Sorry, my previous reply was cut short:
As to Ambrose’s evaluation of the sources of liquidity: he’s spot-on. The Yen carry trade (borrow Yen at slightly over 0% APR and convert it into $USD or Euro’s) has been a huge source of liquidity for the last six years.
Greenspan injected huge amounts of liquidity into the US market after 9/11.
And China has boatloads of dollars as a result of our incredibly high trade deficit and current account deficit with China. One of the ways China has sought to ameliorate this, and deliberately keep long-term interest rates low in the US (which helps keep the consumer spending) has been to buy US Treasuries in the 10 year range. The 10 year T is used as the benchmark for a wide variety of loans.
Gold won’t cure this right now. There isn’t enough gold in the world to replace the current levels of liquidity without everyone taking a huge haircut in valuation levels.
But at some point, the liquidity merry-go-round is going to stop. The Yen carry trade is already no longer as lucrative as it was as the Bank of Japan started to raise interest rates. The PRC has indicated that they’re going to start diversifying their debt portfolio, which is banker-speak for “we’re not going to buy quite so many US Treasuries any more”, which will result in interest rates on T’s going up a bit.
There are hedge funds in the EU who have invested (heavily) in US mortgage debt who are going to get a rude surprise (if they haven’t already). If they’re leveraged to US investment banks, then the BIS might start getting involved. I’m not too worried about what the BIS has to say at this point. Right now, I’m more interested in what Fitch’s, Moody’s and S&P start doing in how they rate the debt in some of these portfolios.
The Blackstone public offering interests me. Peterson and Schwarzman weren’t phased a bit by Senate threats to raise the taxes on their take from 15% to 35%. Looks like they thought it was time to get out, doesn’t it?
Wonderful analysis. Making the complex understandable for the financial dim bulbs such as myself.
Thanks
Many 401k’s are in stock funds,some bonds, foreign funds.
What’s a relatively safe place to put your money to ride out the possible fall?
Mattress? Bank ‘Passbook’ savings? :)
In other words, too much money (at least on paper), too little real value.