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Daily Market Commentary

The pain in the financial sector continues this morning, causing even more flight to the quality of government bonds.  Two year treasuries are now trading down to yields not seen since early 2004.  Wachovia is the latest victim in the US to set aside some money for the inevitable losses that are coming from the consumer sector loans.  The bond market and the comments coming out of the financial sector in the last few weeks have pointed to nothing other than a grinding halt to growth in the US economy.  US consumer spending account for almost 20% of WORLD GDP.  Much of that spending has been financed through rising household debt.  Household debt has risen at a much faster pace than assets, and now those assets are turning south while the debt is still there.  This can only mean tighter lending standards is the US.  Not only are the existing loans (packaged up in CDO's and other structured debt products) turning sour, but the banks' revenue from loan origination will be drying up significantly.  This will hurt both the assets and the income statements of financial companies, causing a retrenchment and a pullback in the liquidity that they provide to the rest of the corporate sector.



The answer to this problem if of course liquidity in the form of lower rates from the Fed.  Just like they flooded the system following the tech crash in 2001-2002, we will be seeing lower rates, particularly out of the US.


The CAD$ is once again weaker following the reversal on Wednesday.  The US$ is still seen as a flight to quality asset, and Treasuries are the only pool of risk free assets big enough to really hide a lot of money, so the greenback has been well bid.



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