World Economy: Markets Recover after European Rescue Plans Announced

Tokyo, 14 Oct. The Dow, S&P, Nasdaq and even the Nikkei were all up more than 11% after losing almost as much in the past week.

Tokyo, 14 Oct. The Dow, S&P, Nasdaq and even the Nikkei were all up more than 11% after losing almost as much in the past week. Investors have wagered that the markets were at their worst, right after a series of European announcements to resuscitate credit, amounting to over US $1.4 trillion.

Markets dipped so low that at some point many stocks looked appealing. This, along with the UK and EU news to re-liquidate banks was all that was needed to cause a convincing comeback.

The UK, Germany, Spain, Italy, and Austria all announced huge rescue schemes for their banks. The plans guarantee lending between European financial institutions. Apparently, this was all investors needed to get markets running again, as US bailout plans had no such effect.

The UK government promised to pump almost US $65 billion into Lloyds TSB, Royal Bank of Scotland, and HBOS. Germany approved a US $683 billion package; France’s is worth about US $478; Spain is proposing almost US $137 billion. Austria promised around US $116 billion and Italy simply declared it would contribute as much as its country needed, without quoting a figure.

Like the US plan, Germany and France will use their funds to acquire shares in struggling banks.

Japan promised to help Iceland recover via loans. Japan’s finance minister, Shoichi Nakagawa, said, “With nearly USD 1 trillion in foreign exchange reserves, Japan is prepared to help bail out nations running out of funds amid the worsening global financial crisis,” according to a Reuters report.

The question now, however, is whether or not tomorrow investors will still find these stocks as attractive as they did yesterday, and whether or not they will hold onto them. Everybody is wondering if this was the bottom – one would shudder to think it was not, and that we are going to see another drop even greater than this rally.

A quick glance at historical growth of the US GDP tells us that over the past 150 years it has experienced linear growth, of about 3.3% per year. Keep in mind that US GDP growth rates were recently revised to 2.8% per year (as of late September 2008). The fact that the US system of democratic capitalism creates this steady state of growth – albeit with a blip or two here and there – suggests there is inherent stability in this system.

This is a good reality check for long-term investors. Sometimes the smartest investor does nothing amid such turbulence, content in the knowledge that he can ride it out while everyone else panics.

Hiroko Mirafiori, EconomyWatch.com