What is bothering Wall Street? Every headline offers another hypothesis: subprime, says one; oil, says another; the dollar, says a third.
You never know what will cause the end of a credit expansion. Just as you never know when or how your life will end. That is the fate that is not given to man to know. But all things come to an end, lives…and credit expansions too; that is the fate we can know.
The price of oil hit a new record yesterday – over US$78 a barrel. What that is probably signalling is not so much the strength in oil but the weakness in the paper money in which it is quoted. It is a lot easier to put more dollars in circulation than it is to add barrels of oil. The dollars/barrel ratio is bound to go up.
This is also true of the dollars/gold ratio – currently at about US$675. We expect that to go up too…we know, we know. More than one dear reader has written in, or stopped us on the street to let us know that we may just have too much faith in the yellow metal – but we are sticking to our guns.
Another thing that is worrying Wall Street is the rising yen – partly because it reflects dollar weakness, and partly because it puts the carry traders in trouble. As long as you could borrow yen at a low interest rate…and place the money safely in, say, subprime CDOs for a much higher yield…you could enjoy “positive carry”. But when the yen rises, and the CDOs go bad, your carry goes negative. That’s why hedge funds are reporting staggering losses…and some are going out of business.
But Bear Stearns (NYSE:BSC) says it is not putting its third troubled hedge fund out of its misery – not yet at least. Instead, it blocked investors’ attempts to get their money out. Stay tuned for the next exciting chapter.
Markets and Money