The Dow Jones Industrial Average ended the first week of January under 13,000, at 12,800.18, down 256.54 points on the day.
Friday was the second day in the three trading days this week since Jan. 1 in which the market lost 200 points or more, making it the worst year’s opening in a quarter century.
This past week also saw records with crude oil touching briefly the $100-a-barrel mark and gold traded briefly at $868 an ounce for February futures contracts. That’s close to the all-time high of $875 an ounce that gold reached in January 1980 during the Iranian hostage crisis.
Meanwhile, the dollar reversed its upward trend, ending the week at 75.82 on the USD index, just off the all-time low of 74.48 in November.
The stock market dive today was triggered by a U.S. Department of Labor report that unemployment rose to 5 percent in December, the highest level in the last two years.
Increasingly economists are openly talking about the possibility of recession, just as populist themes of economic woe have begun to take center stage in the campaign rhetoric of candidates as diverse as Sen. Hillary Clinton and Gov. Mike Huckabee.
According to the New York Times, since January 2001 when President Bush took office, the government debt issued to the public has risen $1.7 trillion, with $1.3 trillion of that amount being sold to foreigners.
Of the $1.3 trillion, China held $327 billion, approximately one-fourth.
Moreover, this year China became a net seller of Treasury securities, ending an upward trend in which it bought as much as 36 percent of all Treasury securities issued in 2006.
China has amassed a record $1.4 trillion in foreign exchange reserves, 80 percent of which is held in U.S. dollar assets, largely as a result of the U.S. trade imbalances with China. “Free trade” agreements, including China’s admission into the World Trade Organization, have encouraged U.S. manufacturers to shift jobs to China.
Now, with the value of the dollar declining, China is less anxious to hold U.S. Treasuries or foreign exchange reserves in dollar-denominated assets.
Instead, China has moved to establish investment entities such as the China Investment Corp. to manage Chinese “sovereign wealth funds.”
The Asian Times reports China Investment Corp. has registered capital of $200 billion, aimed at making private investments worldwide, including in the U.S.
In December, the China Investment Corp. paid $5 billion to buy a 10 percent of the U.S. investment bank Morgan Stanley.
The $5 billion Chinese government equity investment into Morgan Stanley followed the investment bank’s decision to write down an enormous $9 billion of mortgage-related assets that were nearly worthless, in comparison to the price it paid.
Meanwhile, the Federal Reserve has announced it will offer U.S. banks $30 billion in emergency loans in auctions planned for Jan. 14 and another $30 billion in emergency loans in auctions scheduled for Jan. 18.
But the problem U.S. banks are facing, as the Morgan Stanley case illustrates, may not be liquidity or the need for cheap short-term funds to restore faith in money markets.
Today, no one at the U.S. Treasury, or anywhere else in financial markets, can estimate the true level of write-downs that need to be taken on the trillions of dollars currently held by U.S. banks and brokerage firms in various Wall Street-generated collateralized loan obligation, or CLOs, securities held in the financial institutions’ asset portfolios.
If U.S. financial institutions were required to “mark to market” the true current value of the CLOs held in asset portfolios, hundreds of banks, including some of the largest, may not have the asset strength required to meet reserve requirements needed to continue operations.
Increasingly, U.S. financial institutions are turning to foreign countries and their government-owned “sovereign wealth funds” to find the needed capital.
Last September, WND reported Dubai utilized sovereign wealth funds gained from petrodollars to purchase 19.9 percent share of the Nasdaq in New York, placing the Arab government in an ownership position of the second largest U.S. stock exchange.
Dubai alone is estimated to have nearly $1 trillion in sovereign wealth funds, accumulated largely from petrodollar windfall profits as oil has spiked to nearly $100 a barrel.
Editor’s note: The November issue of WND’s monthly Whistleblower magazine, titled “HOW GLOBALISM IS DESTROYING THE U.S. ECONOMY” – focuses exclusively on the future of the U.S. economy, and answers key questions like: “If inflation is so low, how come food and energy cost so much?” “What is the ‘housing bubble,’ and why did it burst?” “What’s really going on with the stock market?” “Is America heading into a recession?” “Will the dollar collapse in 2008?” and “What will happen to the price of gold?”