The rejection of the bailout bill is likely to plunge the world economy into recession unless central banks step in to limit de disaster by cutting interest rates, experts said.
Help the Consumer, Cut Rates
"I'm very pleased that it was rejected because I don't think it would have worked. Fiscal packages don't work in these situations. All they do is take resources from one group of people and give them to another group of people," Roger Nightingale from Pointon York said Tuesday.
"If you want to improve the market situation, you cut interest rates. Doing this just hurts the consumer and helps the banks; hurts the good guys and helps the bad ones."
Hey, It Could Be 1987
The market is oversold, claims John Roque of Natixis Bleichroeder. When you get something that's oversold, you expect a rally in the other direction. Unless, of course, its oversold and weak and stays that way. “So far, it's the latter that's been true,” says Roque. Additionally, volatility is also at or near historic highs. On the bright side, says Roque, “It's nowhere near as high as it was before the 87 crash.”
There's No Place Like Home
"This market is within a 6 or 8 percent level of a bottom, unless we're forming that bottom now." Says J.J. Burns, J.J. Burns & Company. Until then, he adds, "We're going to be spending more time in our homes." Burns thinks that benefits nesting plays, like cable companies. Bruce Levis, of McQueen, Ball & Associates, on the other hand, is revisiting asset allocation. "At times like this, you're questioning the amount of risk your taking," says Levis. "Make sure the breakdown between cash, fixed income and equities is appropriate for [investors'] long-term objectives." In other words, get back to basics.
Consequences Could Be Severe
"Some sort of package will be passed by the end of the week, and maybe we get some sort of bounce in equity markets. But I think it's very necessary for something to be done. This is not the best package in the world. It wasn't the greatest package in the world to start with. I think the add ons from the Democrats really warded the package down and probably made it very unpalatable for any major U.S. financial institution to really get on board," Benjamin Pedley from LGT Investment Management.
"That being said, I think the alternative of doing nothing would be hugely problematic for the U.S. economy. And it's all very well to say the taxpayer is footing the bill, well, I think the alternative is basically a complete breakdown of the financial system. So I think, given the alternatives, that the U.S taxpayer may not like it right now but I think the alternative isn't particularly nice."
Gassing Up On Natural Gas
“Look at natural gas,” says Joe Terranova, chief alternatives strategist at Virtus Investment Partners. “It hasn't been part of the massive liquidation.” Natural gas is more of an industrial fuel used for power generation, he says. In a slowdown, crude oil is impacted more than natural gas. What to do? Play the ETF, which is UNG, Apache, EOG Resources or Chesapeake.
Interest Rate Cuts Won't Help
"In this environment cutting interest rates isn't going to help because the problem isn't interest rates, the problem is lack of liquidity," Trevor Williams from Lloyds TSB Corporate Markets told CNBC.
'Cut Sooner Rather than Later'
"Interest rates will have to be cut sooner rather than later," Niall Paul, CIO of equities & deputy CEO of Aviva Investors, told CNBC. "There's some very serious economic slowdown going on globally, irrespective of the short-term impact of the bailout plan," he added.
Only if 'Plan A' Fails
"We're seeing a chance for a rate cut if 'Plan A' fails and the liquidity injections are not enough to stabilize and calm markets. We might see the Fed go out and cut 25 to 50 basis points," Christian Blaabjerg from Saxo Bank told CNBC.
US Economy to Slow
"The longer we go (without a bailout plan), the worse the economic story gets. We're talking about negative GDP probably in at least the fourth quarter and the early part of 2009," Marc Zabicki from H&R Block Financial Advisers told CNBC.
Suspend Mark-to-Market Rules
"This isn't a bank crisis caused by people lending to people who can't pay back their debt. It is a crisis that's been created, not by people going bust and handing back the keys, everyone thinks it's about the subprime mortgages or the U.S. housing market, this isn't. This is about the leverage that was put on top of that and the rules-based systems that said 'this junk bond is a AAA-rated junk bond, you can buy it'," Mark Tinker from AXA Framlington Gemini said.
"The SEC have got to suspend these mark-to-market rules," Tinker suggested.
Job Losses to Speed Up
"If the TARP (Troubled Asset Relief Program) proposal had gone ahead, the hope would have been that when we pass the end of the quarter, maybe we could have seen some semblance of normality (in the money markets). But that's clearly not the case now," Ken Wattret from BNP Paribas said.
"Businesses are going to change their behavior, given the uncertainty and the increased cost of funding and worries about the state of the global economy. They will be reining back on their hiring. We'll see a bigger increase in the pace of job losses."
Cuts No Panacea
"The major problem is still liquidity, in particular the liquidity when it goes from the central bank to arrive at the commercial banks' balance sheets because simply commercial banks don't exchange liquidity anymore or exchange it at a very high interest rates or very high margins," David Kohl from Julius Baer said.
"The main task for the central banks is to provide the liquidity to certain institutions which need it, to do actually some fine tuning at the markets. Interest-rate cuts wouldn't particularly help, as interest rates in the money market are well ahead of the current target rates of the central bank."