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thirdwave

Global Lending Thaw May Yet Return To Deep Freeze

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The second round of the the banking crisis looks likely to be worse than the first. The bust of the bond bubble would be a sight to behold. I have already moved most of my savings into gold..

http://www.reuters.com/article/reutersEdge...lBrandChannel=0

Global lending thaw may yet return to deep freeze

Thu Jan 15, 2009 3:35pm EST

NEW YORK (Reuters) - Hell may yet freeze over again in a second wave of the global credit crisis.

Despite some evidence of a bank lending thaw, some analysts worry that the fragile recovery in credit markets is based almost entirely on gargantuan central bank liquidity programs and government bailouts which have yet to be funded via debt markets.

"The short-term fix has been to throw more money at the problem," said Jes Black, an analyst and fund manager with NetBlack Capital, a New York-based currency fund.

"But we haven't really addressed the fundamental factors that got us here," namely excessive borrowing, Black said.

For now, trillions of dollars of government cash have cranked opened the taps for desperate borrowers of all stripes who spent the final quarter of 2008 parched for credit.

Libor rates, or the London interbank borrowing rate which is the benchmark for trillions of dollars of short term loans to consumers and businesses, have fallen steeply in recent months.

This week, the "Ted Spread", which measures the premium banks charge for three-month dollar Libor over ultra-safe U.S. Treasury bill yields, dipped below 100 basis points for the first time since just before investment bank Lehman Brothers went bankrupt, signaling the extreme panic in these markets is ebbing, for now.

But the worsening financial position of several big U.S. banks, including Bank of America (BAC.N) and Citigroup (C.N), this week has helped stall Libor's decline.

Some analysts warn that fear may hit new extremes in a second round of the global financial crisis as the costs of government bailing outs send bond yields spiking, crippling the global economy and contributing to yet more failures of banks and companies.

"This is a temporary respite and when it's over, the stock market will make new lows, and Libor spreads will go beyond their extremes in October," says Robert Prechter, chief executive officer at research company Elliott Wave International in Gainesville, Georgia.

Attempts to support an economy that's already borrowed to the hilt by issuing more debt are often destined to fail, says Prechter, whose book "Conquer the Crash", published in 2002, warned of the dangers of the U.S. debt bubble and a deflationary depression, advising investors to shelter in cash.

In 2008, investors took huge losses as stocks, commodities and corporate bond prices plunged. Cash and government backed Treasuries, especially T-bills, were the safest place to hide.

England in the 1720s, when the so-called South Sea Bubble collapsed stock prices, offers a salutary example of what is happening to the global economy now, Prechter says.

"People were trying to solve the problem by offering more credit and that didn't work," he said. "That is what is happening in the banking system today."

American borrowers became "completely maxed out" in the 2002-2007 period and "no amount of additional credit will be able to change the direction of deflation," Prechter said

The U.S. government is expected to issue some $2 trillion of debt this year, flooding the $5.8 trillion Treasury market, analysts expect, while the total bill for promised government rescues and aid to the financial system could run to $8 trillion.

Yet some more bullish analysts draw some comfort over the near term from signs that massive amounts of central bank cash are enabling companies, homeowners and consumers to borrow again, if they want to.

Rates on three-month U.S. Treasury bills, have edged up to 11 basis points from zero in mid-December when panicked investors fled to the comparative safety of ultra short-dated government paper.

"Ever since the Fed has said we will give you whatever you need, there has been a steady drop in the Libor rate," said Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co. in New York.

A key catalyst was the Fed's announcement in November that it would buy agency mortgage-backed securities, he says. Since November, U.S. investment grade and high-yield bond prices have charted a spectacular rally.

But the government's purchases of battered assets merely delay the day of reckoning for the banking system and the economy, some say. "We haven't worked off the excesses that led us to the crash," says Black.

If job losses continue to rise, causing consumers to cut back spending even more, eroding companies profits and undercutting stocks and corporate bond prices, investors could dump these assets again with a vengeance.

"In every indicator that I follow, the bear market is not over yet," says Prechter.

As CGNAO would have said, protect yourselves...the UK and the US are going down the sh*tter. 100% guaranteed

Edited by thirdwave

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Some analysts warn that fear may hit new extremes in a second round of the global financial crisis as the costs of government bailing outs send bond yields spiking, crippling the global economy and contributing to yet more failures of banks and companies.

"This is a temporary respite and when it's over, the stock market will make new lows, and Libor spreads will go beyond their extremes in October," says Robert Prechter, chief executive officer at research company Elliott Wave International in Gainesville, Georgia.

