A Dark Morning

A hardy perennial in sci-fi movies is the scene where people start firing ever-larger weapons at some alien object, only to see it wobble a little instead of getting obliterated as expected. I'm beginning to see the TED spread (432bp today) as one of those alien objects. Which is not to say people aren't hopeful:

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped for a third day, its longest sequence of declines in seven weeks, according to the British Bankers' Association. It slid 9 basis points to 4.55 percent today...
"Government participation in the banks along with the huge liquidity operation is flooding the financial system, which is having the desired effect on Libor," said David Keeble, head of fixed-income strategy in London at Calyon.

Er, no: "the desired effect on Libor" is not a 9bp drop from 4.64% to 4.55%. The desired effect on Libor is to get it down to below 2% -- something which would normally be entirely reasonable when the Fed funds rate is 1.5%.

Meanwhile, stocks are down again today, thanks probably to the truly atrocious September retail sales report, which also came with a certain amount of understatement:

The Commerce Department said that retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. The surprise showing significantly increased the risks of a recession.

I suspect that the probability of a recession was already so close to 1 that it's no longer possible to significantly increase it. But you know what they mean: things are worse than expected, and they're likely to remain that way for the foreseeable future. We're in a vicious cycle: no one wants to lend going into a recession whose length and severity is likely to be unprecedented in the postwar era. So that's going to keep credit largely frozen -- which in turn will only exacerbate the recession's effect on stock prices. Governments migt be able to prevent financial meltdown. But they can't prevent a major economic slump, or its reflection in the Dow.

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