Searching for the silver lining

I did what stock gurus said to avoid at all costs - I looked on in horror at the performance of my retirement fund in recent weeks. Of course, it is disconcerting to see the 13% drop so far, and my investments are skewed moderately toward guaranteed income funds. Listening to the radio in Chicago yesterday, I understand yesterday's drop in the stock market could have been much more severe had not the Fed cut key interest rates by three quarters of a point.

What seems to be clear is our economy's struggles have a bigger than expected impact on the world economy. Consider this analysis from India:

The subprime loan crisis, which is devouring America's real estate industry, was considered a local problem by many outside the US until they discovered how many major global players in fact stood quite close to the fire - thanks to complex deal making that goes on behind such mortgages.

The red hot economies of India and China, one growing at nearly nine per cent and the other between 11 and 12 per cent, and overall strengthening of other Asian economies such as Japan, created the impression among many observers that finally the world economy was significantly reducing its dependence on the US.

On the contrary, as it turned out in the last couple of days, the world still remains inextricably attached to the fortunes of the US economy.

That is where the uncertain politics in the US come into play in so much as they impact the rest of the global community. With less than a year left for the Bush administration and it having lost most of its initiative on any substantive issues, especially the economy, it is seriously doubtful whether there would be a turnaround any time soon.

In a sense the US economic management is caught in the vicissitudes of electoral politics. The Bush administration is practically into its lame duck period where the president no longer sets or controls the agenda. On the other hand there is no one other than George Bush who at least theoretically has the power and the platform to intervene by the sheer virtue of still being president. The dichotomy is that the platform has lost its effectiveness.

The global fall put the US Federal Reserve in a peculiar spot. If it was contemplating a hands-off approach, as many had speculated, it had to change gears suddenly in the aftermath. A hands-off approach may have been a strategy to send a signal to the rest of the world that the problem is not as serious as the markets had concluded. However, on Tuesday the Fed reversed that strategy and delivered a dramatic three-quarters of a percentage point cut. Obviously, the hope was that such a big cut would calm frayed nerves on the Wall Street. But it had the opposite effect as the Dow Jones fell irrespective of the announcement.

The Federal Open Market Committee seemed to foreshadow recession that in so many words. It said, "Appreciable downside risks to growth remain" without really succeeding to hide that it was concerned about recession.

"The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets," it said.

The announcement of a $150 billion stimulus package by the Bush administration coupled with the interest rate cut to bolster the US economy are measures that could well ease some of the pressures but at this stage it is anybody's guess when and if the global markets will be able to internalize the problems in the US without any significant loss.


TK: ABC's Consumer Comfort Poll shows a reading of -23 this week, which this report notes continues the longest consecutive negative double digits since 2002-03. Still, most consumers view their own finance with more optimism than the general economy. Fifty-six percent say their own finances are excellent or good, ABC reports. To the benefit of fresh produce marketers, it seems logical to expect consumer purchases of big ticket items to suffer more than purchases of food, including fruits and vegetables. Meanwhile, Congress and President Bush appear to be close to an agreement on a $145 billion stimulus plan that would provide individuals with rebates of as much as $800 and give married couples as much as $1,600.