Bond/Sovereign debt meltdown sometime in the next 12 months ... I certainly wouldn't bet against it.

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Bond/Sovereign debt meltdown sometime in the next 12 months ... I certainly wouldn't bet against it.

There is almost zero risk of default according to the market because they can print the money they need out of thin air.

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There is almost zero risk of default according to the market because they can print the money they need out of thin air.

Well, in that case investors would abandon bonds in favour of assets which can`t be produced out of thin air (like gold).

CDS spreads on UK sovereign debt are widening again, up 18 bps in the last week

http://www.markit.com/information/news/commentary/cds.html

Edited by thirdwave

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Not if they expect deflation.

119bps wow Armageddon!

Austrian, bonds tend to do well if markets expect a deflation but that could change if they realise that the Fed is buying them with money created from thin air..This wall of liquidity would eventually have to find a home somewhere..They can stay on the Fed's balance sheet only for so long..

And 119 bps is certainly bad when you consider the fact that it was 8 bps in 02/08..

Edited by thirdwave

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Austrian, bonds tend to do well if markets expect a deflation but that could change if they realise that the Fed is buying them with money created from thin air..This wall of liquidity would eventually have to find a home somewhere..They can stay on the Fed's balance sheet only for so long..

And 119 bps is certainly bad when you consider the fact that it was 8 bps in 02/08..

They already know they are being bought with money created from thin air. That is why the Treasuries are worth more than nothing. The liquidity has already found a home: It's why house prices were so high for the last few decades.

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They already know they are being bought with money created from thin air. That is why the Treasuries are worth more than nothing. The liquidity has already found a home: It's why house prices were so high for the last few decades.

Treasury yields are low due to the bond market bubble created due to fears of deflation..Monetization of debt should hopefully burst this bubble..

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Treasury yields are low due to the bond market bubble created due to fears of deflation..Monetization of debt should hopefully burst this bubble..

It won't because it isn't inflationary... The price of money will only fall if the money supply increases. Monetisation replaces one type of money (Treasuries) with another (Fed bills) so it won't affect prices.

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"But we haven't really addressed the fundamental factors that got us here," namely excessive borrowing, Black said.

+1

Got it in one, the problem is govts don't want to address the problem because they would then have to admit all the growth was illusionary and politicians are idiots.

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It won't because it isn't inflationary... The price of money will only fall if the money supply increases. Monetisation replaces one type of money (Treasuries) with another (Fed bills) so it won't affect prices.

If the sole purpose of monetization of govt debt is to keep treasury yields low, would the investors not eventually dump treasuries once they get fed up of lending money to the govt at next to nothing rates, which in turn would cause yields to go through the roof (unless the fed 'expands' its balance sheet indefinitely)..Somehow it doesn`t make sense..

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If the sole purpose of monetization of govt debt is to keep treasury yields low, would the investors not eventually dump treasuries once they get fed up of lending money to the govt at next to nothing rates, which in turn would cause yields to go through the roof (unless the fed 'expands' its balance sheet indefinitely)..Somehow itdoesn`t make sense..

unless the fed 'expands' its balance sheet indefinitely

What do you think has been happening??! Treasuries are still valuable to investors (no matter what the rate) because they are cash. The money supply is diluted, unless you expect the Government to refuse to monetise the debt (no one in the market thinks this) why wouldn't you value Government debt?

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unless the fed 'expands' its balance sheet indefinitely

What do you think has been happening??! Treasuries are still valuable to investors (no matter what the rate) because they are cash. The money supply is diluted, unless you expect the Government to refuse to monetise the debt (no one in the market thinks this) why wouldn't you value Government debt?

That has to be inflationary if they keep at it forever..

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That has to be inflationary if they keep at it forever..

Certainly, which is why your gold might very well be a good bet! I'm just saying the Govt can keep doing this indefinitely, yields are no measure of (in)solvency.

Thanks for an interesting chat.

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Certainly, which is why your gold might very well be a good bet! I'm just saying the Govt can keep doing this indefinitely, yields are no measure of (in)solvency.

Thanks for an interesting chat.

Phew...I was just about to lapse back into the deflationist camp there :)

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Fixing the problem means admitting that we can't all have what we want right now on credit we can't pay back.

Not a great vote winner with a generation that have got used to fairyland economics. Thus politicians will continue barking up the wrong tree trying to fill a hole by digging a bigger one. Until they fall down it along with the rest of us.

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  • 285 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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