Asset Inflation

Due to continous money supply by central banks across major economies, asset prices have reached a point where it looks scary to justify this hightened exhuberance among so called value investors. This continous and extremely fast rise in asset prices is creating an asset bubble, which no body wants to burst, but still fears. The common casualty is layman person, or what economist love to term as Consumer, which bears the brunt of this artificial asset inflation and gets credit at high interest rates to buy that asset! This can't go on for ever, something might topple this top heavy giant from the cliff, what would that be, only time will tell.

Markets Cheer Rate Cut!

Stock markets are cheering 0.5% rate cut by US federal reserve but i believe Fed must have punished defaulters of subprime mortgage borrowers and lending institutions by raising interest rates rather than cutting them. Instead Fed has revisiting same starting point which started this whole cheap credit phenomenon across all asset classes. By printing more and more dollars, Fed is again pumping more cheap money into the financial system and re-assuring the market participants that in any adverse event like default mess the fed will bail them out by printing more money, thus inviting more defaulters to do default at will and get away! That's the way systemic problems linger on and system makers continue to drag them for their pity interests like to help very large lending and investment banking institutions.

Greed

Greed was the sole reason why subprime mortgage mess ocurred in the US. Big financial institutions, hedge funds, gave credit to people having low credit score in order to earn more returns and thus in the process inviting more risk to their credit exposure. This is precisely what happened and happened with vengence, hitting stocks especially financial stocks across the globe! Credit risk containment measurements needs an overhauling before anything happens again in the credit markets.

Crude Is Boiling

Crude oil prices have surpassed important technical level of U.S.$77.50 per barrel mark today and is a cause for concern as it will along with rising food prices can give further boost to inflation, which has become central point for many central bankers across the world. Growth has not been dominating central banks monetary policy of late as excess liquidity is amply supplying credit to fuel growth, but rather asset inflation, especially food and fuel prices are grabbing their monetary stance.
U.S. markets are feeling pain after subprime mortgage mess and continue to suffer investor apathy. Asian markets are showing great resilience and are very close to their all time heighs.

Markets Fall Again

Markets have now again started showing signs of weakness with Dow Jones falling 280 points in yesterdays trading session with renewed fears of sub-prime mortgage defaults and bankruptcy among large hedge funds and financial institutions, also aiding the fall is low consumer confidence among U.S.consumers.
Asian stocks are also trading lower on the back of weak signals from U.S. markets. U.S.Fed now has to take several rate cuts this year so as to restore market and consumer confidence.
It seems worst hasn't come out from U.S.sub-prime mortage mess. And till then stocks will be hugely volatile. This credit crack can have potentially a drag on world economic growth which so far has been very good.
Uncertainty will prevail till then in the financial markets.
Buying in sharp falls in sectors and stocks with the strongest of business fundamentals will pay eventually. Yen is gaining strength against the dollar and is trading at 114 against it, it seems the yen carry trade un-winding is still underway and thus causing volatility in the financial system.

Not all money is credit

Markets have been bearing the brunt of mahem in the U.S. sub-prime mortgage with several U.S., Europeon and U.K. funds going burst.
Investors and traders believe that all markets have risen because of cheap credit pouring in the markets, however this is paritally true as people do have their own money to invest in case oppurtunity arises, because if all was borrowed money then markets for the past few trading sessions would not have been found the support of new buyers!

Smart buyers have been utilising this sharp fall in equities as a buying oppurtunity and are putting their own money.

Excessive borrowed money can only inflate the valuations of given assets to artificial levels but any cracks in that credit cycle can turn that tide against the borrower as he has to return the money to original lender and he does that in panic as we have seen for the past few weeks. Therefore investng with own money is the only rational strategy one must adopt.

Investor Confidence Is Shaken

By looking at stock market behaviour for the past 3 days gives indication that investors/traders confidence has been shaken and they are using any rally in the markets to lighten their stock commitments. Cracks in the credit markets and subsequent pouring of around U.S.$550 Billion in the financial system by various central banks only indicates the intensity of underlying unresolved problem.
This is causing huge nervousness among investor/trader class who may not want to enter the markets unless and untill some assurance that problems with subprime mess has been contained.
This world runs on credit, so if that gets affected badly then we have a serious problem in our hands and smart market players knows this. Good luck with our investments.

