Paul V. Azzopardi's  Instablog

Although I think that the decision to let Lehman go should be deplored - considering that it was unfair since all the other firms were being saved and considering that it was foolhardy since the Lehman failure was a big shock to a financial system which was already on the brink of collapse  - one positive aspect of the decision was that it acted as an antidote to the inevitable spreading of moral hazard. 

The regulators did not have all the tools they wished they had to impose order on the financial market place and when Lehman went down it meant two things: (1) that not all would necessarily be saved, and (2) if you were a player, you had better play ball when the regulator winked.

Today, while trading, I realized that there was a slight change in the behavior patterns of the US dollar and gold.

Recently, they see-sawed : severe bouts of risk aversion usually meant investors going for the US dollar and Treasuries, abandoning equities and commodities, including the precious metals.

Today's uneasiness with equities led to both the dollar and gold finishing higher !  (The yen and silver were up as well.)

What does this mean?

-- Is it a fluke?

-- is the market implying a higher risk of a financial crisis, thus the increase in the gold price?

-- is it the fear of inflation?

-- are gold and silver up on the rumored inventory deficit?

What else could it be?

 

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In the old days, there were tightly controlled banks which were allowed to take people's deposits and whose operations where limited to particular geographical areas. They were allowed to lend for the short-term.

Then there were investment banks which were allowed to do many other things but they were general partnerships - all the partners had most of their wealth tied up in the bank and at risk, withdrawals were frowned upon, and all partners worked out of the Partners' Room, from one big desk.  This last Dickenish arrangements ensured that partners could keep an eye on one another and any partner who took too much risk on behalf of the firm was instantly discovered.

Investment banks were eventually allowed to take on limited liability and go public, using OPM.

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June 1^st might have marked a turning point for international equities.  Are they starting to slide back down or are they merely taking a rest and consolidating before they move further up?  Either way, interesting times.

Many continue to see “green shoots” sprouting everywhere but the big difficulty is trying to distinguish what is driving them from underground – the massive liquidity being created, the perception (mistaken or not) that markets have overshot on the downside, or good economics.  I rather suspect the first two.

This is the position in equities.  I am plotting here three ETFs: SPY (for the US market in general, the S&P500), EEM (MSCI Emerging Markets), and EFA (Europe, Asia, Far East).  This shows the big picture:

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One problem with pumping oceans of money into world economies is that no-one can say where they will eventually erupt.  Is the magma we had to print turning into lava and nasty volcanoes?

I am still of the opinion that ominous creatures still lurk beneath the bubbly surface of many markets – what we see crawling are speckled vipers not green shoots.  In a way, it got worse these past weeks.  I thought there was slightly more than even chance of deflation, with inflation a distant threat.  Now I think I smell the sulfur of the first rude eruption of inflation.

 

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