Friends,
Bernanke’s team may announce lowering of bench-mark rate to 1 pc, it will be lowest since May 2004. His other tools would be to purchasing securities directly from treasury and that way injecting a dose of cash in to economy. Fed balance sheet size will grow at good pace as it has been lending and buying assets(absorbing risks too).
Japan had to fight, only a decade or so back, deflation and banking collapse and its Central Bank saw the balance sheet size growing to more than 30 pc of GDP.
Bernanke has, for the first time since 1930s, made loans available to investment firms(it rescued AIG and Bear Stearns) while he lowered interest rates to 1.5 pc from 5.25 pc.
The world write down of 659 billion dollars have made the firms also raise 642 billion dollars of capital. The rescue package of 700 billion dollar should help the situation a great deal together with other measures.
Now, I have to tell you some thing of importance. The destruction of capital worldwide has made the rest of it shy away. The result is the prices of assets falling. This is making stock markets to tumble. The govts are filling the gap left by the absenting capital to let the economies not derail. The absentee capital will become bolder with stability returning and will want itself to work rather than remain shy and unproductive for long. The tide will have turned then. This is the time when markets have become unhooked and float in the direction of push without an opposing force controlling the movement.
The fact of the matter is why would the capital go for making itself in to a receivable, in times of low interest rates. It has to prefer its conversion in to assets directly, such assets may be productive or unproductive or be rights in to natural resource pool of the world. Equity shares therefore qualify best from the angle of ease of transfer, tax relief, no nursing, yield through dividend and no costs involved in holding. It is a good asset, only if bought at right price. This situation has arrived.
HariOm,
Krsna Khandelwal
BIRDINFO Stock Rx – A prescription for stock market