Commodities Are Cooling

Commodity prices are cooling off for the past few trading sessions and this is a very welcome sign with regards to overall inflation scenario. Also with concerns of U.S. economy slowing down because of lower consumer spending and weak housing sales and serious credit squeeze in the U.S. mortgage market, commodity prices have began to ease of substantially from their recent highs.

However crude oil is still trading above U.S.$70 per barrel for the past few weeks and is a major concern.

Reason For This Carnage

Market players always try to find reasons for market falls as and when it happens, this time around excessive credit lending to not--trust-worthy people(having very low credit score) in the sub-prime mortgage market is sited as the main culprit behind steep stock market fall as they have de-faulted on their loan obligation. But i say excessive GREED was, is, and will always be the biggest culprit behind every melt down in the asset prices.

Yen Carry Trade Unwinding

For two days running, stocks across the world are bearing the brunt of a credit crack that first started in U.S. sub-prime market and now has spread to other credit instruments. This collateral damage has prompted hedge funds, PE funds, large financial institutions to pay back the capital that they have borrowed from Japan very cheaply. With the losses mounting on their mortgage books, they will now have to withdraw from risky assets like stocks and return the borrowed money and this is causing Yen to strenghten against the Dollar, now trading at 114.32 after touching a high of 113.55 against the Dollar. Serious downward stock price adjustments had happened in the last few days, dow jones has re-traced all the gains it had made during this fiscal year and all other emerging markets are also follwoing the suit. For the first time in the last four years, serious credit squeeze is happening and this is not good for assets like stocks. Only selective buying can be made in stocks which are having the strongest of fundamentals and business momentum. Commodities are also correcting and this is good news for commodity user industry and hence to some extent for Inflation.

Look Credit Score Before Giving Credit

Sub-Prime Mortgage mahem in the U.S. has taught one very important lesson for lenders across the globe that a lender must check the applicants credit score before sanctioning the loan.
Markets across the globe are tanking for the past few days as investors/traders are now very much concerned about health of the credit system in major economies in the developed world and hence taking a very cautious and selective approach towards financial markets.
In 2004, 2005 stock markets crashed by fears that chinese economy will slow down and that lead to sell off in both commodities and stocks.
Now in 2007, Financial stocks are causing the sell-off.
One is left with guessing what's next.

Problem Of Plenty

For the past two and a half decades, U.S. federal reserve has done nothing but to print more and more dollars and that has created the problem of too much money chasing few asset classes and hence bubble like situation in each and every asset.
Asian countries are holding U.S.treasuries worth trillion of dollars just to finance U.S. consumer's shopping list and keep their growth going.
This never ending credit cycle has turned financial markets across the globe at very risk of un-sustainable inflated levels. After all where does that huge sum of money goes other than stocks, bonds, real estate, currency, they have to park it somewhere. And thats the problem for these markets.

Dow Jones is Down Again Sharply

On August 03,2007 Dow jones fell sharply again by 280 points, thus retracing all the past few days gain in one trading session indicating that worst is not yet over for global equity markets.
To tread cautiously is the name of the game.
Watching carefully the Credit Market in the U.S. will be extremely useful in knowing future course of action by big players like Investment banks, Pension funds, Mutual funds, PE firms, Insurance companies, Hedge funds etc, in the financial markets.

Business And Inflation

I don't know how many people know about this that Businesses love Inflation for the reasons i believe are root cause for their profit growth.
We all know that biggest borrowers are Goverments and Big/Medium Businesses and they suck out very large portion of available credit (and that too very cheaply)in the market, leaving small players to borrow at hight Interest Rates.
Well they say:- Money is sufficient but there are very few things to buy!
Businesses can create artificial demand-supply situation(sometimes it's geniune), raise their product prices citing inflation as reason even though they are not facing input cost pressures, thus earn huge profit with similar sales growth.
And these same businesses also run banks and financial institution which give credit at high interest rates to small entities, thus further making credit costly. Cost of money is the Inflation in the hands of the borrower, more it is more it hurts.

Credit Cycle

We should ask ourselves one extremely important fundamental question i.e., whether Credit cycle that has fuelled spectacular price inflation across the asset class has cracking or not before we raise doubts about continuation of bull run in stocks, commodities, properties.
I say in some segments of U.S. subprime mortgage market, it is showing signs of troule with many borrowers defaulting on their credit liability, and hedge funds along with large investment banks who love to buy these certificates are facing problems. Thats adding volatility in currency and stock markets because they pull back money from other assets like stocks if they face turbulance in holdings of their other invesments like subprime mortgage certificates. Volatility is the name of the game for some time now.