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The Perils of the New Liquidity



March 16, 2007 – Comments (2)

Jim Jubak has an interesting column here which discusses the counterintuitive phenomenon that we've seen in the market lately. When equities fall and currencies appear weak, the "safe havens" like gold get killed too.


This isn't just a today thing. It happened during last summer's big drop too. And to me, it's pretty good evidence that the markets aren't floating higher on sound assett pricing models, but on a sea of "liquidity." In other words, the usual, rational reasons for moving from one asset class to another aren't applying, because the valuations assigned to too many asset classes simply aren't rational.


Everything is up because money has been cheap for a long time, leverage is en vogue, and all that moolah needs to end up in someone's clutches.


But it need not stay there forever, as the Shanghai Casino -- I mean stock market -- proved a few weeks back. When (not if) there's an actualy economic event to precipitate a real panic, the liquitidy will dry up faster than beer on the sauna rocks. And when that happens, a lot of people won't be able to cover, no matter how hard they duck.

2 Comments – Post Your Own

#1) On March 16, 2007 at 8:33 AM, TMFBent (99.25) wrote:

liquitidy !


Hey, at least there's proof this is a real, live, stream of consciousness blog and not some sanitized, deep thinkin' hiding behind a mask of informality.

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#2) On March 16, 2007 at 2:52 PM, Greshm (81.76) wrote:

A very timely read.  I was just rambling-on in an email to another CAPS Fool last night about my headaches trying to interpret the market's rationale for certain sectors rising or falling on the news-of-the-day [THERE's a futile hobby!].  You know, all the news M - W of this week would point to the Fed lowering rates and sooner due to the credit debacles. might expect Precious Metals Miners to rise anticipating the Fed 'printing' yet more 'money' again.  But nope, they get hammered those days.

Then, Thursday and Fri. bad inflation stats come-out that point the opposite direction saying Uncle Ben and "da Family" may not yet be able to ease for fear of looking--once again--a wee bit 'dovish'.  PM stocks?  Rocket upward...

Oy!  Of course, this is what makes it fun and keeps some of us junkies comin'-back [Note to DEA: This might be your next battle in that "war" you've been losing.  Except here, a nice, timely bear market could be used as evidence of success!  The Feds can take credit when markets are UP and now will have a way to take credit when they are down!]

Oh, sorry, back to my subject:  I'll try to go find it, I heard an interview on, Bloomberg I think it was recently, in which the guest commented on how normally 'negatively-correlated asset classes' have most recently become much more positively correlated with traditional assets like equities and bonds.  I don't think he specifically said it but it was a light-bulb flicked-on for me.  I immediately thought, "of course, there is so much cash around it is just being tossed at EVERYTHING!"  Made perfect sense to me then...

I'll see if I can find the interview and link it.  Meanwhile though:

Don't we think this all very likely means the eventuality is that the inflation (of the supply of money--the SOURCE of all inflation symptoms in the end) will show-up in prices and wages?  And therefore the 'surprising' higher-than-forecast inflation stats these past two days (Feb. PPI and CPI) aren't really all that surprising?

The more I look;  The more I read and research;  The more these times seem to parallel the macro-trends of the late '60's and early '70's...


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