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Full blown liquidity crisis hits gold and stocksChris Laird As news of new subprime losses emerges around the world, stock markets are selling off. What began as the first string of losses at Bear Stearns has now become wider. In fact, it is beginning to look like a developing world liquidity emergency. This week, the large French bank Paribas froze 3 funds worth about $2 billion after it became clear they cannot value the mortgage derivatives held by the funds. Soon after this news, EU banks and institutions started to flee to cash. The ECB had to lend an unprecedented $130 billion to stave off a banking/liquidity crisis. European investors said the ECB was acting on an emergency basis. EU Bankers said it was not just concerns about Paribas, but like the Bear Stearns situation, investors were very worried about how many more losses are developing. The mortgage derivatives market is literally frozen, and no one will buy either the derivatives, nor buy mortgage originations, which is now paralyzing the US mortgage market. US lender Country Wide is having trouble selling its new mortgage originations - and having to carry them. Country Wide accounts for a huge 25% of the US mortgage market. Mortgage lenders are stating that the mortgage market is in worse shape than they have ever seen. Investors are not buying mortgages, causing lenders to have to carry their own loan originations - which is going to totally kill the US mortgage market if things are not fixed soon. Alt A and sub prime mortgages (30% of US mortgages) are not selling - investors want nothing to do with them. As these mortgage markets become illiquid, the trillions of dollars of mortgage derivatives - which EU banks have bought heavily - cannot be valued - which caused Paribas to have to freeze redemptions in their 3 funds which held those derivatives. The implications of that situation is having broad and very bad ramifications to the world banking/financial industry which is wondering how bad things will get. Things are quite bad now, to say the least. You cannot have multi $trillion markets just stopping - with out major building losses. Of course, this spills over to stock markets as well as gold. The Yen is rising, and adding to the huge selling in general, as carry trade is being unwound in everything. The USD, which had been moderately rising again, rose over .40 on the USDX (US dollar index) Thursday as investors fled to US Bonds. Libor rates in Europe rose an amazing half point. (Libor is private short term money banks and institutions use). It is said that will harm brokerages and other institutions who need short term money. Gold and precious metals are selling off again because funds and institutions are fleeing into cash, and gold is a liquid asset that they can sell. There was so much demand for cash in the EU that the ECB had to lend $130 billion, and said they will supply unlimited money if necessary. The ramifications of the US mortgage derivatives losses are snowballing, and it is being said that this is unprecedented. The present situation has already been compared to the 1987 financial crash in severity. We at Prudent Squirrel have been talking about getting more liquid for over a month. In our last news letters and alerts, we discussed the impending market liquidations due to the huge losses in the mortgage derivatives market. In the last several weeks we have been sending alerts to subscribers that more serious stock and gold selling is in the cards. Our alerts sent early this week anticipated both the US stock selling as well as gold's sell off. We anticipated this latest 2 week bout of world market selling two days before it began in a Tuesday July 24 alert, calling for a severe sell off similar to the February 27 market crashes. The PrudentSquirrel newsletter is Chris Laird's macro economic and gold commentary. Subscribers get 44 newsletters a year published Sunday, as well as mid week email market alerts as needed. Email alerts are not guaranteed delivery. Stop by and have a look. Chris Laird Copyright 2007 321gold Ltd |
