Global bankers working in unison to get the excess liquidity out of the system - all of a sudden. Think Ben's been working the phones?
Nice piece by John Mauldin, and note the sea of red ink around the world... The Dow and NASDAQ, while sucking, haven't sucked as much as some others - good god look at that Dubai number - but then again, there's a smoke and mirror bubble market if there ever was one...
But why the lockstep? Why is every market down? I think we can look at the change in major central bank policy which began a few months ago and was highlighted in this letter. In short, the central banks of the world are taking liquidity out of the system. It was the providing of massive amounts of liquidity that had driven asset prices around the world to frothy heights, and now we are seeing what happens when that process goes into reverse. It wasn't like we didn't have any warning. They made it very clear.
This reminds me of a now prescient paragraph from a speech by Alan Greenspan last August. I thought it was a very important warning then and I do so even more now (emphasis is mine):
"Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
That last sentence has stuck with me. I think about it a lot, and so should you. We are watching risk premiums reassert themselves in markets around the world. This process is hardly over.
June 11, 2006
The global effort to tighten money supply = global financial chaos
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8 comments:
right when the experts were telling everyone to diversify and get into foreign funds, the foreign funds melted down
funny
Geez, what a mess. More to come, I suspect.
So I was thinking that if the fed let inflation run wild that would solve consumer debt to some extent and also would pass the buck to the Chinese. Any reasons why this is a bad idea. I know the dollar will lose value but isn't that good for American exports because they become cheaper. Am I missing something here?
Yes, I agree.. it's the beginning of a massive change in trend over the past 15 years. First the bubbles were blown, now they're about to be popped.
God help all those in debt!
And if you think this wasn't done with the direct intention to steal wealth from the public, you need to wake up from your fairy tale.
The Fed is not your buddy. They are not looking out for your stable prices and employment. They are looking out for their own profit.
clayton -- you're not missing anything and you pretty much summed up what is likely to happen. Throughout history governments with debt troubles have alawys inflated them away. The U.S. dollar is going to take a beating, but Bernanke has no other choice.
He has to let inflation solve the problem or risk a worlwide economic collapse. China, Japan, and the EU will go along because they're all in the same boat.
I moved my savings plan money from the US markets into international the day before the last rate increase. That is because I knew it would kill the US market for a while. Damn if I wasn't doubly burned in the international fund as it tanked hard. Took a real bad haircut away as a lesson.
Live and learn...
shave and haircut -
The bankers have a huge advantage over people like us in this chess match. The "smart money" is like one of those supercomputers - they are looking many steps ahead and can predict what the little investors will do with their funds. They sold and took profits while gold and oil were running up, and they laughed when money rushed into those foreign funds because people like YOU were buying the stuff they were unloading!
Bernanke and his counterparts have computer models that look at second and third derivatives, trends of trends, and they share this info with their buddies. People who think they are trading in free markets are deluded - they are in-duh-vidual investors.
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