By Ed Ponsi, President, FXEducator.com
New York City - After yesterday's barrage of rate cuts, today we are seeing salvos fired by the central banks of Hong Kong (50 bps to 2.00%), Taiwan (25 bps to 3.25%), and South Korea (25 bps to 5.00%). This comes hot on the heels of yesterday's simultaneous cuts by the ECB (100 bps), the Fed, the Bank of England, and the Bank of Canada (50 bps), and many others.
All of this cheap money is wonderful, but even if all of the world's central banks cut rates to zero, banks would still be reluctant to lend money. As the old saying goes, you can lead a horse to water, but you can't make that horse lend money to banks at reasonable rates. Or something like that. Nobody is going to put a gun to a banker's head and force him to lend money. Nobody wants to be the last person to lend money to the next victim, the next Bear Stearns or Lehman Brothers.
For evidence of this, take a look at the Ted Spread, a fear gauge that climbed to its highest point in a decade just after the announcement of the joint central bank action. The Ted Spread is the difference between LIBOR and the yield of the 3-month US Treasury, and yesterday it climbed above 4%. This means that banks are demanding 400 basis points above what they would receive from the Treasuries, which have no risk. For most of this decade the Ted Spread has lingered beneath 1%. Banks are demanding higher rates to compensate for the perceived risk of lending to financial institutions.
One final thought; the cover of Time magazine features a Depression-era photo of men crowding in line beneath a sign that reads "Free Soup". I'm not one to call tops and bottoms, but if history is any guide, this could be an early sign of a bottom. Historically, excessive exuberance or excessive pessimism, as reflected by magazine covers and other forms of pop culture, are signs of a market turn. In late 1999, as the Nasdaq was rocketing to a gain of over 80% for the year, magazine covers featuring bulls were all the rage. There were even two prime time TV shows about Wall Street and the stock market. Needless to say, one year later, nobody wanted to talk stocks.
