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
BREWING FINANCIAL CRISIS 2.0 Suggests RECESSION 2022 - 28th Jan 22
Financial Stocks Sector ETF XLF $37.50 Continues To Present Opportunities - 28th Jan 22
Stock Market Rushing Headlong - 28th Jan 22
The right way to play Climate Change Investing (not green energy stocks) - 28th Jan 22
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is the Stock Market Rebound From the Flash Crash Sustainable?, The Answer Lies in Liquidity

Stock-Markets / Stock Markets 2010 May 13, 2010 - 04:30 PM GMT

By: Q1_Publishing

Stock-Markets

Best Financial Markets Analysis ArticleThe only thing that matters in this market is liquidity.

As last Thursday’s market sell-off and this week’s rebound have proven, the only real factor driving the markets higher is liquidity.


That’s why all the recent action directly or indirectly related to the Greek bailout, the European Central Bank (ECB) monetizing more debt, the ongoing bailouts of Fannie Mae and Freddie Mac, and deep deficits of Western governments at all levels, simply further cement the most important trend of the next decade.

It’s a trend that will make fortunes for some and cost others a lot. Here’s how to ensure you’re on the right side of it all.

The Set Up

The western world is drowning in debt. Western governments, corporations, and consumers (as a whole) are all deeply indebted.

Credit is not expanding. Consumers and businesses are actually paying down debts.

The thing is though, when credit contracts, liquidity dries up. And less liquidity means lenders have to be more careful with the money they have. So they are less likely to make loans to bankrupt governments (i.e. Greece, California, Illinois, etc.) and make riskier loans to small businesses and consumers.

The signs are everywhere. Whether you’re a corporation rolling over debt, trying to get a small business loan, or a consumer just looking to get a loan other than a mortgage - which 90% of all newly issued ones now carry a government guarantee – loans are tougher to get.

Liquidity is drying up and it has the governments scared to death.

After all, less liquidity means bad things are going to happen.

That’s why we’re keeping a close eye on the world’s ultimate liquidity measure - the TED Spread - to see the market’s next move.

The Ultimate Liquidity Indicator

The TED spread is the difference between the rate on the “risk-free” 3-Month U.S. Treasury Bills and the interbank lending rate.

The spread increases when liquidity dries up and banks consider lending to each other to be risky. It rises because banks buy T-Bills and push down rates on them and demand higher rates for interbank loans.

The spread falls when banks perceive less risk of lending to each other and they want to eke out a greater return by lending to each other rather than buying “risk-free” T-bills.

In a market where liquidity means everything, the TED spread is the key indicator of where the markets are headed next.

The chart below shows the TED Spread over the last five years:



It’s easy to see a correlation between liquidity (as tracked by the TED spread) and stocks, gold, and commodities.

Over the long term, the relationship between the TED spread and stocks is even more apparent (view long-term TED spread vs. stocks chart here).

TED spread down, liquidity and stocks up. TED spread up, liquidity and stocks down.

It really is that simple.

That’s why it was no surprise to see the rebound this week. Last Thursday’s sell-off was not a sign of a bigger panic. After all, the market self-corrected within a matter of minutes. The liquidity was there, although to a lesser extent, but it was there. As a result, TED spread barely jumped.

Now a week later, liquidity has increased substantially, the TED spread has started falling back down, and stocks are back on the rise.

It’s the Liquidity, Stupid

So that’s where we’re at right now.

The ECB has proven its resolve to keep the liquidity spigot open despite the short- and long-term costs – political or otherwise.

Injecting billions of dollars of liquidity into the financial system by buying Greek debt at above-market prices, handing Greece cash, and by taking an untold sum of European governments’ outstanding debt (a.k.a. monetizing) off the hands of banks, has provided a short-term jolt of liquidity.

And in a market driven by liquidity, it naturally reacted positively.

The thing is though, more and more investors are realizing what’s going on. Problems, a.k.a. “threats to the financial system,” come up and they’re just shifted up the chain.

When the banks had problems, the Federal Reserve and the U.S. government took them over. When Greece had problems, the entire European Union took them on.

There’s a clear trend forming and there’s no reason to expect a different solution with the next crisis. Whether it’s commercial real estate, state government budgets, or the next European welfare state to collapse under its own entitlements, the problems will just be passed the next stop up the chain.

But more and more investors have figured out there are only so many levels to shift problems up to. Eventually something has to give. And right now we expect that to be the value of currencies. And over time a steady devaluation of currencies is going to mean two things are going much, much higher – interest rates and commodities.

So for now, with liquidity on the rise, it’s still too early to bet against this rally just yet.

That’s why there’s still time to get in position for higher interest rates – you will not regret it.  And when it comes to commodities, we’ll look at where to find the biggest gains in the coming historic run for gold (hint: it goes against everything that’s happening in precious metals stocks right now) in the next Prosperity Dispatch (sign up here – it’s free) and the current corrections in oil and agriculture commodities will be viewed, in time, as opportunities.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2010 Copyright Q1 Publishing - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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