By Gary Dorsch
October is famous for stock markets crashes. US Treasury chief Henry Paulson's ill-fated decision on Sept. 14th to pull the plug on the 158-year old brokerage firm of Lehman Brothers set in motion a horrific chain of events that unleashed a torrent of panic selling on commodity and global stock markets, froze the European and US banking systems, and changed the direction American politics for years to come.
At its lowest point in October 2008, the meltdown in equities around the world erased $12 trillion of market value for the month and $31 trillion from a year earlier. Lehman's bankruptcy left sellers of credit default swaps with liabilities of $270 billion, and hedge-funds scrambled to raise cash by selling anything they could get their hands on, including commodities and stocks.
The Reuters/Jefferies Commodity Index plunged by 23% in October, its steepest monthly decline since 1956. Investment-grade corporate bonds lost 7.4% in October, their worst month since the inflationary blow-out of 1976.
At the same time, US home prices continued their unrelenting slide for a 20th straight month, reducing homeowner wealth by about $3 trillion. Stock market losses add-up to an additional $8 trillion of lost wealth. This could force US households to cut aggregate spending by $300 billion a year or more.
The Treasury's bail-out – aiming to purchase toxic mortgage-backed securities from banks – was badly flawed and utterly rejected by the marketplace. Even after the House finally passed the bill on October 3rd, the Dow Jones Industrials plunged another 3,000 points and free-falling to a five-year low. It was not until the British and Eurozone governments moved aggressively to inject capital directly into their own banks, and the US Treasury then followed suit, did some measure of calm and stability return to the global stock markets.
But for "Maverick" McCain, the collateral damage from the October market meltdown torpedoed his long-shot bid for the presidency. The Dow Jones Industrials rallied 15% in the week prior to Nov 4th election results, a move that surprised many traders, because Barack Obama's higher tax policies – combined with far-left Democratic control of Congress – defied the conventional wisdom that markets like lower taxes and at least some gridlock on Capitol Hill.
However, soon after Obama's victory speech in Chicago, the stock market rally fizzled out, and the Dow began melting down 800-points over the next 36-hours of trading.
Americans are naturally eager for fresh start – a "New Deal" – as is typical during periods of economic hardship. And a majority of voters turned to Obama in a giant leap-of-faith.
This is a man many Americans know little about, and with no executive experience, after less than four years out of the Illinois Senate. McCain tried to paint Obama as a tax-raising Socialist, who will "spread the wealth around", a fear that resonates with the biggest and most powerful traders in the financial markets.
Uncertainty over how Obama and the far-left Social Democrats in Congress would alter tax policies for US-multinationals listed on the NYSE, and capital gains taxes on wealthy investors, intensified the stock market's meltdown in October. On corporate taxes, Obama proposes to tax world-wide income earned by American multi-nationals at the 35% domestic-corporate rate, the world's second highest.
Obama is also promising a windfall profits tax on oil companies, and in his stump speeches talked about lifting the capital gains tax on wealthy investors to 20% next year.
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