While the stock markets are all over the place this week, up 420 here, down 300 there, it’s important to take a look at some of the other markets out there, namely treasuries and commodities. Speculation bubbles in those markets are causing chaos as the dollar continues to flounder.
Since January, speculators have ditched stocks and have gone to treasury bonds and commodities like oil. But the problem is this: with the dollar plummeting, yields on treasuries have dropped like a rock, well below the rising rates of inflation.
The three month bond from the US government has dropped to its lowest yield in 50 years.
Treasuries were little changed, with three-month bill yields at the lowest level since 1958, as Credit Suisse Group said it is “unlikely” to be profitable in the first quarter.
Two-year yields declined to levels not seen since 2003 as Credit Suisse, Switzerland’s second-biggest bank, said it may have a loss in the period for the first time in five years, further signs that credit-market losses are deepening. The difference between what banks and the government pay to borrow for three months widened to 2.03 percentage points, the most since December, showing an increase in corporate borrowing costs.
“The economy is broken,” which will boost demand for the safest investments, said Matthew Johnson, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest inter- bank broker. “People are more concerned with the return of their money than the return on their money.”
The two-year yield was 1.49 percent as of 7:30 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 2 percent security due February 2010 was 100 31/32. The two-year yield will decline to 1.25 percent as soon as next week, Johnson said.
Three-month bill yields were unchanged at 0.56 percent, after falling to the lowest in almost 50 years yesterday.
The way the dollar is going right now, would you consider buying a US treasury bond for 2 years at a measly 1.5 percent or less?
And yet that’s exactly what people are doing. People are flocking to treasuries because even a relative loss like that due to inflation of taking a 5% loss or so is still markedly better than putting it in a stock market where losses like Bear Stearns losing 95% of its value are now possible.
That’s how far confidence has fallen. So many people are buying up treasuries that the yields on these bonds in the space of a year have dropped from 5-6% to 1.5% or less. In the case of three month bills, they are .56%…a pittance. And yet…a safe pittance is worth more than a massive loss. Stocks at their height (inflated by Greenspan’s bubble) were making double digit percentage gains and were all the rage on Wall Street.
Now the smart money is on yields of 0.56%. What does that tell you?
Investors are terrified, and you have to look no further than US treasury bonds to see just how truly frightened folks are.
At the same time over in the commodities market, the speculation bubble is bursting. The same mentality, get out of stocks, get into gold and oil fast fast fast, is coming apart as the reality of the US recession kicks in. Demand for commodities is dropping like a stone and in the last 48 hours commodity prices for items like gold are crashing around the world.
Gold headed for its biggest weekly drop in 25 years in London as a strengthening dollar eroded the precious metal’s appeal as an alternative investment. Platinum, palladium and silver also declined.
Gold for immediate delivery declined $29.56, or 3.1 percent, to $914.64 an ounce as of 10:20 a.m. in London after earlier falling to $905.41, the lowest since Feb. 19. Gold’s 8.8 percent drop this week would be the biggest since March 1983. The U.K. is on holiday tomorrow and March 24.
Assets in StreetTracks Gold Trust, the biggest fund backed by gold, fell 2.2 percent yesterday as investors sold commodities on speculation the slump in the dollar will end. Gold has climbed 39 percent in the past year as the dollar weakened and investors sought a haven from credit-market turmoil.
Gold was well over $1,000 an ounce a few weeks ago. It’s plummeting to $914 and falling, and this is gold we’re talking about here, not some crazy fly-by-night IPO offering.
And oil…well…oil this week is collapsing.
Crude oil fell below $100 a barrel in New York on growing concern a U.S. economic slowdown will hurt commodity demand.
Oil has fallen 11 percent from a record this week, tracking declines in gold, wheat and metals, as the dollar strengthened, reducing the need for hedges against inflation. U.S. gasoline demand in the past four weeks averaged 3.2 percent less than last year, the Energy Department said yesterday.
“Investors have taken money from the capital markets and bought oil futures, but there’s nothing changed in the fundamentals to make oil worth $100,” said Gerrit Zambo, an oil trader at BayernLB in Munich. “Now these investors may think it’s time to get out.”
Crude oil for May delivery fell as much as $2.95, or 2.9 percent, to $99.59 a barrel in electronic trading on the New York Mercantile Exchange. It was at $100.41 at 11:43 a.m. London time. Oil is up 77 percent from a year ago.
Brent crude for May settlement fell as much as $1.97, or 2 percent, to $98.75 a barrel on London’s ICE Futures Europe exchange. It was at $99.54 at 11:43 a.m. London time.
Brent oil is heading for a weekly decline of 8.2 percent, its biggest since January 2007, in a week shortened by the closure of exchanges in London and New York tomorrow for public holidays.
So what the hell is going on here? The answer is in the next paragraph:
Commodities such as oil and gold, which had reached records as equities and currencies tumbled, are no longer attracting demand as investors now need to free up money to cover losses in other assets, said Robert Laughlin, senior broker at MF Global Ltd. in London.
That is how badly the market players need cash, despite the billions of liquidity pumped into the markets. The liquidity crisis caused by rotten derivatives is spreading. They are selling anything and selling now to get money to cover margin calls.
Sell sell sell! It’s being heard all over the place. The Fed’s additional money isn’t enough. Throwing money at the problem is not working. Buying oil at $95 and selling at $110 looks pretty damned smart now, doesn’t it?
The markets are in a state of panic. The normal rules no longer apply. People are backed into treasuries while selling anything else they have to raise cash, because all the players in the market are leveraged out. Nobody has cash, everybody has debt. Nobody wants to buy debt anymore. That game is over.
If you buy a million dollars of stock with $10,000 in cash and $990,000 of derivative garbage, and the stock goes up 5%, you made five times your investment.
If it goes down even 1%, you’re wiped out.
Hence the flight to treasuries. Hence the fire sale on commodities. Hence the complete panic in the market.
Oil has dropped $10 this week alone! The commodity market is falling apart completely. Who knows at this point how low oil will go.
Do you think gas prices will fall 10% next week to reflect the price changes? After all, that’s the explanation we got for why we’re looking at $4 a gallon in several places in the US.
I don’t think so either.
Folks are cashing out to cover their losses in the market and to try to stay solvent. The rest are cashing out to avoid losing 10% a week in value and running to what is literally the last investment left…
US treasuries. And now, US treasuries have such lousy yields that they are a known loss, far, far blow the rate of inflation…and yet people are flocking to them because the losses everywhere else are much, much worse.
Does this look like a healthy market to you? We’re looking at a freefall in commodities now and treasuries that are becoming more worthless every day. It’s all coming apart out there…and the problems in the derivative and mortgage markets are still there. The dollar is still is serious trouble (now it’s reached a record low versus China’s yuan).
As I said several days ago, by the end of the week it would be painfully apparent that the Fed’s rate cut wasn’t going to do anything to solve the systemic problems out there.
Good Friday holiday tomorrow, and then next week back into the breach once more.
Be prepared.
