Anything But Bullish
Some of the more useful liquidity indicators are the different money market spreads. Typically when the financial system is feeling stress we will see spreads rise as banks become hesitant to even lend to each other due to counter party risk and general uncertainty. We saw this in the 1987 crash, in the 90-92 recession, in the bond market route of 94, in the .com crash, and then in the crash of 2008. A rise in spreads does not guarantee a crisis or crash but we have seen higher spreads during each crisis.
Right now we are seeing what could be the beginnings of a new liquidity crisis or maybe just the second leg of the last crisis. If spreads were rising just due to a weakening economy then we would not be overly concerned as these events take some time to really move lower. Right now however we have a huge mess that goes by the name of the EU. We are not necessarily saying that 2008 part 2 is upon us but we are saying that this is a real cause for concern, basically the rise in spreads is anything but bullish and as it reinforces our view that this is not just a normal correction but instead could be the start of something a lot worse.
Money Market Spreads
Happy Trading,
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