“Gold is for optimists. I’m diversifying into canned goods.”
–commenter “dWj” at Felix Salmon‘s Market Movers blog
Maybe he was also looking at the yen (which surged massively overnight) and the 3mo Treasury/Libor spread, which was 200 basis points as of five minutes ago. Something big in the UK financial system is combusting, and I think it’s more than just Northern Rock.
These numbers are apocalyptic by the standards of my professional lifetime. The credit spreads have generally blown well past their 1998 LTCM extremes–and the yen hasn’t fallen to nearly the extent that it did in May 2006, when USDJPY fell to about 100 (it’s currently at 108.5). If the yen did fall to those levels at its current rate, we would have a financial meltdown. The difference in ’06 was that every other part of the US economy (and the world economy, even more so) appeared to be firing on all cylinders.
Commodities are the only assets resisting the JPY-centered global liquidity contraction. The market knows Bernanke will scramble the helicopters before things get too bad and is pricing accordingly. The Fed’s conduct throughout has been terrible. Far from letting Citigroup fail, the Bernanke Fed went one further and opened $10 billion credit lines to Barclays and RBS–just after RBS had conducted an absurdly overpriced $100bn leveraged buyout of ABN Amro. (It was a 46 percent premium over ABN’s stock price.)