The Liquidity Trap Cometh

Daily Treasury Yield Curve Rates

And Paul Krugman sends us to the TED spread--the risk and liquidity premium big banks are demanding over Treasuries for the loans they make to each other.

Think of the TED spread as an indicator of financial fever--with something like 0.3% per year being normal. Think of the short end of the yield curve as an indicator of how powerful the Federal Reserve's standard medicine of swapping Treasury securities for bank reserves is.

Be afraid. Be somewhat afraid.

Comments

[rdial54]

Ok I will be watching. We have dodged a few bullets. There are more lingering. Steady as she goes.

[GKM]

I am afraid. I'm very afraid. The smart money rushed for the exits and the charts have set up for one more whoosh down. Also, part of my reasoning is that I actually felt like buying something this week which is wrong in a bear market where you don't have a confirmed bottom. The last time I felt like buying something was the best sell in the past year. Live and learn I guess.

It was interesting that the market shrugged off the CIT news. I think that or something similar will become a catalyst sometime next week and will reveal why the smart money is in t-bills.

Some may be interested to read the following:
freethemarketman.wordp.../
criticalmas.com/2008/0.../
thewallstreetbully.blo...

I think we will find that these guys were only slightly ahead of their time.

[phinsuntanning]

maybe W is planning some final firecrackers

[Tony Soprano]

Since there is so much angst directed toward the Fed and the US Government, I decided to listed some events, not all of them, that had dramatic ramifications on lives, cost and the psychology of our country. I started in 1906 because it’s just a little over a hundred years. As I compiled the list, I could not help but feel the great sacrifices that many American’s have made and what a resilient country, economy and government we have in American.

The 1906 San Francisco Earthquake and fire, registered 8.25 on the Richter scale; estimates range from 700 to 3,000 dead or missing, approximately 225,000 injuries and $400,000,000 in 1906 dollars.

Recession, May 1907-June 1908, 13 mo

Recession Jan. 1910-Jan. 1912, 24 months

Completion of the Panama Canal, 1914 – 27,500 workers are estimated to have died

Recession Jan. 1913-Dec. 1914 23 months

World War I -- 116,708 killed – 33 billion

Spanish influenza, 1918, killed over 500,000 people in the worst single U.S. epidemic.

Recession Aug. 1918-March 1919 7 months

Recession Jan. 1920-July 1921, 18 months

Recession May 1923-July 1924 14 months

Recession Oct. 1926-Nov. 1927 13 months

The Great Mississippi Flood of 1927, flooded 27,000 square miles, 246 killed

The Great Depression, Black Tuesday, crop prices fell by 40 to 60 percent, after the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.

The Dirty Thirties, longest drought of 20th century. Peak periods were 1930, 1934, 1936, 1939, and 1940. The dust bowl covered 50 million acres in the south-central plains during the winter of 1935-1936.

Labor Day Hurricane of 1935, 400 killed

Recession May 1937-June 1938 13 months

World War II – 408,306 killed – 360 billion

Wartime Controls: 1941-1945 rationed consumer items ranging from sugar to gasoline

Recession Feb. 1945-Oct. 1945 8 months

The Marshall Plan, July 1947 – 13 billion in economic and technical assistance were given to help the recovery of the European countries

Recession Nov. 1948-Oct. 1949 11 months

Korean War, July 1951 - July 1953 – 33,000 killed in action

Recession July 1953-May 1954 10 months

Recession Aug. 1957-April 1958 8 months

Recession April 1960-Feb. 1961 10 months

The Cold War, some estimates shows $8 trillion was spent, worldwide, on nuclear and other weapons between 1945 and 1996

The Cuban Missile Crisis, Oct. 1962

Good Friday Earthquake (1964) In Alaska, it was the fourth biggest earthquake recorded

Vietnam War, 1963 – 47,378 killed in action

The murder of JFK, 1963 Nov

The Gulf of Tonkin Incident, Aug 1964

The murder of Dr King, April 1968 and Bobby Kennedy, June 1968

The city riots of April, 1968 – 30 cities affected

Hurricane Camille, Aug 1969, 259 killed

Recession Dec. 1969-Nov. 1970 11 months

Stagflation of the 1970s began

Nixon first imposed wage and price controls on August 15, 1971

Oil Embargo, Oct 1973 long gas lines

Recession Nov. 1973-March 1975 16 months

Articles of Impeachment of Nixon started
(Approved by a vote of 27-11 by the House Judiciary Committee on Saturday, July 27, 1974.)

