As long term EPJ readers know, I have been holding the belief that the market was in a huge dead cat bounce climb from the financial crisis lows.
The problems in Greece and the other PIIGS are in a certain sense the result of a lack of new money being printed, money which would inflate away the debt problems for the PIIGS. The Federal Reserve is simply not printing money despite many, many reports to the contrary (and there is only limited printing by the ECB).
In this stage of the crisis, the lack of liquidity is squeezing governments. The stock market downturn is really playing almost a support role. Although some of today's drop, down at one point by as much as 900 points, is being blamed on a bad print in PG stock, the general trend was lower before the suspicious alleged bad print.
The liquidity to support this market is simply not there.The dead cat has landed.
At some point , I expect the Federal Reserve will start printing again, but that day is not here, yet.
You relate a very important point that the liquidity to support this market is simply not there. The liquidity came from investment banks going long and from yen carry traders who borrowed at 0.25% from the Bank of Japan and its proxy lenders.
ReplyDeleteThere was a violent exit from yen carry trades, including but not limited to the Aussie, the Loonie, the Peso, the Rand, the Ruble, and the Rupe, as investors bought the Yen, FXY, which rose a spectacular 3.8% to close at 109.77. The Euro, FXE, fell to 125.96. The US Dollar, $USD, rose to a 14 month high to close at 84.85. Currency traders sought safety, if it be called that, in the US Dollar.
This one day violent extinguishment of carry trades was a repudiation of investment risk. The Aussie Yen carry trade, FXA:FXY, fell to its 250 day moving averge. In one day, currency carry trade investment fell back seven months, to the early October level when gold broke out. This extinguishment of carry trades represents a "vaporization of investment liquidity" which places one's investment capital at risk: further declines in the stock market may trade in an illiquid manner, meaning that there may not be buyers for securities: one may not be able to obtain one's funds in brokerage accounts and at money market accounts. I recommend that one be invested in gold and take physical possession in the form of gold coins. Gold, GLD, rose 2.9%.