While the stock markets are all over the place this week, up 420 here, down 300 there, it’s important to take a look at some of the other markets out there, namely treasuries and commodities. Speculation bubbles in those markets are causing chaos as the dollar continues to flounder.
Since January, speculators have ditched stocks and have gone to treasury bonds and commodities like oil. But the problem is this: with the dollar plummeting, yields on treasuries have dropped like a rock, well below the rising rates of inflation.
The three month bond from the US government has dropped to its lowest yield in 50 years.
Treasuries were little changed, with three-month bill yields at the lowest level since 1958, as Credit Suisse Group said it is “unlikely” to be profitable in the first quarter.
Two-year yields declined to levels not seen since 2003 as Credit Suisse, Switzerland’s second-biggest bank, said it may have a loss in the period for the first time in five years, further signs that credit-market losses are deepening. The difference between what banks and the government pay to borrow for three months widened to 2.03 percentage points, the most since December, showing an increase in corporate borrowing costs.
“The economy is broken,” which will boost demand for the safest investments, said Matthew Johnson, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest inter- bank broker. “People are more concerned with the return of their money than the return on their money.”
The two-year yield was 1.49 percent as of 7:30 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 2 percent security due February 2010 was 100 31/32. The two-year yield will decline to 1.25 percent as soon as next week, Johnson said.
Three-month bill yields were unchanged at 0.56 percent, after falling to the lowest in almost 50 years yesterday.
The way the dollar is going right now, would you consider buying a US treasury bond for 2 years at a measly 1.5 percent or less?
And yet that’s exactly what people are doing. People are flocking to treasuries because even a relative loss like that due to inflation of taking a 5% loss or so is still markedly better than putting it in a stock market where losses like Bear Stearns losing 95% of its value are now possible.
That’s how far confidence has fallen. So many people are buying up treasuries that the yields on these bonds in the space of a year have dropped from 5-6% to 1.5% or less. In the case of three month bills, they are .56%…a pittance. And yet…a safe pittance is worth more than a massive loss. Stocks at their height (inflated by Greenspan’s bubble) were making double digit percentage gains and were all the rage on Wall Street.
Now the smart money is on yields of 0.56%. What does that tell you?
Investors are terrified, and you have to look no further than US treasury bonds to see just how truly frightened folks are.
At the same time over in the commodities market, the speculation bubble is bursting. The same mentality, get out of stocks, get into gold and oil fast fast fast, is coming apart as the reality of the US recession kicks in. Demand for commodities is dropping like a stone and in the last 48 hours commodity prices for items like gold are crashing around the world.
Gold headed for its biggest weekly drop in 25 years in London as a strengthening dollar eroded the precious metal’s appeal as an alternative investment. Platinum, palladium and silver also declined.
Gold for immediate delivery declined $29.56, or 3.1 percent, to $914.64 an ounce as of 10:20 a.m. in London after earlier falling to $905.41, the lowest since Feb. 19. Gold’s 8.8 percent drop this week would be the biggest since March 1983. The U.K. is on holiday tomorrow and March 24.
Assets in StreetTracks Gold Trust, the biggest fund backed by gold, fell 2.2 percent yesterday as investors sold commodities on speculation the slump in the dollar will end. Gold has climbed 39 percent in the past year as the dollar weakened and investors sought a haven from credit-market turmoil.
Gold was well over $1,000 an ounce a few weeks ago. It’s plummeting to $914 and falling, and this is gold we’re talking about here, not some crazy fly-by-night IPO offering.
And oil…well…oil this week is collapsing.
Crude oil fell below $100 a barrel in New York on growing concern a U.S. economic slowdown will hurt commodity demand.
Oil has fallen 11 percent from a record this week, tracking declines in gold, wheat and metals, as the dollar strengthened, reducing the need for hedges against inflation. U.S. gasoline demand in the past four weeks averaged 3.2 percent less than last year, the Energy Department said yesterday.
“Investors have taken money from the capital markets and bought oil futures, but there’s nothing changed in the fundamentals to make oil worth $100,” said Gerrit Zambo, an oil trader at BayernLB in Munich. “Now these investors may think it’s time to get out.”
Crude oil for May delivery fell as much as $2.95, or 2.9 percent, to $99.59 a barrel in electronic trading on the New York Mercantile Exchange. It was at $100.41 at 11:43 a.m. London time. Oil is up 77 percent from a year ago.
Brent crude for May settlement fell as much as $1.97, or 2 percent, to $98.75 a barrel on London’s ICE Futures Europe exchange. It was at $99.54 at 11:43 a.m. London time.
Brent oil is heading for a weekly decline of 8.2 percent, its biggest since January 2007, in a week shortened by the closure of exchanges in London and New York tomorrow for public holidays.
So what the hell is going on here? The answer is in the next paragraph:
Commodities such as oil and gold, which had reached records as equities and currencies tumbled, are no longer attracting demand as investors now need to free up money to cover losses in other assets, said Robert Laughlin, senior broker at MF Global Ltd. in London.
