Are the Clouds About to Break?

Written by Nathan White, CFA

photo by Per Ola Wiberg

Central banks across the globe took an unprecedented step today in lowering interest rates in a coordinated move. The price of credit is amazingly cheap. The problem is no one can get it.

It takes time for the government actions to have a real effect on the economy and the liquidity situation.

Right now we are seeing the market price in all of the economic cost of the credit freeze up, and it is not a pretty sight.

The current sell-off indicates that many thought the positive ramifications from the government actions would lift the markets right away. The markets of course like to do the opposite of what the crowd intends and when no instant bounce materialized, everyone rushed for the exits.

Over the course of the next few weeks the government actions to unfreeze the credit markets will start to occur and then we will be able to see if they have any real effect.

Look for the effect it will have on banks willingness to lend to each other.

If credit can start flowing again and at the same time the cost of credit is significantly lower you could very well see market sentiment change very quickly.

Could this current sell-off just be shaking out the impatient people who thought that the "bail-out" bill would spark a large rally?

Once their done selling could the storm be over?

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