Thursday Outlook: Commodities, Global Markets 26 comments
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<< Return to page 1 - Creating a Liquidity Bubble
The Fed day was exciting for day traders and the media. But the buying intensity pooped-out in the last hour much like the previous Fed announcement. Investors got exactly what they expected and the current announcement was basically the same as September.
While we have Jobless Claims data tomorrow, the next big thing is Friday’s unemployment report. That report should set the tone for much of November. The consensus estimate is for job losses of 175,000 but with a wide range. While this is a much manipulated government report (the “birth/death model” is a joke), we’ll see how investors play it.
Earnings reports tonight were basically well received despite how poor they were. CSCO beat much lowered expectations as sales and profit fell. No matter how you view such nonsense, below is the after hours trading data:
click to enlarge
Let’s see what happens and you can follow our pithy comments on twitter.
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This article has 26 comments:
Just a reminder, the bulk of the active economy is still consumer driven.
What David is saying is an asset bubble of all class. Stock, commodities, High yield currency and according to Robert Shiller, Real Estate now.
As for consumer, they just don't care as long as asset price is high.
A crazy thought. The US (a financial basket case, granted), still is the largest known holder of gold in the world (about 8100 tons). I know, some think the gold is no longer "there" (conspiracy theorists).
Sooooo, who makes the most money if the price of gold goes up? The USA, or, whoever controls that 8100 tons of gold. Even at current prices, its only a few trillion dollars, but, its something.
And, unlike oil, and other stuff we need, rising gold prices don't hurt anyone, except brides in India. The rest of you can use Palladium, lol.
With high and rising unemployment the Fed can create money, boost asset prices, and still keep rates down at historic low levels. In spite of what they say, this is clearly what they want to do.
The Treasury and the Fed know that only inflation will solve our
most immediate economic problem: the sluggish economy and resultant high unemployment. Inflation will eventually boost real estate prices which will help save the banks.
Stocks and commodities are going along for the ride.
If you are a small bank and having, say, $1 million of cash, would you lend it out today knowing Fed will have to raise the interest rate sooner or later when you will be able to make a lot more money at that time? You would just sit on it and do nothing. You won't finance a mortgage at today's rate and get stuck with it for the next 10, 20, or 30 years, if you think you can get better return after the Fed has hiked the rate.
On the other hand, the big investment bank turned holding banks take this costing-almost-nothing money and churn the stock market and making a zillions of dollars.
The net result is the this low interest rate is not creating liquidity. In fact it is hurting everybody except the big banks who can trade on their on account and those who have the gull to charge 30% interest on the credit cards.
As for the short term, action on the casino floor continues. Good luck.
See you at the Crash.
See you at the Crash.
On Nov 05 07:41 AM Ergo wrote:
> Love the Being There quotes. I really don't think the Fed understands
> the long term implications of what they're doing.
>
> As for the short term, action on the casino floor continues. Good
> luck.
On Nov 05 07:20 AM Dr. O wrote:
> >>The Fed just green-lighted a continued fall in the dollar and rise
> in commodity prices, and worse, they don’t seem to care.<<
>
> A crazy thought. The US (a financial basket case, granted), still
> is the largest known holder of gold in the world (about 8100 tons).
> I know, some think the gold is no longer "there" (conspiracy theorists).
>
>
> Sooooo, who makes the most money if the price of gold goes up? The
> USA, or, whoever controls that 8100 tons of gold. Even at current
> prices, its only a few trillion dollars, but, its something.
>
> And, unlike oil, and other stuff we need, rising gold prices don't
> hurt anyone, except brides in India. The rest of you can use Palladium,
> lol.
I can rest easy now.lol
Second comment - your point on the global liquidity/ asset-price bubble is well taken. As you are probably aware, Nuriel Roubini, Wilbur Ross and other knowledgeable figures have been very vocal in expressing the same concerns. And as with all bubbles, we're seeing growing recognition of the imbalances coupled with panic buying. But Roubini made a great point. The fact that we're in a bubble does not mean that asset prices won't continue to skyrocket beyond any measure of fundamental value for a very long time to come. As long as central bankers are flooding the system with liquidity, that liquidity will have to land somewhere - probably in stocks, real estate and commodities since "risk-free" bonds generate guaranteed negative returns - and that will inflate asset prices accordingly. The forces of momentum will only take that inflation in asset prices to absurd extremes. This scenario more or less describes 2003, 2004, 2005, 2006 and the first half of 2007. We're just seeing the same thing unfold again, but this time, on a far greater scale. If my analogy is correct, we could easily see commodities, equities, corporate bonds, real estate, all go up 100% in price over the next few years, even as earnings dwindle, inflation roars and recessions grind. Eventually, there will be no greater fools left to bid up stock prices, the bubble will burst, and 2008 will look like kid stuff. While many people within the world's central banks are highly cognizant of this risk, they've opted to kick the can down the road, multiplying the pain, agony and gnashing of teeth that will eventually have to come. I suppose you're correct to be angry. You're probably doing everyone a great service by raising this issue in a public forum. When we all get burned, we won't be able to say nobody told us so.
On Nov 05 07:34 AM Gerry Sullivan wrote:
> The biggest anomaly in this stock/gold/commodity/f... currency rally
> is that US Treasury interest rates have stayed so low. The 2, 3,
> 5, 7, 10, and 30 year Treasury securities are all trading at premiums
> to their most recent auctions.
>
> With high and rising unemployment the Fed can create money, boost
> asset prices, and still keep rates down at historic low levels. In
> spite of what they say, this is clearly what they want to do.
>
> The Treasury and the Fed know that only inflation will solve our
>
> most immediate economic problem: the sluggish economy and resultant
> high unemployment. Inflation will eventually boost real estate prices
> which will help save the banks.
>
> Stocks and commodities are going along for the ride.
On Nov 05 08:49 AM JR Ewing wrote:
> I might be missing a zero but I come up with 285,120,000,000 in gold
> 8100 tons at 1100 per oz. that is 285 billion not much to get excited
> about.
David I am behind u on this one. All these prices are artificial & the markets will eventually have to face that. What ever happened to long term responsible planning?
John Mylant
mylantsmoneyblog.typep.../
I think you're correct. I couldn't find a calculator with scientific notation, and did my best to count zeros. So even 8100 tonnes of gold is only a couple hundred billion dollars. I guess we are broke, completely. Seems to me that if all the gold in the world is only worth a couple trillion dollars, that the gold is vastly undervalued. I mean, Obama pissed away a trillion dollars on a stimulus bill in like a month. And bailing out the banks cost a trillion last fall. All that paper backed by nothing.
I don't see a sharp leg down in the world economy with the baltic dry index ascending like it is. Higher equity prices are illusory gains, but better than money in the bank which loses value in a declining dollar situation.
I'm not convinced that the stock market rally is thanks to the "liquidity bubble" which is localized in the banks, I just can't believe banks would be stupid enough to use money from the discount window to speculate on the stock market.
But what I can believe is that they borrowed at 0% and then bought 10-Year and 30-Year Treasuries, which I think is the main reason that those yields are staying much lower that is "natural" given (a) the over-supply and prospects of more oversupply and (b) the very real prospect of inflation down the road (which could be partially driven by commodity prices) .
My view the bubble right now is in US Treasuries.