Deregulation: 1974-1992 this era began when Nixon left office

Three Mile Island nuclear power plant crisis, March 1979

Mount St. Helens eruption 1980

Recession Jan. 1980-July 1980 6 months

Prime reached unbelievable 20% in January 1981,

AIDS was first reported June 5, 1981 by the government – It is thought that more than one million people are living with HIV in the USA and that more than half a million have died after developing AIDS.

Recession July 1981-Nov. 1982 16 months

California earthquake 1983

The 87 market crash - Black Monday

California earthquake, 1989

Recession July 1990-March 1991 8 months

Iraq invaded Kuwait on August 2, 1990

The Persian Gulf War, 1991 or Desert Storm Jan 1991

Hurricane Andrew 1992 very destructive United States hurricane

The Great USA Flood of 1993

Intervention in the Former Yugoslavia,

Dot Com Bubble, climaxed on March 10th, 2000 with the NASDAQ peaking at 5132.52

9/11 Attack, 2,974 people died

Recession March 2001-Nov. 2001 8 months, Airline Industry Collapsed

Enron bankruptcy in late 2001, employed 22,000

WorldCom, July 21, 2002, filed for Chapter 11
Iraq War, March 19, 2003 – 4,000 dead

Hurricane Katrina, late August 2005, 1,836 people lost their lives

Start of the Great Housing Recession or Sub-prime Recession 2006 or 07, 08? Date to be determined.

[Gross Bill]

GKM....why only ONE more whoosh down. I see at least two. The unwinding of the excessive leverage, and then a second one when they write down all the earnings estimates for the rest of the year.

[Gross Bill]

Tony, while I wouldn't ever dispute that many people have made tremendous sacrifices to build and protect this country, what your list illustrates to me is a "government" that seems to make the same mistakes over and over again...several times in a hundred year period.

The inability to handle natural disasters, useless wars, corporate scandal, speculative bubbles, etc. And for us, the people that make the sacrifices, our median income is less now than what it was in 2000. We're pawns, Tony....here to stand on the front line in times of war, and pay taxes in times of peace...so that the top 1% can continue to control the majority of the wealth.

[aversely]

bit better story on Thursday....
www.treas.gov/offices/...

[irondoor91]

Gross Bill; All my life I've heard about the "top 1%" controlling the majority of the wealth. Do you really know who these people are, how they got there and the risk they took to do it? My wife recently came across the August 8, 1983 edition of Fortune Magazine here in my junk pile. The headline was "The bull market's biggest winners". (keep in mind that the great bull market of the 1982-2000 period had just got started) Let me give you an example that was included in the main story on page 36:

"It also shows that entrepreneurs can create enormous wealth quickly. Indeed, K. Philip Hwang, 46, who gained $247 million, wasn't even in the stock market until March, when he took his company, TeleVideo Systems, Inc., public. At the offering price of $18 per share, his stock was worth $508 million. An emigrant from South Korea, Hwang was sweeping casino floors in Lake Tahoe 15 years ago to work his way through Utah State University. When he incorporated TeleVideo in 1976, venture capitalists had no interest in helping at the company's birth. "I don't blame them", says Hwang. "I was just an engineer with an idea and no management experience." He mortgaged his house, his car, and his furniture to raise capital. In 1983, TeleVideo was the leading supplier of video display terminals outside IBM. Says Hwang with feeling "It's a miracle."

Check TeleVideo's stock quote today and you'll find that it is zero. It's 52 week high was 1 cent per share. It has 19 employees. What happened to it and to Mr. Hwang? I don't know, but I'm sure that you can research it if you're really interested in knowing more about the 1%. It's called "creative destruction" and has likely spawned many more multi-millionaires (thousands of them in the new internet and digital age that did not exist in 1983) who themselves may have stepped into the "lucky 1%" for a while until the unforgiving market forces re-distributed their wealth.

This is the way of the capitalist system that has developed this into the greatest country on earth in just a few hundred years. You must be able to see that the other 99% are not failures and that the 99% contains those who have previously been in the top 1% and those who strive to knock someone out of that lofty perch and occupy it themselves for a while.

Next time you get to feeling sorry for yourself and the other members of the 99 and want to blame the 1% for your own troubles, just look around. You might spot some kid (white, black, hispanic, asian, etc, male or female) sweeping floors at night to put themselves through school. My hope is that you too will be inspired to get off your lazy ass and get to work thinking and dreaming of joining the 1%.

