The best quote I’ve seen to explain what the financial system is suffering went like this:
…”nobody knows how much monetary easing is too much. The shrinkage (makes me think of a Seinfeld episode…giggle) in global liquidity as a result of the financial meltdown is impossible to quantify. Think of it as a gas tank – the crisis (2008 and 2009) was like a leak in the world’s global gas tank. Unlike a gas tank though, there’s really no fuel gauge to determine how much liquidity was lost. The U.S. and other leading countries have simply been pumping in more gas and hoping for a sign that the tank is back to full again.”
I wrote that on this site March 2nd 2011. Ever since Lehman, whenever the financial commmunity of the world puts forward a stopgap measure to stem another potential collapse (Greece to now Italy) it seems whammo, another problem appears. The best visual representation of the current state of the global financial system in my opinion is poor Chevy Chase in the movie Vegas Vacation attempting to plug leaks in the wall of the Hoover Dam with bubble gum. If you click on the photo (above) you can see exactly what I mean.
Interest rates, like the stock market, have a tendency to rock & roll around major trend lines. Now that the press is so gungho about interpreting every little thing that relates to finance and investment -(it’s ‘our fault’ I suppose since it’s the public their catering to) even Pimco guru Bill Gross gets lambasted because he sold Treasury bonds too early.
As my quote suggests, the verdict is still out on how much liquidity will ultimately be needed to at least modestly compensate for the wiping out of trillions of dollars (or rupees, euros, remnimbi’s, peso’s, pounds etc.) during the financial crisis. Long Treasuries can range anywhere between 2.5% to 4.5% for months (depending upon the short term mood – bullish or bearish – of the speculating hordes of bond managers). The virtually unanimous decision by global leaders to try to avoid a massive meltdown of the financial system was made, and until most of the “leaks” seem to have been dealt with it’s unlikely rates will rocket upward.
Bill Gross is absolutely RIGHT in his thinking though. Interest rates will rise from the range they are trading in and nobody can really say exactly when it will happen – the business of the financial community is managing risk because there is NO certainty. The smart thing for a maverick to do is make the sensible call, wait and ignore the fumes of the cow pie radiating from the press.