Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 12/15)

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics. 

Unfortunately, there is still plenty of bad news. Though the stock market now appears to acknowledge that we are in a recession, the depth and duration of the economic downturn is still uncertain. The financial-service companies still face asset write-downs, with concerns now focused on credit-card debt and commercial-real-estate loans, while other sectors are dealing with slumping demand across the board. The autos remain in the headlines. The government announced this morning that indeed they will be kept afloat, which the market is applauding, but real recovery by the Big Three is still incredibly uncertain.

On Tuesday, investors celebrated the unprecedented measures announced by Fed Chairman Ben Bernanke – cutting interest rates to near-zero levels and vowing to do anything and everything to boost the economy. On more sober reflection, unfortunately, the aggressive posture of the Fed raised concerns.

First, the dollar took it in the chin in a big way. I have been expecting some reversal of the dollar’s recent strength. Last week I mentioned that the yield on Treasury bills briefly went negative last week, a theoretical impossibility, in spite of a massive sale of securities by the central government. That anomaly indicated an all-out flight to safety by investors here and overseas, who now have come to their senses.

While the U.S. economy and the dollar do indeed look sounder than many others around the world, plummeting interest rates and enormous budget deficits are not the stuff of strong currencies. As traders grappled with the Fed statements, the dollar continued to slide, ending up down sharply against the euro and the yen. The euro bottomed at $1.25 in November; it closed at $1.43 yesterday. That is a shocking move in currency markets, which tend to shift gradually over time. But, after all, everything is weird these days. It may well be that as the Eurozone and Japan deal with slowdowns at home, and also further reduce rates, that the dollar may stage a comeback, but I don’t expect to retrace the losses anytime soon.

Another item on our “weirdness meter” today is the ongoing collapse in oil markets. Consider: OPEC has agreed to another 2 million per barrel production cut, on top of a prior 2 mb/d reduction, and still prices fall – into the 30s. The slumping dollar is one reason for the drop. Oil is priced in dollars; to the extent that traders are dumping dollar-denominated assets currently, oil would suffer, and it has. Also, traders don’t believe in the projected output cuts. Saudi Arabia has to absorb most of the decline in production, while other states are cheating, as usual. Countries like Iran and Venezuela are in financial trouble and face domestic unrest if income falls further.

Still, really, can you believe that oil prices have come down more than $100 a barrel in the past six months? It is amazing, and a perfect example of how forecasters across the board tend to extrapolate from recent trends. Last week Goldman Sachs issued a report forecasting that oil would go to $20. These were the same jokers that projected oil going to $200 when prices were rising last summer. It’s remarkable that people are actually paid to come up with forecasts like that.