Global Liquidity

by Larry Levin


Central banks across the globe poured liquidity into the marketplace today with its coordinated rate cuts. Across the world, however, banks are already drowning in liquidity. Cash is not the problem - trust and fear is. The indices traded wildly today, with enormous S&P moves in short time spans the likes I have never seen before - expect, perhaps, the first day the market was open following the terrorist attacks of 9/11. In the end, investors considered the rate cuts for what they were - more whiskey for the drunk, not a solution - and the Dow closed down another 2%.

What can the government do? What can central banks do? These organizations are not the solution, they are the problem. Greenspan kept rates far too low for far too long, and Congress' insistence on loose lending has brought us here. Banks do not trust each other, and no amount of cheap money can force a bank to lend. And why are they fearful to lend? Because they know that the borrower, whether it is another bank or an individual, may not be able to pay it back. Other banks still have rotten-to-the-core Level III assets, and the consumer is BROKE. The global credit boom is OVER and there is little the Fed or Congress can do to change it.

Just yesterday the Federal Reserve said that consumer borrowing fell at an annual rate of 3.7% in August, which was before the financial crisis became front page news in September. The consumer isn't consuming junk anymore; she is saving money for a change - if possible. This is the first time this has happened since January 1998.

A global rate cut is just more bread & circuses: it will do little, if anything immediately. A homeowner that cannot afford his current house cannot take out a loan for another. A consumer that cannot afford his two leased Mercedes will not be given a loan for a Hawaiian vacation. And a bank with a trillion dollars of worthless derivatives in its Level III books has terminal cancer, whether it knows it or not. Cutting interest rates just guts the saver even further.

Banning short selling did nothing to save the market, as anyone who is still capable of critical thinking would have told the SEC. The Emperor has no clothes. The ban, however, ends tonight at midnight.

The quicker the market tanks, with real panic, the quicker we are to a recovery. What we have had so far is orderly selling. There is no rush to the exits.

On the other hand, Japan experienced panic selling yesterday. The Nikkei 225 closed down almost 10% in one session! If the S&P or Dow were to be halted at limit-down, maybe we'll be close to a bottom. However, even that would most likely be temporary. Like the bear market of the 70's, one should expect at least a 50% drop (Dow 7,000) followed by years of churning.

Real Time Trading Signals*for

Trade Date: 10/8/08

E-Mini S&P Trades*
(before fees and commissions):

1) VA sell @ 8:35am at 1000.00 = -2.50 (1 lot)

2) OTF buy @ 1:45pm at 1012.75 = -2.00 (1 lot)

3) Algorithm positions (4)...combined total...-9.25

ZB (30 Year Bond) Trades*
(before fees and commissions):

1) No ZB trades today.


Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!