Wall Street oblivious to the financial storm coming from Europe
Posted on 29 April 2010 with no comments from readers
US financial markets are curiously oblivious to the financial storm developing in Europe that has all the makings of a second global banking crisis and another stock market crash.
Last night the Federal Reserve again assured Wall Street that interest rates will stay low for a protracted period and stocks rallied modestly after the big sell-off during the Goldman Sachs grilling the day before. But Americans are reading this wrong.
Almighty Fed
They seem to think that the European version of the Fed, the European Central Bank can do something similar and put this cat back in the bag. Is Greece such a big deal? Haven’t they already said there will be a bailout?
Well, yes and no. Yes Greece is a big deal because it is the first domino in a whole line of indebted European states that require bailouts or austerity packages. Greece has raised the possibility of a sovereign default in Europe and that has sent interest rates soaring and frozen up bond markets.
Try raising a commercial bond issue in Europe now. They are all on hold. It is a credit freeze again. Sounds familiar?
This is the subprime crisis under a new guise. What was thought to be Triple-A turns out to be junk. The market response is to panic and raise rates. Meanwhile, Europe does not have the centralized power of the Fed to respond. Things will get worse while politicians dither and markets are ruthless when they sense a weakness.
Bond market problems do tend to blow up quickly and spread. The US is feeling the impact most immediately in a surging dollar. That is bad for exports and the US recovery. Don’t forget dollar weakness last year was a key part in bringing the economy out of recession.
Crossing the Atlantic
But how long will the US bond market hold up? The return being offered investors is far too low for the risk posed by bond prices that look very overstretched and due for a downturn.
Besides it is all very well for the Fed to pretend that it controls interest rates but actually it is the market that sets interest rates. Mortgage rates have been climbing recently in the US.
Even old Alan Greenspan has recently commented that the bond markets are the canary in the coal mine, or in other words the warning signal of impending doom. If the man who missed the subprime disaster coming can spot it then surely Wall Street ought to get the message very soon.
