As Oil Approaches $100, Markets Plunge

Peter Cohan
BloggingStocks
November 9, 2007

The New York Times reports that the Dow lost 360 points — or 2.64% — back to where it was before Ben Bernanke cut the Federal Funds Rate an unexpectedly large 50 basis points. My message to Bernanke is that cutting rates just to keep the market from falling is not a winning strategy.

The Fed is supposed to keep inflation in check, and it’s failing at that job. How so? At $96.37, the price of oil is near an unprecedented $100, and gasoline prices — which blessedly dropped during the fall — are poised to rise about 50% to $4.50 a gallon, just as people step up their driving during the holidays. On January 19, 2001, oil was $24 a barrel – it has since quadrupled. Meanwhile, the cost of heating a home is hitting a record — $3.05 a gallon for home heating oil in Massachusetts. It may be higher elsewhere.

Then there’s the little problem that the Fed has engendered through its rate cuts — a dollar that’s plunging like a knife. Relative to the euro, the dollar has lost 13% from $1.30 at the beginning of January 2007, to its current $1.47. And since January 19, 2001, the dollar has lost 60% of its value! Back then, one euro bought 92 cents. In addition to Brazilian supermodel Gisele Bundchen, China is now seeking to switch from the dollar to the euro. So the dollar drop is feeding on itself.

But what scares investors the most is the uncertainty about how badly the world’s financial system will bleed as a result of write-downs of bad loans. With $456 billion in Level 3 assets, the country’s largest nine largest banks would barely have anything left of their $584 billion in capital if they had to write all these mark-to-model assets down to zero.

I don’t know if it will get that bad. But the uncertainty about how bad it is and how bad it could be is scaring investors.