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The Dow Jones Industrial Average closed up 430.30 points, or 3.98 percent, at 11,240.15.  The S&P 500 was up 53.18, or 4.75 percent; Nasdaq was up 124.83 percent, or 5.29 percent, in the best day for stock in two years.  Markets opened higher, from bargain hunting, and S&P assurances to India over night, that their credit rating would not be challenged.  

Markets then soared after the Federal Reserve Bank's, Federal Open Market Committee, FOMC, announced intentions to keep interest rates low for at least two years.  

Stocks Soar Most in Two Years, S&P 500 Up 4.8%

The Federal Reserve pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 in a bid to revive the flagging recovery after a worldwide stock rout.

The dollar weakened and the Swiss franc rose the most since at least 1971.  ... The 10-year Treasury yield fell as much as 28 basis points to 2.03 percent before trimming its decrease and trading down six basis points at 2.26 percent. The Dollar Index slid 1 percent. ...

In pledging to keep its benchmark rate at an all-time low, the Fed also discussed a range of policy tools to bolster the economy, saying it is prepared to use them “as appropriate.” The statement fueled speculation the central bank may consider a third round of quantitative easing through bond purchases to revive a recovery that’s "considerably slower" than anticipated.

We've been hearing some speculation that some degree of quantitative easing may have been going on already, but I've seen no confirmation of this.  I'm hoping some of our readers who may be experts on this may help improve our understanding of the difference, if any, between "quantative easing"  where the Federal Reserve buys assets to pump liquidity into the system, and "just" keeping interest rates low?  Is this not accomplished by the same mechanism?  

If the Federal Reserve buys our own Treasury Bills, this should lower interest rates should it not?  Perhaps, the extra distinction arises from controlling how many Treasury Bills the Federal Reserve decides to issue?  

This makes sense, doesn't it. If we flood the market with T-Bills, interest rates would be lower in the short-term.  

Overnight bank lending rates are another lever, the Federal Reserve has to influence interest rates.  If none of our resident experts rescues us here, I will get out my old economics textbooks, and give a smarter report tomorrow.  All Keynesian Kossacks should understand Federal Reserve operations better than I'm displaying here.

How ironic that after the US credit rating was reduced to AA+ last Friday, leading to expectation that our government would have to pay higher interest rates to borrow, the Treasury Bill rates have actually declined, as global investers vote with their feet, when the risk of a financial collapse confronts them.

U.S. stocks rebounded from a rout that wiped out $1 trillion yesterday in the first trading session after the government was stripped of its AAA rating at S&P. The S&P 500 sank 11 percent in the previous three days and started today trading at 12.3 times reported earnings, compared with its average of 16.4 since 1954, according to data compiled by Bloomberg. The MSCI All-Country World Index is valued at about 12 times profits, down from 21 in 1995, the data show.  

While yesterday’s stock rout wiped out about $2.5 trillion in global equity values, extending total losses since July 26 to $7.9 trillion. ...


And, here we see another poignant irony.  (Or, is it an ironic poignancy?).

In a clumsy effort to save $2 trillion over 10 years, the Teabaggers end us destroying $7.9 trillion of global market value?

I really hope, Majority Leader John Boehner has the decency to apologize to the American people, and the people of the world.  Perhaps, if he, Cantor apoligized and promised, not to do this again, the S&P would restore our AAA credit rating, and we could move forward.  And, someone could say, "one day, we''ll look back on this episode, and just laugh."  

Yesterday, Moody’s Investors Service said the US will retain it's AAA rating, due to the dollars as the world'd reserve currency. Fitch also did not change it's rating, making the S&P change look ever more dubious.

Another, poignant observation, is that China was lecturing the US earlier in the week about our credit rting when our AA+ rating is still higher than theirs.

Last, night, after a free fall of 5% to 9% for a few hours, Asian markets turned around and recovered most of their losses.  

Bargain hunters were already out last night, looking for oversold stocks based on their fundemental price/earnings ratios.

Let's hope this continues and we establish a secure and stable floor for global asset prices, restoring some confidence for consumers, business, and investors.  

3:10 PM PT:

I felt guilty of my clumsy explanation of the Federal Open Market Committee, so here is a link to Wikipedia which does a much better jobs.

There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:[80]

The effective federal funds rate charted over more than fifty years.

The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The Federal Reserve System usually adjusts the federal funds rate target by 0.25% or 0.50% at a time.

Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system as necessary to balance the Federal Reserve's dual mandates. Open market operations are done through the sale and purchase of United States Treasury security, sometimes called "Treasury bills" or more informally "T-bills" or "Treasuries". The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these securities affects the federal funds rate, because primary dealers have accounts at depository institutions.[87]

I hope this helps. I'll put a test in the poll.

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Comment Preferences

  •  Tip Jar (17+ / 0-)

    The means is the ends in the process of becoming. - Mahatma Gandhi

    by HoundDog on Tue Aug 09, 2011 at 03:00:58 PM PDT

  •  Lots of irony: (4+ / 0-)

    Money flows into treasuries, and the best place for China to invest is still Not China.

