Friday, November 18, 2011

Lock up in Financial Markets

It appears from some of the main stream press and some of the chatter on the internet that the situation in Europe is about to get ugly. If it isn't already.

This from The Telegraph yesterday : "Sir Mervyn King: Britain on the brink of second credit crunch, Bank of England Governor warns. The eurozone crisis has left UK banks unable to raise the funding they need to make loans to businesses, evoking the spectre of the crunch that followed the collapse of Lehman Brothers."

This from Pragmatic Capitalism: "This is getting more interesting with every day.   As the ECB is increasingly pressured to stop the Eurozone crisis with massive bond buying, the yield blowout is starting to spread to the core countries.  The surge in Italian bond yields is taking all the media glory in recent weeks, but the surge in French, Belgian, Austrian and Spanish yields is equally alarming.    Spain’s 10 year yield is now sitting well above 6% with Belgium fast approaching the 5% level."

And from The Future Tense: "The contagion is spreading so rapidly through Europe now that is is almost impossible to keep up with.  Rates are now rising across the board in Portugal, Italy, and Spain.  In addition, the markets have now turned on France."

Gonzalo Lira says: "We’re In The Middle Of A Run On Europe—And It’s Gonna Get Worse."

What appears to be occurring is money markets are seizing up. It is beginning to look like the period just after the Lehman Brothers collapse where banks stopped lending. For two reasons banks stopped lending, then and now. They have no liquidity (they have leveraged their deposits and now they are gone) and they cannot get new funding to keep their businesses going. Banks and other Financial Institutions don't trust each other. Risk is deemed too high.

Gold and all commodities (including oil) took a hit today. May be this is a result of people selling some of their holdings in the speculative markets in order to meet their funding requirements. After all, they cannot get it from anyone else. This would make sense as the USD has risen against other currencies. Yes, the high-frequency traders probably went all milisecond on us and sold speculative positions in minutes, but it's not their fault. This is a problem of confidence in paper.

Recall too, that New Zealand banks need to go regulary to these money markets to borrow funds. This could very well see the leap in interest rates for our banks that was expected. Bad for home-owners and the recovery and the NZ dollar. Temporarily good for exporters. But on what value terms? With the NZ dollar moving down 10 cents against the USD recently, gold in NZ dollars is still near record levels. Deflation in value seems to be upon us. If you hold gold, you are OK.

Europe is freezing up, even as winter approaches. Serious riots today in Greece, Spain, and Italy. When these sovereign bond interest rates move up to these levels so quickly, it means the buyers are drying up. Interest rates go up because no one is showing interest in buying bonds and the risk is too great. Contagion is spreading quickly to France. When France goes, then the winter of discontent will truly be upon us.

Are you prepared?

Gold in New Zealand dollars: $2272.01 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $41.86 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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