February 28, 2007 what a difference in 11 months

February 2, 2008

While organizing my desk I came across the Wall street journal for Feb. 28, 2007. The headline in the money and investing section was ``Market seeks safety in treasurys``. The Dow Jones was at 12, 216 down over 400 points on the day, the NASDAQ at 2407, oil was at 61.46 a barrel, 10 year treasuries at 4.515 % and the Canadian dollar was trading at 85.73 US and the euro at 1.3236. The Fed discount rate was   at 6.25, the federal funds rate at 5.27 and the US prime at 8.25.
It is rather amazing that in 11 short months the Canadian dollar has moved to above parity, oil is close to 90 $ a barrel after having hit 100,the euro is at 1.49 and the federal funds rate is down to 3 %. inflation remains roughly where it was   with the core rate then just 2. 7 % and unemployment is now up from its low of 4.6 % to 4.9%. The Dow -Jones is at 12743 still over 500 points above last February's value but the NASDAQ at 2413 is virtually the same as last year.
What has happened to cause such substantial shifts in interest rates , expectations, employment growth and exchange rate differences. The answer is clearly the shock of much higher oil prices driven up by the actions of the cartel and strong demand and the antics of the futures traders and the discovery this summer of the asset backed commercial paper crisis.

The fact that the Fed had driven the prime rate to over 5 % in   real interest terms by raising the discount rate to 3.5 % in real terms also played a major role as it usually does in bringing about a sharp decline in growth and employment and bringing into play whatever vulnerabilities there existed and there are plenty of them in overvalued assets and undervalued risk.