Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Liquidity Crisis Would Be Reflected in High Interest Rates, That hasn't happened!

Interest-Rates / Liquidity Bubble Dec 15, 2007 - 09:32 AM GMT

By: Adrian_Ash

Interest-Rates

"... The Dollar's holed up in a hotel shooting neat vodka, whatever its "people" are telling the press..."

IT'S A COLD & BITTER TRUTH that the world's investment markets rarely act as sober as Britney Spears in a new wig.


In fact, as John Maynard Keynes famously noted, they're prone to stay much crazier for much longer than a right-minded investor can stay solvent.

But is that really an excuse for the world's financial markets acting so tired and emotional right now?

US Treasury bonds this week delivered their worst drop in more than three years, but global stock markets also plunged – defying the base logic that bonds rise when stocks fall, as investors flee the risk of lower earnings for the safety of fixed income.

The Western world's five biggest central banks meantime pledged $100bn in loans to help inter-bank lending, but short-term interest rates barely flickered. "It's not going to help us find an exit to this crisis," warned Cyril Beuzit at BNP Paribas in London . "Banks are still reluctant to lend money to each other because there are serious concerns about potential further bad news."

The Dollar then bounced on surging inflation data, even after the Federal Reserve cut US interest rates to stimulate fresh money creation. Grain, soybean and oil prices all rose too, despite analysts the world over forecasting a global slowdown.

And Gold Prices ? Well, gold gave back all of its gains from Monday, and sank to a series of two-week lows for British and European investors, even though rising inflation and lower interest rates are the very conditions that tend to drive investors into the Gold Market – if only when they finally have a moment of clarity and quit drinking at their Bloomberg terminals.

"Gold down as Dollar strengthens," said a headline late Thursday, "lower oil prices reduce inflation risk." Which all sounds fair enough, until you ***** an ear to the deafening thunder now rolling above Wall Street's very heads.

Most investors – and not least the big institutional managers – would rather try to drown it out by replaying the newswires' sound and fury on their new iPhones. But when stocks and bonds all slip together...sliding alongside house prices and the huge credit-derivative markets they now underpin...not even that pair of Bose Quiet Comfort 2's you asked Santa to get you for Christmas is going to cancel this noise.

Hark at the Dollar's bounce, for example...

Turning tail from its worst valuation ever on the world's currency markets, the US Dollar has now gained more than 3% since the start of November.

The fundamentals, however, are going about as well as Lindsay Lohan's post-rehab recovery if Star magazine is to be believed.

Believed about Lindsay, that is. The Dollar's holed up in a hotel shooting neat vodka for sure, whatever its "people" are telling the press...

  • US interest rates have been cut by 0.5% since Halloween;
  • The number of home-buyers now one month or more behind with their mortgage payments rose by one-third in the third quarter alone, says RealtyTrac;
  • Consumer Price Inflation – even on the official measure – just broke 4.3%, way ahead of even the gloomiest Wall Street forecasts;
  • The trade deficit refuses to shrink, despite the shrinking Dollar.

Trouble is, not least for US investors wanting to use this bounce in the greenback to switch overseas, the same deafening thunder is rolling across pretty much everywhere else right now, too.

Germany's consumer-price inflation broke 3.1% year-on-year in November. Europe-wide, the cost of living rose 0.5% last month alone from October. In the United Kingdom , the CPI looks a little tamer. But the older and more trustworthy Retail Price measure rose to 4.2%, even as the UK's 10-year housing boom continued to plunge from the top of this summer.

Meantime in the oil pits, "I think we are going to give back a lot of what we gained Wednesday, if not today at least during the next week," reckoned Phil Flynn, senior trader at Alaron Trading in Chicago, to Bloomberg on Thursday.

"The [oil] bulls need to be fed every day and I don't see the Fed adding yet more liquidity to the market today."

Oh really? The New York Fed injected $20.75 billion in short-term funds into the money market on Thursday, more than one-quarter of it in two-week loans.

But hey – the average daily injection in November was $45.95bn. So on a relative basis, and what with Christmas coming...good will to all men, and all that...then sure. The Fed's doing its damnedest to support the Dollar, keep a lid on oil prices, and ward off inflation with a magic wand marked "tight money".

"Nor are the numbers devastating in the bond markets," says George Friedman of Stratfor, puzzling over the on-going crisis in world money markets. It led to Wednesday's joint action by five of the world's largest central banks, but the interbank lending rate in London – center of the world for short-term finance – didn't budge.

"By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great," says Friedman. "In other words, a liquidity crisis would be reflected in high interest rates. That hasn't happened.

"In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won't lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron."

All told, in short, the Western world's central bankers – and by extension, the poor mugs who have to get by on the paper money they're supposed to look after – now face a big, ugly challenge, almost as angry as the pitbull chewing a wasp that Timothy Geithner, president of the New York Fed, waved a stick at during a speech to Princeton University this week:

"Do we need additional instruments that would better enable us to mitigate marketwide liquidity problems?" he asked. "And how can we mitigate the moral hazard risk inherent in such instruments?"

Note the lack of a conditional in Geithner's second sentence. Gabbing "can" rather than "could", he clearly believes the answer to Question #1 is "yes" – a loud, happy kind of yes, usually barked by consenting adults drunk together in a Vegas motel room. With a couple of friends along to watch.

If we were in the business of making short-term calls in the Gold Market here at BullionVault (which we're not), we'd wager that gold below $800 per ounce will be all but a happy memory sometime soon in 2008.

When things don't stack up – and when the markets get as crazy and mixed-up as they are now – someone's sure to get hurt or lose an eye. Our guess, for what it's worth, is that it won't be gold owners, not if they buy gold for defense against the ailing Dollar, rising inflation, slowing growth and on-going crunch in world money markets.

But we could be wrong. Right?

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in