    Avg. Medicaid cost to New Jersey: $1936 per child per year. Avg cost of helicopter commute for Governor: $2300 per hour. Guess which one Christie wants to cut back on?

    by Inland on Tue Aug 09, 2011 at 03:09:50 PM PDT

  •  "Obama fails to calm jittery markets". (3+ / 0-)
    Recommended by:
    HoundDog, cassandracarolina, craiger

    Your genius media.


    @NorahODonnell Norah O'Donnell
    Pres Obama fails to calm jittery markets. Our @cbseveningnews piece
    10 hours ago via web

    Sweartagawd this country is nothing but a bunch of fucking dumbasses.

    Kevin dropped his ice cream and blames Obama? He's gone hamsher!

    by punditician on Tue Aug 09, 2011 at 03:19:11 PM PDT

  •  Recovery? or dead cat? (2+ / 0-)
    Recommended by:
    HoundDog, bee tzu

    Admittedly, 430 points is a rather big cat, but it's not over yet ...

    •  The good ole "dead cat bounce?" (1+ / 0-)
      Recommended by:

      Could be.  On analyst last night predicted a 200 point technical recovery, which would last long, as those who want to get our for the longer term use the opportunity to unload.

      Then, we had the FOMC on top of it.

      I need to study the price/earnings ratio more, and look at how low it went during the last recession.

      At some level there's pure math in the fundementals.

      If you have money, where do you put it?

      Yes, it is safe in your bank, with FDIC insurance, but you'll be getting 1% or so, and only up to $250,000 per account.

      So, T-Bills are giving just over 2%, which 30 year terms, or some transaction fee each time you go in, or out.

      With, E-trade, and Schwab, you can find blue chip stock, with dividends of 3% to 4% or more now.  Corporations are highly profitable, .... before this latest fall.  They'd be higher now, although, what would a recession due to prices, and business revenues.

      But, how long will this keep up, if the economy stalls?

      Still, if you can buy a diversified portfolio of stocks, at some point, it looks like a better reuturn than bonds.

      The curve ball, is that if the dollar keeps dropping, at some point foreign investors, will prefer non-dollar based stocks.

      I was just reading the new Fortune 500 list of companies and surprised to see how many Chinese companies are in there now.  A phone company, some utilities.

      A whole lot of Japanese manufacturing plants.

      But, I don't understand these emerging Asian markets in terms of political risk.

      And, to what extent are these Asian companies dependent on US imports for their strength.

      China is trying to stimulate it's domestic markets now, to gain independence, but Japan's corporate profitability seems highly dependent on exports to the US and Europe.

      I guess, one needs to stay diversified.

      And, get comfortable with risk/return ratios.

      What I want is high return with no risk.  lol

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 09, 2011 at 03:44:36 PM PDT

      [ Parent ]

  •  What a day on Wall Street. (0+ / 0-)

    Up when it opened, then I looked again around 1:00 or so and it was briefly down 132, then I didn't look again til the markets closed. I've tried to ignore it the last few days. Much as I hate being dependent on the stock market, for most of us, I would imagine, our retirement depends on it.

    You can't scare me, I'm sticking to the Union - Woody Guthrie

    by sewaneepat on Tue Aug 09, 2011 at 03:21:39 PM PDT

  •  prediction: (0+ / 0-)

    The consensus seems to be a bumpy ride for the next couple of weeks.  

    I'm predicting that Friday evening's close will be -50 to -100 from where it was before things went crash last week.  This will be understood to be within the normal range of fluctuations and no big deal.  Then over the next couple of weeks, it will gradually climb back up to a stable level slightly above where it was before the crash.  

    We'll see...

  •  Yesterday on this site I predicted an uptick (0+ / 0-)

    I am inclined to think tomorrow it will go down again.

    Lets see if I can keep my streak going.

  •  Let's hope this is the nail in the coffin (0+ / 0-)

    of great expectations that hoarding money will generate an adequate income any time soon.  If there's no prospect that interest rates on absolutely secure "investments" will go up, then there's nothing for it but for the money hoarders to take a little risk and invest in real enterprise.

    That people could get rich and richer by just sitting on piles of money was a really bad scenario.  But understandable.  If Treasury bonds paid out 8.1% interest, as they did in 1990, and that interest (pure unearned income) was, additionally, tax free and the income from managing rental real estate (a risky and time-consuming enterprise) was, at most, 8%, there was no incentive to undertake that hard work. Which is one reason why home ownership was pushed.  Managing rental housing is an unrewarding enterprise, as banks stuck with houses people don't want to buy are finding out again.

    Fact is that providing shelter is a lot of work and requires a lot of expertise, which many people simply don't have. But, along with other kinds of necessary services, our economic gurus have consistently downgraded the importance of service in their evaluation of our economy's success, rating the production of goods higher -- so much so that banksters started referring to their management of money, a truly esoteric service, as the "creation of products."

    by hannah on Thu Aug 11, 2011 at 05:37:28 AM PDT

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