US stock markets may have closed down yesterday but the rate cut by the Fed last week has essentially arrested the correction in global equities for the time being. From FT:
The Dow closed down 0.4 per cent, the S&P 500 lost 0.5 per cent and the technology-heavy Nasdaq Composite index fell 0.1 per cent.
In contrast, the Morgan Stanley Capital International emerging market equity index broke into uncharted territory as it recouped all the losses incurred during the credit squeeze in July and August.
Shares in India, China and Brazil all touched new records.
However, John Hussman thinks that the impact of the Fed action was largely psychological.
If you examine the data you'll find that the total level of “liquidity” that the FOMC deals with is minuscule in relation to a $13.8 trillion economy, and the variation is even smaller. The total reserves of the U.S. banking system are about $40-$45 billion, and are very stable. The Fed simply does not “inject” meaningful amounts of “liquidity” to the banking system.
Indeed, the latest cuts in Fed controlled interest rates were effected without any injection of “liquidity” into the banking system at all. Total borrowings by depository institutions from the Federal Reserve...actually fell last week to $2.421 billion, from $3.158 billion the preceding week...
Outside of the banking system, you'll notice that while Fed-controlled interest rates dropped last week, market-controlled interest rates rose...
The bottom line – the much celebrated move by the Fed last week created no new liquidity, no new reserves, and no new purchasing power. Given all that, it's unlikely that all of this will result in any material improvement in the solvency of the mortgage market.