That is how badly the market players need cash, despite the billions of liquidity pumped into the markets. The liquidity crisis caused by rotten derivatives is spreading. They are selling anything and selling now to get money to cover margin calls.
Sell sell sell! It’s being heard all over the place. The Fed’s additional money isn’t enough. Throwing money at the problem is not working. Buying oil at $95 and selling at $110 looks pretty damned smart now, doesn’t it?
The markets are in a state of panic. The normal rules no longer apply. People are backed into treasuries while selling anything else they have to raise cash, because all the players in the market are leveraged out. Nobody has cash, everybody has debt. Nobody wants to buy debt anymore. That game is over.
If you buy a million dollars of stock with $10,000 in cash and $990,000 of derivative garbage, and the stock goes up 5%, you made five times your investment.
If it goes down even 1%, you’re wiped out.
Hence the flight to treasuries. Hence the fire sale on commodities. Hence the complete panic in the market.
Oil has dropped $10 this week alone! The commodity market is falling apart completely. Who knows at this point how low oil will go.
Do you think gas prices will fall 10% next week to reflect the price changes? After all, that’s the explanation we got for why we’re looking at $4 a gallon in several places in the US.
I don’t think so either.
Folks are cashing out to cover their losses in the market and to try to stay solvent. The rest are cashing out to avoid losing 10% a week in value and running to what is literally the last investment left…
US treasuries. And now, US treasuries have such lousy yields that they are a known loss, far, far blow the rate of inflation…and yet people are flocking to them because the losses everywhere else are much, much worse.
Does this look like a healthy market to you? We’re looking at a freefall in commodities now and treasuries that are becoming more worthless every day. It’s all coming apart out there…and the problems in the derivative and mortgage markets are still there. The dollar is still is serious trouble (now it’s reached a record low versus China’s yuan).
As I said several days ago, by the end of the week it would be painfully apparent that the Fed’s rate cut wasn’t going to do anything to solve the systemic problems out there.
Good Friday holiday tomorrow, and then next week back into the breach once more.
Be prepared.
Trust, lack of
Trust is the illusive commodity investors are seeking. It’s the lynch pin of the problem. And, as in the 1930s, neither the Feds or anyone can manufacture or restore. This thing will unwind us into a depression.
There’s no practical solution. Not rate cuts. Not the generating of digi dollars. This monster, trillions of debt, will be destroyed so we can rebuild the system.
I’ve been reading and hearing banks are restricting the movement of personal and corporate funds. Hoarding our money. They’ve put in place tools to avoid bank runs…to conserve cash and capital
1. this notice
We are required by federal regulations to monitor savings and money market account withdrawal activity and limit third-party or pre-authorized transfers to six per month. This includes transfers made by personal computer (online), telephone, or from overdraft protection. Of these six transfers allowed per month, no more than three may be made by check or draft. If transactions continue to exceed these limits, the law requires us to close savings accounts and transfer funds to a non-interest bearing checking account. Please note that money market accounts will not be closed, but converted to a non-interest bearing checking account and a fee may be charged when transaction limits are exceeded.
2. ARM resets
Hmmm, so we thought all those rate cuts would be passed on?
my nephew relates. “I went to my bank to renegotiate mortgage interest rates, confident the recent cuts will be passed on.”
“No”, said his banker, “we need the money”
Remind us please, how do we get through this financial meltdown to over there, safely on the other side.?
Imho, through a severe depression.
3. Who will follow Bear?
WSJ: True or False?
CIT
Citigroup
UBS
Credit Suisse
Lehman
Merrill
New talking point here: the stock market is worthless right now. Why? Bear Stearns. The buy-out there clearly showed us that major, “solid” American companies are actually worth a tiny fraction of their supposed value. Much of the economic growth of the past 25 years has been illusionary, created by capitalists laundering money through the stock market over and over in an attempt to evade taxation. Reaganomics has failed. The tide hasn’t risen, it’s pulled out and left the boats high and dry.
I’ve seen this argument and it’s actually very compelling.
If Bear Stearns “real value” is a single digit share price, then what does that say about the rest of the financial sector, especially investment banks? The problem is in a very real sense these companies really ARE worth single digit percentages of their supposed value because they are holding IOUs rather than cash.
A company that’s leveraged 30 to 1 in debt to cash ratio would be worth about 3% of what the stock was at in reality. Ironically, that was the offer made for Bear Stearns and the situation it was actually in. Keep in mind that level of leverage was typical of many many companies, but especially in the financial sector.
This also means that a 3% loss for a company leveraged 30 to 1 is therefore potentially fatal for the same reasons, 30 parts IOUs, 1 part cash, your one part cash is now gone. Instant “liquidity crisis”. The Fed is allowing these companies to trade in that debt for more cash. They have to or these banks are done.
How many companies are leveraged that highly in the era of Bushenomics? How many of them have taken 3% losses over the last few weeks? How many of these same companies are in fact the walking dead, bankrupt but kept alive by the Fed’s emergency Frankenstein jump start?
How many of these bank stocks have lost 10%, 20%, 50% of their value in the last couple of months alone?
The liquidity is keeping these companies solvent. When that Fed money runs out, the banks fail. Simple as that.
