September 17, 2008

Reading between the lines

Today markets gave us a lot of new information. Lets read it, line by line:

1. Ted spread higher in year:
This spread measures the difference between 3 months libor and 3 month t-bills. In last days (and in previous crises) this spread rised because of the higher libor. This was the result of higher risk aversion, with banks demanding higher premiums to loan money. Yesterday we saw this, but today a libor decreased. The new stuff was that the ted spread skyrocketed because the yield on 3 month t-bill went south to almost zero. The only way to read this is that everyone lost the confidence on financial institutions. The only secure place to put your money is on short-term t-bills, or bellow your bed...

2. US dolar falls:
When compared to a basket of the main world currencies the US dolar lost value today. There is no free lunch, so what happen when fed uses more and more dollars to bail-out financial institutions? For small bailouts, fed reserves are enougth, but when the amount starts to be high, the fed needs to print more money. With more money and the same wealth... We get a lower dollar value.

3. Euro is also weak... JPY is weak too!
This time, the financial turmoil is global. The globalization spread problems around the world so we shall expect same problems worlwide. This is why forex exchanges are relatively flat (when compared to gold...)

4. Gold rises most since 1999:
When people can not find secure places to deposit money and cannot find safe currencies... Gold is the safest place to be.

5. VIX reaches 36:
In the last year crises this was a signal of a bottom of the equity markets. I think that this time we are in the eye of the storm, and we will probably face a major movement. Looking for history we can see that in some important crashes vix went above 40! I believe that we will meet such a vix this time, so i will not be surprised to attend a big crash this week.

6. Recovery will be slow:
This kind of financial crises lasts on average 3 years. We are in the second year... Is this time less problematic than the average crisis? I suspect it isn't. Don't be affraid to lose some rally... Markets will not rally so fast and furious as most of us would like.

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