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Excess Liquidity & Cheap Money Runs Rampant on Wall Street
By Dian L. Chu, EconMatters
If one studies markets trading during the week, one thing becomes glaringly obvious-- there is too much cheap money sloshing around markets these days (See Chart Below). You no longer have healthy, two-sided markets in most asset classes.
This is not a good thing for true market based price discovery, and ultimately leads to the creation of market bubbles. There are so many bubbles today that once QE2 ends, and the tightening cycle begins, investors are going to lose a lot of money.
?Gold, Silver, and Oil, for the most part, trade as one giant asset class these days against the US Dollar. Copper used to be in this asset group, but China decided it wasn`t going to buy Copper at these high prices, and the buying stopped in a very dramatic fashion. Eventually, Copper no longer could sustain the $4.65 a pound pace once China called the traders bluff.
The Middle East turmoil has far less to do with the current price of Oil. The market has no supply disruptions, and Saudi Arabia didn`t materialize into the much hyped unrest contagion story. However, the US Dollar Index weakens by 30 cents and Gold goes up $15 and Crude goes up $2.50 in just one trading session.
The US Dollar weakness is one thing, as we have had dollar weakness before. The real difference these days is the juice in terms of excess cash that needs a place to go, i.e., sloshing around financial institutions, responds and exacerbates market moves on a daily basis.
This results in any dip being bought up in almost any market, and this quarter, it has finally reached a head with equities alone having their best quarter since 1998--wasn`t that around the time of another famous bubble created around the mania of the internet?
Obviously, the Federal Reserve has overstayed their welcome again and is too late in responding to market conditions. The very thing they promised they would be able to correct this time after the last bubble they helped create with such low interest rates stemming from a monetary policy initiative that made house flipping a State sponsored sport.
Even if the Fed stopped QE2 tomorrow, and raised interest rates by 50 bps, the damage is already done, and we will start to really see the total magnitude of effects six months from now. However, even though Fed Chairman Ben Bernanke says he can hold an emergency meeting tomorrow and raise interest rates immediately if conditions warrant, that is just Fed speak and not based on reality.
In reality, the Fed takes months just to reach a consensus, then they have to send signals to markets to prepare markets for policy changes, and this usually takes months, and then finally they act.
In short, the Fed cannot do anything fast, let alone making monetary policy changes at the first sign of bubbly market conditions like we have today as exemplified currently with runaway food and energy prices (See Chart).
This has always been one of the drawbacks to the U.S. monetary system--the Fed over compensates in markets through excessively lopsided market intervention, which inevitably just creates another unintended consequence down the line.
We are just now working through some of the vestiges of the last housing bubble created by excessively loose monetary policy, and lo and behold, we are creating yet another inflation bubble in food and energy with a new round of excessively loose monetary policy.
What is that definition of insanity, doing the same thing over and over again, and expecting different results? And here we are—trapped in this seemingly never ending cycle of bubble creation....will we ever learn?
Related Reading
Fed’s Bullard: Full of Self-Contradictions
Rising Consumer Inflation: The New World Order By Commodity
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I'm buying the dips, but I for sure don't have any fast money...
What is that definition of insanity, doing the same thing over and over again, and expecting different results?
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It would only be insanity if they were trying to help regular folks. But it makes perfect sense when you create 4 or 5 trillion and give it to your best friends.
Inflation? Who cares?
The job comments are interesting. I'm a mechanical engineer with a very diverse background (defense, medical, consumer, biotech, ect..) - fortunate to realize I didn't want to pigeon hole myself in an industry. VERY fortunate not to go into the auto industry, and I'm getting lots of job prospects every week. The boomer engineers are all retiring and there is a large dearth of good engineers out there... so much that good out of school mech e's are demanding $65k or so still..... Guess it goes to show actual skills at something tangible still mean at least something.
edit - I'm 31 with a great knowledge in engineering software, which helps an amazing amount in keeping up with tech. The more "mobile" you are the better.
B
"unintended"? I think not. They are crazy, insolent and greedy but not stupid.
Yep
<<< This results in any dip being bought up in almost any market, and this quarter, it has finally reached a head with equities alone having their best quarter since 1998--wasn`t that around the time of another famous bubble created around the mania of the internet? >>>
There is a major difference between the internet bubble of the late 1990s and today. There were many good paying jobs being created in the USA in the mid to late 1990s. Lots of people had lots of disposable income from their take-home pay to spend. That is hardly the case today. Newly created good paying jobs in the USA are as rare as hen's teeth. Today's bubble is far more insidious. It was based on massive fiat currency creation with no economic value being the cause of it. the Fed simply created it out of thin air... and we are all eating higher prices as a result.
The Ben Bernank = The Great Chairsatan & enemy of the people
Plus arguably there was some value created during the internet bubble, and some lasting business models (AMZN as one example). It was sort of like a lottery - it was a negative expected value game with some big winners.
This current bubble is something altogether different - it is driving by money-printing, pure and simple. Think Zimbabwe, Weimar, etc. Not much difference.
Agreed. There were many advances in technology in the USA in the decade of the 1990s. There were internet companies with dubious business models, but many new products were brought to market during that decade. U-3 unemployment was low and many people had disposable income to spend. That is hardly the case today. This bubble is purely artificial.
Every RE broker knows market will take min. of five years to recover except for upscale markets. A 50 bps increase would extend glut over 10 yrs. Result is Fed caught in a trap , cant get out and juicing stock market as only means left to create wealth effect. Might work for awhile but inflation will sooner or later kill domestic consumption or result in public sector debt default or both. The notion that excess productive capacity will keep inflation tame will no longer apply if demand dries up in real value. Use of Keyensian cyclical stimulation has been abused over the past 20 years to a point of monetary collapse on a global scale. Impending currency wars will be next chapter before total collapse of derivatives markets that are beyond stratospheric redemption or reserve currency status to be of any help to save the good ol USA
Good comment. Besides currency wars, I think we might see some good old fashioned trade wars too as nations try to grab a slice of a decreasing pie.
"Even if the Fed stopped QE2 tomorrow, and raised interest rates by 50 bps, the damage is already done, and we will start to really see the total magnitude of effects six months from now."
Disagree. The market will feel the impact of the absence of QE almost immediately. See last spring for details.
Mild selloffs will turn into flash crashes as the "invisible hand" of POMO money isn't around to support the market.
Interest rates take a while to take effect - not so for POMO money, it is like rocket fuel to the markets.
I just came out of a two-year coma this afternoon.
Holy shit is silver really at $38?
yes, still underpriced, i know. shocking that the JPM manipulation is still in place and working, isn't it? You should know that the CTFC is still "mulling" whether or not there is any manipulation or fraud at the Comex.
Nothing has changed in two years, except we've had whistleblower testimony, truckloads of evidence delivered to the CTFC, public acknowledgement that there "might" be a problem, delivery meltdowns averted by a hairsbreadth...
but, it seems the CTFC has been paid off once again, so you can go back to sleep, and rest easy.....silver isn't going to trade freely until supplies run out. and that's probably a year or so away.
The bubbles will be progressively worse because "money" is increasingly intangible and infinitely fungible.
With each year fewer and fewer real currency circulates, and the binary dollars proliferate.
The FED prints, the Banks shovel it in and out at will with no consequences, as does Congress and the rest of Government.
"The buck stops here" is true only for the household, which when it stops will really put the kaibosh on the current bubble.
It has only been forty years since unpegging from gold, and in that short span the computerization of markets and money have gone parabolic. If that doesn't scare the shit out of people it should.
yes when we hit the bottom...but who knows where the bottom is!