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Chart Presentation: Free MoneyInter-Market
Relationships Analysis Many will lay the blame for recent asset price bubbles on the doorstep of the Greenspan Fed - and to some extent that is likely a good place for it to rest - but even with a 1% funds rate the U.S. was never the low cost source of credit. That particular honor belonged to, and remains with, Japan.  The chart above compares the Nasdaq Composite Index with euroyen futures. At a price of 100 euroyen futures would reflect a yield of 0% while at or near 99.90 the yield would be roughly .1% which, more or less, is effectively 0%. Following the Asian crisis in 1998 the Bank of Japan pushed short-term interest rates down close to 0% in an attempt to reinflate Japan's real estate and equity markets. In response the credit created shifted into the tech and telecom sectors as the Nasdaq rose from 1500 to 5000. Through the first half of 2000 Japanese yields began to rise as euroyen prices moved lower and the chart shows that in virtual lockstep the Nasdaq began to weaken. By late 2000 central banks were forced to stop fighting inflation and return - with vigor - to inflating asset prices. The chart below compares euroyen futures with the stock price of U.S. home builder DR Horton (DHI).  One could identify any number of recent asset price bubbles ranging from gold and crude oil to Asian and emerging markets stocks. The chart, however, suggests that the first and perhaps primary bubble occurred in the U.S. housing market as free money from Japan translated into free money in the U.S. for the speculative purchase of built and yet-to-be-built houses and condos. We are currently slogging through the post-binge hangover associated with the cessation of free money from Japan in the spring of 2006. Notice on the chart how the start of declining euroyen futures prices went almost directly with a negative trend for the home builders. In a sense the charts are arguing two things. First, that the markets and, perhaps, global growth remain inextricably linked to near-free credit (which, we would argue, still suggests that the deflationary trend remains intact) and second, the birth of the next great asset price bubble is only one 'crisis' away from taking place. If, that is, it hasn't already begun to form. Kevin Klombies
Editor/Publisher All Rights Reserved, 2007. IMRA subscriptions are available at www.krk-imra.com 321gold Ltd |