Right, but it’s worth pointing out that it’s not limited to banks, it’s all companies. The entire stock market. I’m in tech, so I’ve got kind of front-row seats on the sector that’s got the worst exposure after finance. Pretty much any tech company that’s been even remotely successful has a hugely inflated stock price. Why?
Because investors saw some actual value there, or potential actual value, and dumped money into them to try and get a slice of the pie. So if our fears about the actual value of these banks are right, that means that a lot of the market value of, say, Google, Facebook, Feedburner, YouTube, Skype, EBay, etc. has come from this imaginary cash. Maybe the entire tech bubble’s been driven by a mad scramble by investors looking to convert this imaginary cash into “real value” before the reaper comes calling. There’s no doubt that tech’s had a lot of real innovation, but does Facebook really have $15 billion worth of real innovation from essentially cloning MySpace and putting it in a nice suit? Hell no!
A nerd parody band called the Richter Scales did an excellent video about this a few months back: Here Comes Another Bubble v1.1.
And while tech’s probably at the most risk here, they’re far from alone. Everyone bought into the delusion, and everyone’s going to get burned.
I subscribe to Roubini who called this meltdown years ago. Now he’s being interviewed all over the media.
Today’s missive: The Worst Financial Crisis Since the Great Depression is Getting Worse…and the Need for Radical Policy Solutions to the Crisis
Some key points:
“A market solution to this crisis does not exist, those who believe in such markets solutions are deluding themselves as markets left alone will melt down and enter into the mother of all meltdowns, margin calls, cascading collapse of asset prices, massive credit crunch and liquidity seizure and severe economic recession.”
The lack of trust of financial institutions in their counterparties is surging in spite of all the Fed actions as panic is setting in money markets and credit markets.
And the run on the shadow financial system has barely started; we’re passed nine of my 12 Steps to a financial Diasaster.
formal nationalization is extreme but there is no practical solution to this debacle.
At the nationalization phase, we’ll be in the depths of depression
Protect yourself.
Yep.
We’re looking at de facto nationalization, followed by actual nationalization, followed by hyper-inflation, followed by depression.
But only because the current government is going to waffle and waver until it’s too late. An on-the-ball government with sane policy would see what’s going on and probably be preparing to nationalize important banks as soon as needed. Which would, if done right (there’ve been a few stories on EuroTrib lately documenting cases where it was) mitigate or even eliminate the hyper-inflation and the consequences of the depression.
Alas, Bush and his cronies will keep pretending that free markets work until Wall Street’s reduced to a smoking crater and the rest of the economy’s teetering precariously on the rim.
And while you’re right, we’d need leadership from Bush and Congress in order to do this, as well as political will. There’s actually a minute possibility that might happen as this is an election year.
But by the time our next President can do anything, it will almost certainly be too late.
Right. I’m just saying that we need to be clear. Nationalization isn’t bad, in fact it seems to be necessary. What’s bad is the poisonous conservative free market ideology that’s created this entire house of cards.
word has it that the recent closed door session of Congress (the first in 176 years) said to be on FISA was in fact a heads-up on the imminent collapse of the financial system. No coincidence.
Hmm, the weekend bailout of Bear Stearns quickly followed. Notice the Fed had to bypass its own Emergency-Loan Policy on Rate for Securities Firms.
double Hmmmmmm.
While this thought is somewhat worrying (the secretive aspect of a corporative lovefest), this would not surprise me entirely. What would completely surprise me? That every single one of these idiots took so long to react to a situation that has been “screaming” on the internet for so long now.
you’re absolutely on the mark re: commodities. look at todays chart from bloomberg. the massive increases, brought on in no small part by the inherent problems with the new energy bill…supported by demoRATs l might add…and it’s ethanol provisions, has run out of steam. all the margin calls are forcing everyone invested heavily in margin trading to cash out.
and now that the markets are closed for the three day holiday, this bit of good news from the people who haven’t a clue:
not to worry though, you can help save the banks…or you can walk away…
another catastrophic success brought to you by BushCo™.
You left out mention of the sleeping Lion in the room who is about to wake up – INFLATION!!
So, what the hell do we do? Those of us with 401K’s and not millions of dollars in the bank?
I look at this, and think there is just flat no solution to this that doesnt result in something that looks like the great depression.
Personally, I’ve cut back spending and eliminated a lot of personal debt. Living within my means was an important lesson I learned the hard way.
I expect a lot of other folks are going to be learning the same lesson.
a heads up for those watching the debacle unfold…did you see the reaction in the market to visa’s ipo yesterday?
scary shit:
so the smart money’s going with the concept that the average consumer is going to continue down the road to ruin with more, more, and more debt.
pay as you go folks…because with the current draconian bankruptcy laws, they own you.
that’s the egg the economic elie layed on you ahead of good friday…have a nice easter
arthur silber’s take on the situation: The Slow, Inevitable Collapse of the Narcissists’ Tautology, and from that, a very good site for the nitty gritty stuff…calculated risk…specifically related to economics and it’s implications to home building, mortgage lending, and such things.
book it danno.