The volatility bandwagon continues to roll on Wall Street. The market was up one day this week over 360 points and then we gave almost all of it back the rest of the week. On Thursday the Treasury added $48 billon dollars liquidity to the system and this amount was the largest infusion by the Treasury in history, even greater than the infusion after 9-11, you remember September 11, 2001.
Not to be out done by the Treasury, Wells Fargo, one of the largest mortgage originators in the nation, said that the housing decline was the worst since the “Great Depression”. The markets are still trying to get a handle on the magnitude of both the sub-prime and housing problems. Goldman said on Friday that they figure that when it is all said and done the impact of the sub prime and housing issues will mean a loss of about $2 trillion dollars.
This past week I had the opportunity to teach a class at Florida Southern University in The School of Journalism. The subject of my class was “Is the sub prime problem a cover for the real problem in housing’? I think the sub prime issue is the result of greed by many players in the housing sector.
"Greed is Good"
In the movie “Wall Street”, the most famous quote about Wall Street is “Greed is good”. If you think of Greed as a pendulum that swings back and forth, at the height of the housing bubble the Greed pendulum had moved to far in one direction. As we learned in high school physics class every, action has an equal and opposite reaction. The pendulum is swinging back towards the middle and it will probably swing to far the other direction before it is all said and done.
We had a scare again in the credit markets this week in money market accounts. Legg Mason reported that it had to infuse over $300 million in two of their money market accounts to keep the par value of one dollar. On the other hand GE Capital broke the $1.00 level when it reported that it had sub prime asset backed paper in their money market account. The last reported price for the fund was $.96.
The big question face investors between now and the end of the year is were will the $ 2 trillion in short-term money market investments go when they rollover? When the markets go up we seem to think that the problem with the credit markets is over and then something like the events of this week and the markets fold as fear takes hold again and people don’t know what to do with their money.
90 Day T-Bill could break 3% by year-end
I think the demand for short Treasury Bills will be high for the rest of the year. If another shoe were to drop more and more people will run to the short end of the n curve and put tremendous downward pressure on short interest rates. The old law of supply and demand is at play for now in the short-term credit markets. We may well see the 90 day T Bill yield below 3% by the end of the year