Although the financial crisis is often said to be over anytime soon, the global financial markets have never been more exposed to a problematic crash. Getting over the crisis is nothing but a tricky sensation, since specialists agree that the worst is just beginning. Bernanke's last statement has practically told the world how significant a role speculation has become over the past few years. The speculation has affected the costs for pretty much everything, so there is a big chance for multiple countries to simply run out of cash.
The past years have created huge imbalances around the world, regardless of the domain. Stock markets in Germany have never been in a worse situation, while the U.S. markets were simply lackluster. New names show up on the bankruptcy map every once in a while, with Spain, Italy, Portugal and Greece being some of the representative names. As if all these were not enough, Japan has encountered serious problems with a destabilized domestic market, which practically affected the entire world. If the first country that was said to register an economical growth has managed to encounter problems again, what would happen with the already affected countries?
A dash and some cash
Just like it happened before, a liquidity crisis begins with a serious struggle for cash, especially when it comes to various speculators. Practically, they sell anything that can be sold, starting from low levels and going up to impressive markets. It makes no difference how many markets you research, since you will see nothing but sales. Commodities, stocks and even equities are being gotten rid of. This is basically more than enough to realize that the world finances are not going back in the right direction, but still going down. This is not an assumption, but an actual fact.
When it comes to the bonds – the most problematic area out there, the U.S. represents a very informative factor. It is the pillar that can tell whether or not the market is recovering. The note released by the U.S. Treasury spreads over ten years, so this duration represents a benchmark for plenty of other interesting items, including the mortgage bonds. Although a recent announcement has confirmed the potential problems, specialists knew about these issues with months before it. The statistics and graphs were conclusive enough from this point of view – bonds represent an opposite factor of yield and price. If one category goes down, the other one raises, and vice versa.
One of the first clues that something is going wrong is the overall cost of the 10 year Treasury. It has not been that low since the last trimester of 2011. Another clue implies the inefficiency of QE3 and Operation Twist, two of the so called economy saviors. In other words, thousands of billions of dollars were printed and invested in bonds, yet the Treasury price is still lower than before such operations. Aside from the 10 year rate, the other debts are just as high.
The two operations were supposed to change the whole economy, but they have managed to convince the audience of two different aspects. From some points of view, the population is convinced that the Fed is not capable of solving absolutely any problem. At the same time, the rates will most likely hurt the economy even more, leading to a series of speculations.
There are plenty of other negative effects coming with the high rates, such as low equities, fiscal problems for people with large loans, but also mortgage difficulties. The mortgage rates became some of the first victims of the growing interest rates. They have grown with around 0.4% within the last month only and this failure is far from being over. As if it was not obvious already, any factor that will negatively affect the housing industry is contraindicated and unwanted by the Fed. After all, the economy needs people to buy homes, which is less likely to happen when the rates keep going up. Even the refinancing mortgages end up suffering for this reason.
Aside from the U.S., rates rise everywhere, including the European Union or Japan. This scenario is a little different, but it follows the same principles. Basically, there are plenty of problematic countries that cannot really brag with high bond yields. Countries like Greece, Spain, Italy or Portugal obviously are not worth the low rates they benefit from these days, so the past yield highs might be revised.
It is not hard to realize that only speculators and high status institutions have invested in unclear sovereign debt at high prices in Spain. Any specialist can agree that the institutions were mostly local banks, while their investments seemed political and not really financial. The whole technique worked for quite a lot of time, since the high prices came up with decent capital gains. However, a deeper view can reveal the fact that such investments are now seen as major losses.
On the other hand, speculators were proven to be a little more advantageous, since their investments seemed to go in the proper direction. But just like the money came very easily, they were lost just that quickly. They easy came and easy went, so the investors lost them before even enjoying them.
As a general conclusion, bolds are attempted to be sold in any country around the world and this factor will negatively affect the equities. There is a very important connection between equities and yields. The yields seem to go down, while the investors hope to make money in the long run by investing in equities. This idea is beneficial if the interest rates are negative and this is exactly what the Fed has actually thought about in order to revive the economy.
But just like you probably expect it, this sword has two cuts and the most harmful one implies high yields and low equities. It is exactly the opposite of what the Fed has had in mind. If you bother to analyze the U.S. stock industry, it reached to a peak in May, but it has also went down over the same time, since the interest rates went up.
These days, the market has to break a new round limit – 1600. Practically, the moving average of 50 days has played a very important role in the evolution of the S&P 500. As if all these were not enough, commodities were not too lucky either. For example, they are now under the 200 week moving limit.
All in all, the continuous run from equities, commodities and bonds that floats around the world is trying to tell you that no one can hide. Sooner or later, the global economy will reach to the situation from 2008. People sell everything, so this is an obvious sign of the last phase in a speculative process. There are a lot of misconceptions, ideas and predictions regarding this process, but the obvious evidence makes it clear that the global economy is getting into a new stage. Although the summer has just begun, most specialists agree that it is going to be a very harsh one from an economical point of view. However, only time can tell how far it will actually get.