[bhakta]

This debacle is not over. There are going to be lower lows coming in the months to come. Don't run after the false bull.

[GKM]

Gross Bill I'm not saying that there won't be further deterioration down the road, but, based on the way the charts are setting up right now, there will be one more down turn in the very near future. Then there will be a gradual recovery followed by some as yet undetermined correction to new lows.

I read another article that said essentially "don't worry unemployment is so low that this recession won't be so bad". Well, the unemployment rate before the start of the Great Depression was 3.2%. (see encarta.msn.com/encnet... ) Last time I checked the US has a higher unemployment rate than that currently.

I would love to be a bull on the market since there would be a lot less stress but it ain't in the cards right now. I'm also feeling a little more confident that having such a studied depression era historian as Bernanke will morph this market into something less catastrophic but history does have a way of repeating itself. He is also only part of the puzzle.

The EU may not be helping matters by refusing to stimulate things with a rate cut. Similar occurrences during the depression exacerbated the problem. As an example tariff rates were increased significantly. How about the US just suspend NAFTA? Does that not sound like a similar policy? Is that history repeating itself?

[gordon]

Remind yourselves, people ,of the big picture, here>
www.financialsense.com...

[Eric Olson]

Could not understand what h was talking about -- abd I'm a fairly sophisticated investor. He should have provided some background on the TED Spread and explained the chart he was presenting rather than expecting his readers to understand what to him may be perfectly clear but not so to those who are unfamiliar with this spread.

[sammyg123]

Quote from the article for Eric: "And Paul Krugman sends us to the TED spread--the risk and liquidity premium big banks are demanding over Treasuries for the loans they make to each other."

What the author is saying reflects what the media is calling the "credit crunch." The problem is not that banks can't lend to each other due to lack of liquidity. The liquidity is there, it's just that they WON'T lend to each other unless there is some "juice" for them in the loan. That's what he's trying to show.

Another good indicator of fear is the VIX. It's not really that smart to go long if the VIX is over 15, unless you are trading. Right now, I believe, the VIX is over 23, even with the big market rally last week. You can look at the vix as an oscillator, buying TRADING positions when the VIX is over 30, and selling them as the VIX drops back into the mid to low 20's. The VIX has called the trading bottoms almost every time when it is above the 30's.

Until the VIX is down below 15, or at least below 20, then I am afraid the rallies that we are seeing are only bull traps. This is the kind of activity that we see in bear markets, which from my lowly perch, we are firmly emplaced.

I agree with the posters that say we have at least one if not two more major moves to new lows. The technical damage if the Dow breaks below about 12700 isn't pretty. Capitulation will occur when the Dow closes below approximately that point. Dow theorists, please feel free to step in and fill in the gaps of my thinking here, but from what I understand, just about every average except the Dow is down over 20% thus far. When the Dow confirms the bear market, I believe that capitulation will have occured, and we'll be able to establish the bear market low.

The engineered bottom that we saw last week, and the following rallies, are not going to hold. The macroeconomics just don't support a recovery at this time. When the TED spread narrows substantially, banks will be in the process of providing liquidity to businesses and each other, and economic activity will increase, as will profits. Until then, if banks won't even lend to each other, there is nothing to get excited about in this market unless you are a bear.

[sammyg123]

The TED spread narrows when the economy is in good condition. It widens when banks fear to lend to each other. If the banks fear to lend to each other, then the banks are a good place to invest. The TED spread is telling us that banks aren't sure they'll get their money back if they lend, which is telling you and me that there should be some more bank failures, and brokerage failures in the short to intermediate term.

[sammyg123]

Correction: I meant to write that banks aren't a good place to invest. Oops.

[MattBlackman]

Well written article Brad. This is great information and something more investors and analysts (including Dick Bove who confidently declared "the credit crunch is over" this week) should pay attention to... The credit crunch is certainly not over as far as bond investors and banks are concerned based on the TED spread, record 300+ basis-point spread between corporates and T-Bills and lowest 3-month T-Bill rate in more than 50 years!

[NI123]

Tony Soprano:

Take you 'government is great' shilling and head elsewhere. No one here falls for that crap (hopefully).

[cheesecake]

the first graph is inflammatory and really tells nothing due to it's short time frame. the second graph is quite revealing.