Liquidity Crisis Hits Markets and Gold

By Chris Laird

For the last several years, corporate buyouts, corporate stock buy backs and such, the Yen carry trade, and the mortgage derivatives markets have added tremendous liquidity to world financial markets. In tandem with this, the market analysts came to view a ‘world stock bull’ emerging, and even the most conservative market bears started to get into this world stock bull theme in their writings. The total amount of these sources of financing and liquidity in the last 2 years is over $5trillion, and has been one of the major supports for stock markets.

All of a sudden, these sources of liquidity are vanishing so fast, that market experts are amazed. This all came together in about 3 or 4 weeks after the Bear Stearns mortgage derivatives mess revealed how illiquid structured finance (derivatives in mortgages and such) can become – instantaneously. After that, investors started to flee from billions of dollars value of structured finance offerings in the last several weeks, and in the blink of an eye, almost the entire derivatives financing universe lost liquidity across the board. This is a prime cause of the latest world stock crashes.

Right now, virtually all sources of liquidity are drying up faster than anyone would have thought. Or, put another way, with corporate buy outs and stock buybacks at over $1 trillion in the last year alone – that is now almost gone as support for the markets. Investment banks such as Morgan and Goldman have had to park about 40 huge deals planned this year, as they have not been able to sell of the bonds and financing for these deals. This picture emerged in only about 3 weeks.

Continuing, the now well known debacle with mortgage derivatives – structured finance packaging risky mortgages into so called AAA rated tranches – have led to financial crises at Bear Stearns, Italease, killed deals with Morgan, and Goldman and others, and caused that sector to lose liquidity to zero basically, in a mere two or three weeks after the problems with Bears two now worthless hedge funds emerged. Now, the almost the entire mortgage derivative universe is tanking – and huge margin calls by banks to counter parties are happening- and no one wants to buy.

Then, the long threatening unwinding of the Yen carry trade is afoot, the Yen strengthening significantly now for two weeks, and as that continued apace, world stock markets finally started to fall apart – or crash – this week. Lots of cheap Yen are borrowed at about 1% and invested in every financial market imaginable. As the Yen rises, investors have to sell out stocks and whatever, and then pay back Yen at higher exchange rates – a sure loser. This effect is magnified by a factor of ten by hedge funds who use 10 to 1 or more leverage.

And the list of liquidity drying up goes on, but, only a few weeks after the Bear Stearns CDO (mortgage derivative mess) showed that no one wanted to buy CDOs any more, that rumbled through credit markets, and now, as one trader said, ‘there is a full blown liquidity crisis at hand in world financial markets’. This is not just about CDOs, but has now scared almost the entire structured finance (derivatives) universe because it showed how illiquid they can become- basically instantly illiquid.

And, as, in the case of Bear, or Italease, bankers have to call in loans from counterparties who hold their structured finance derivatives, and find that their counterparties cannot fulfill the ‘margin’ calls in many cases – read as a liquidity crisis.

Then, as this all is occurring, world financial markets are crashing, as the easy liquidity for corporate buyouts and buybacks, and mortgage financing, all of a sudden vanishes in only about 3 weeks. The speed which this liquidity crisis is emerging is amazing many.

Gold suffers because it is sold as a liquid asset by funds and investors to make margin calls among other things. As losses cascade in this latest world stock crash in Asia – down 2 to 4% last night, Europe – down about 2%, the US down 2% or so yesterday, gold (and precious metals) is dragged down with them.

We at Prudent Squirrel have been warning for several months that this was about to occur in the NL and in mid week market alerts. Tuesday this week, we put out an alert that the same factors that led to February 27th crashes were again in place. That warning was prescient. In any case, subscribers were thankful for the warning. Gold and world stock markets plummeted two days later.

Comments

Post a Comment

Popular posts from this blog

I'm an accountant, I hate my job, but seriously, I wouldn’t know what else to do

I was born to be a lot of things, but being an accountant isn't one of them. In my heart of hearts I have always known this, but for some stupid subconscious reason, I have always ignored it. Why? Well...um...err...I didn’t know what else to do. How many people faced with the same predicament of deciding on a profession upon graduating used “not really knowing what to do” as their guiding compass? Blink. Ten years have passed and you’re left wondering, how did I get here? In this cubicle? Doing something I cannot stand (and I’m not even honestly good at), with people I quite frankly don’t really care about? For me that was accounting, a profession that conjures numerous clichés, such as boring, bean counting, personality not needed, number crunching etc etc. These have now evolved and have been replaced by repetition, reconciliations, long hours, fudging figures, high turnover, Enron and even more reconciliations. R-E-S-P-E-C-T But please don’t get me wrong, I have the utmost respe...
Read more

Three money managers who lived through the 1987 stock-market crash warn of danger today

Image
By  Philip van Doorn Published: Oct 31, 2017 1:49 p.m. ET SHARE   ‘I would take some money off now because ... there are clear signs of deranged valuations,’ says Gabelli fund manager Lawrence Haverty Getty Images A trader on the New York Stock Exchange on Oct. 19, 1987 — Black Monday. When the stock market crashed on Oct. 19, 1987, investors panicked. It was an unfamiliar event — the previous decline of a similar magnitude occurred 58 years earlier, in 1929. Now, 30 years after Black Monday in 1987, there are professional investors still at work who lived through that fateful day. In interviews, three of them talked about their experiences, offered insights into warning signs and gave advice on how to handle major downturns. They are: •  Lewis Altfest , president of Altfest Personal Wealth Management, which manages about $1.3 billion for private clients. Altfest founded the firm in 1983 after working as a general partner and director of research at Lord, A...
Read more

Have We Reached a Top?

By James Kostohryz It's never been my position that the flow of fundamental news would turn from positive to negative overnight and in a total fashion. The world simply doesn't work that way. When I terminated my core long position a couple of weeks ago for reasons explained in�Ten Reasons the Countertrend Rally May Be Over,�I outlined a series of factors I believe may manifest in the later half of 2009 and the first half of 2010. Indeed, most of these factors will be more back-end loaded, as negative factors tend to build on one another and gain momentum in time through the medium of psychology and social mood. It's my view that the flow of economically relevant events�-- and perceptions of these events --are in the early stages of a transition. In this case, a transition means the flow of relatively good news will tend to wane somewhat while there's an uptick in relatively bad news. This is what one would expect at a top. However, it's to be expected that during t...
Read more