things.

Government rescue packages are beginning to kick in, US, UK, EU. Other countries, originally laggards, are now coming around. Japan will increase its bank bailout scheme, S Korea will take "drastic steps," Kuwait’s central bank just rescued the Gulf Bank. Those governments lacking the resources to rescue their own are applying to the IMF, the most recent hike in Iceland’s key rate the price that country was required to pay for the assistance. A proposed new liquidity fund at the IMF may be approved as soon as next week, offering countries up to 5 times their IMF quota. Hungary, Iceland, Belarus, Ukraine and Serbia and Pakistan are in line. The politics of application of all of this - beyond our pay grade.

Background: As Bernanke’s bubble has burst, world commodity prices have collapsed and with that, so too the economies of developing countries who primarily exported these goods (and the whining ethanol lobby) This activity had been financed by western banks, not so much US but EU and Brit. So the vicious circle. With credit and demand scarce, shipping has collapsed, as good an indicator of world health as we can get. For example, a few months ago one payed about $240,000 as daily rental for a large container ship. That last printed $7340! Empty ships are everywhere. To see how things are intertwined, Greek families control a third of the global freight market for bulk goods. Thus, there is flight from Greek bonds. The UK’s Royal Bank of Scotland and HSBC financed the share of the shipping activity. Both these banks are this instant taking major chunks of UK taxpayer cash. And so it goes.

We continue to be fairly optimistic. We have no idea which bank will be next, but world authorities have moved quickly to address these situations. Only a sovereign default (Russia, Argentina) at this point would open new windows of risk.

We had earlier broached the idea of a Bretton-Woods-like conference; sure enough we will have such an event Nov/15 in Washington. A regional pre-event was recently concluded in Asia and things seemed surprisingly cooperative. We don’t know what to expect other than the world’s financial landscape will change forever, or at least, during our lifetime.

Robert Craven