The red ink continues for the second straight day on the Dow Jones, even the sprightly oil sector was not spared. Oil prices was hit by a strengthening dollar after the Fed chairman, Ben Bernanke said the economy remains under pressure, but he is unlikely to cut interest rates again soon.
Other news spooking investors are the troubles at Lehman Brothers as they aim to dress up their balance sheet by raising an additional $3 billion to $4 billion. And General Motors’s announcement that it will close four pickup and SUV plants by 2010, as consumer preferences for vehicles are affected by higher fuel prices. This does not bode well for the automobile industry.
I believe The Fed is right in not lowering the interest rates in the short term. It is a painful measure but the general economy will benefit in the long term. In fact, as an investor, I want to see a government adopting tough measures to cure the economic ills.
A too low interest rate invites a rush of investments which then generates a boom mechanism. The excesses inevitably lead to a depression when sentiment shifts.
Over-investment in the real estate sector, as what we are seeing now, results from the expansion of credit which allows more to be invested than is saved. Capital is made available but it does not originate from savings and is created out of nothing through the banking system.
The symptoms of a depression can be postponed by a further increase of the credit supply but only at the price of an aggravation of the ultimate debacle.
Hopefully, some life may be injected back into the stock market after two days of correction in prices. So long as the dollar firms up, I am positive about long term prospects.