Are We There Yet?

Is the big crisis in the markets are over or is it simply a weekend break?

In the last couple of weeks we have witnessed a crazy turmoil going on the world markets as the Sub-prime crisis in the US got even deeper and it practically spread worldwide like an epidemic, whipping out billions of billions of public's savings.






What started the crisis?
Its Basically pretty simple, About a month ago, rumors have started to spread in the US that the Sub-prime lending is on a rock, more specifically

The Federal Reserve has been pumping new money into the economy for decades. A lot of this new money, not surprisingly, has found its way into the mortgage markets. With Wall Street's "securitization" of the mortgage industry, close examination of mortgage borrowers disappeared. Banks and mortgage companies had incentives to originate mortgage loans, but since they sold the mortgages off (via securitization) they had no incentive to carefully weigh the risks of individual mortgages.

If you had a warm body, banks and mortgage companies only had incentive to figure out how to get you a loan. Bad credit, no problem. Can't afford to make monthly interest rate payments, no problem. Thus, we had the era of "no docs" mortgages and "Adjustable rate" mortgages with early year rates set sometimes at zero often times at 1%.

On the buying end of these securitized mortgages were institutions with faulty economic models. These models were quantitative in nature. As Austrian economists have warned many times, economics is a qualitative science, not a quantitative science. This is so because the world of human action contains no constants, when you are dealing with humans everything is a variable. The models designed by these institutions must therefore assume that some variable is a constant, since an equation with all variables just can't be.

Some of these variables will indeed over very long periods of time "act" like constants in their relationship with other factors and not change much. These are the variables that econometricians plug in as constants to design their equations. Every once and awhile one of these pseudo-constants begins to act up and act like a variable again. At such time, the variable will blow up the misplaced belief in the equation and quite possibly blow up an investment portfolio or even an entire economy. The designers and money managers who believe in these equations are in fact playing "Equation Roulette." So it was actually only a matter of time until the whole thing explodes.

So is it over?

Today the Federal Reserve announced that it's cut the discount rate by half a percentage point to 5.75%. The Federal Reserve Board said it was acting to "promote the restoration of orderly conditions in financial markets." The Fed also said it would allow banks to borrow unlimited funds at 5.75% for 30 days, down from the previous overnight rate of 6.25%.

So Finlay after a few weeks of crisis when all the screens were painted red we got a relief by Ben Bernanke, Fed's Chief.

Its hard to predicate whether this crisis is all behind us, we ll' have to wait a for Monday to find out, but the rate cut defiantly a good step towards the right direction, but further actions may be required soon.

By cutting the discount rate instead of the federal funds rate, the Fed signaled that it believes problems are mainly confined to the financial system, and are not yet impacting the broader economy. The cut in the discount rate provides funds to banks, but does little to change consumer and commercial interest rates, as a cut in the fed funds rate would do.

"Markets should not be calmed by this tactic," wrote Carl Weinberg, chief economist for High Frequency Economics. "This move is not going to provide any relief to the overall economy.

My advice is when you have a crisis like this its time to buy and invest in the market with best performing stocks at their bottom.

I suggest that the next time you read the words: Crisis and Stocks, call your broker and buy them cheap, its probably the best advice one can get.
In times of crisis I learned the best thing any investor can do is find an opportunity, every market crisis usually presents tremendous buying opportunities since in the long run the markets tend to correct themselves and valued companies are gaining.

Once again I recommend my list of favorite tech stocks, particularly now after weeks of crisis.
Want to learn more about the crisis? Read Tobin Smith's insights.