Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

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

© 2005-2019 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