So, the Dow, after a wild ride, fell almost 400 points. I suppose I should point out that all the crying about how the bailout bill would save the Dow was ridiculous. A large part of this is because Europe had a bad weekend, with multiple financial institutions in trouble, and Iceland is in so much trouble that they do not have the foreign reserves to buy food. The bailout itself won’t actually happen for weeks, since Paulson is setting it up, so even if it might work in theory (it won’t work in theory) it isn’t happening yet. So the entire effect has to be "confidence".
But the problem with the bailout is how discretionary it is. There is no way to know who will get bailed out. And given the way Paulson has acted in the past, with rumors swirling that he has chosen who lives and who dies based on his personal likes and dislikes, if you aren’t in good with Paulson, perhaps you should assume that you aren’t getting bailed?
And the way Paulson is setting it up appears to be to hire Wall Street firms (any bets on Goldman) to do the valuation and figure out what to buy. Anyone see any potential for abuse and conflicts of interest? Would it be in a company’s interest to overvalue stuff that they have a lot of on their books, say? This isn’t necessary, a ton of people (quants) with the necessary qualifications have lost their jobs in the last year. They should be hired and should do the work on a government pay check. They know the game inside and out and they don’t have massive conflicts of interest.
Money will continue to flood into the US, into treasuries and out of stocks, meaning that the dollar will keep going up. The Treasuries can be used as reserves, are essentially cash, and since the Fed has declared that it will pay interest on reserves, the effective interest rate of Treasuries held by banks is actually significantly higher than a treasury held by, say, you. Likewise money is repatriating from overseas, and that is also helping push up the dollar.
The next key point to watch in dollar terms will be when the Treasury finally has to pay for both the bailout and the expansion of the Fed balance sheet. Bernanke announced another 450 billion of loan facilities today, 640 billion was dropped into the market last Monday. The treasuries for all this have not been issued yet. When they are, we’ll see if the money is there. My guess is, actually, that it will.
As for the Dow—it goes up, it goes down. While I’m not a market analyst, I strongly suspect that we have not seen the end of this Bear market. People are going to keep piling out of stocks and into safety and sure returns. So, this won’t be the last market drop.