"Y2K liquidity crunch? What crunch? "

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread



LONDON, Dec 16 (Reuters) - Forecasts of a Y2K-related financial liquidity crunch remain unfulfilled just 15 days before the new millennium, with all sorts of players still active and showing strong interest in the riskiest of assets.

While currency and fixed income markets have seen a typical end-of-year drop in dealing volumes, there is still no discernible hiatus related purely to concerns about the Y2K computer bug, analysts said.

Equity markets appear to have disregarded the issue altogether and volumes are higher than normal for this time of year. Concern about a sudden lack of liquidity -- meaning difficulty in buying or selling securities at consistent prices -- has ebbed.

There is widespread comfort with computer compliance, central banks have taken measures to provide oceans of liquidity if necessary and compelling bull markets in equities have all persuaded investors to keep trading.

U.S. investment bank J.P. Morgan said its so-called "Liquidity and Credit Premia Index", which measures the level of liquidity in financial markets, is not yet signalling any contraction in investor risk appetite.

"The long-awaited millennium turn has arrived with an unexpected result -- risk appetite has remained solid," the U.S. investment bank said in a research note received on Thursday.

The bank said strong risk appetite would continue to support high yielding emerging markets, enhance "carry" trades locking into relatively high interest rates, and underpin the dollar versus lower-yielding currencies like the euro and Swiss franc.

Equity market volumes remain near record levels, government bond auctions have met with strong investor interest, while traders report currency markets are no tighter than usual so close to a year end.

"Institutions that were long of cash in October and early November committed that money expecting a drying up in liquidity in December," said Bryan Allworthy, a strategist at U.S. investment firm Merrill Lynch.

"But what's happened in recent weeks is that institutions have been victims of their own success, pushing markets to such a level that they had to continue to commit themselves in anticipation of a January rally," he said.

Early precautions put in place by major central banks to lift liquidity concerns around the turn of the millennium have allayed investor concerns that it would be unwise to stay fully invested this close to the year end, analysts said.

The U.S. Federal Reserve, Bank of England and European Central Bank have variously expanded the eligible pool of collateral for securities repurchase transactions or eased terms for discount window loans. The U.S. Fed has also extended repos from 60 to 90 days and issued so-called "liquidity" options.

"The (central bank) liquidity suggests a positive climate for financial assets generally globally and it is one source of liquidity which is flowing into equities," said Malcolm Roberts, analyst at Crossborder Capital.


Bond market volatility has fallen steadily since mid-year and the "turn premium", visible in interest rate futures markets over periods covering the year end, has narrowed. The U.S. premium is now at an annualised 9-10 percent from 12-13 percent a few months ago.

European bond markets were lifted on Wednesday after better-than-expected demand for a five billion euro German two-year Shatz bond auction showed trading desks were still willing to take positions ahead of the millennium.

Traders had expressed disquiet before the offer about whether there would be sufficent liquidity to soak up the issue. The offer, though, met with keen interest with a bid-to-cover ratio of 1.8, beating expectations of 1.4.

Receding concerns about Y2K risks have meant there has been little increase in the cost of borrowing for lower rate borrowers.

In early August 10-year dollar swap spreads were at more than 110 basis points, their highest levels this decade. In recent months spreads, which measure the additional cost of borrowing for a double-A rated credit over the U.S. Treasury, have shrunk and the 10-year benchmark is currently 82 basis points versus 80 basis points early last week.


Equity volumes in major European bourses remain well above normal levels, buoyed by rampant demand from retail investors chasing recent strong performance in Internet-related shares.

Volume on the London Stock Exchange is still double equivalent 1998 levels, with the daily average in December around 50 percent higher than at the same time last year.

"As private investors have been given the means to Internet trade volume has been like it never has before," said Allworthy.

-- Johnny Canuck (j_canuck@hotmail.com), December 17, 1999


My apologies, the link needs to be cAse SEnsItIVe:


-- Johnny Canuck (j_canuck@hotmail.com), December 17, 1999.

Party on, everybody! Party on!

-- cody (cody@y2ksurvive.com), December 17, 1999.

another y2k prediction - ie, the disappearance of cash - bites the dust.

-- lou (lanny1@ix.netcom.com), December 17, 1999.

With all the excess liquidity in the market in conjunction with the biggest bubble in history, it has now occurred to me that this in itself could pose a worse problem than Y2K.

-- rc white (cw5410@netscape.net), December 17, 1999.



Sunday December 12 1:28 AM ET

Y2K Paranoia or Greenspan's Irrational Exuberance?

By Pierre Belec

NEW YORK (Reuters) - The stock market just keeps on climbing and Federal Reserve Chairman Alan Greenspan has been making a massive amount money available in the financial system.

Is it irrational exuberance or Y2K paranoia? Or Both?

Greenspan has permitted the biggest expansion of money supply in the Fed's history in the weeks leading up to the end of the year, when the so-called Y2K computer bug could disrupt financial systems.

The Fed's move has been explosive on Wall Street because a free flowing money faucet at the Fed boosts confidence in the financial system, and the economy at large, and is the stuff that makes bull markets get bigger.

M3, the Fed's broad definition of money, which includes currency, travelers' checks, bank deposits and money market mutual funds, has climbed $194 billion over the past 13 weeks -- the biggest increase ever. The money supply increased at an annualized rate of 15 percent, which is well above the Fed's target growth rate of only 5 percent.

Just a week ago, M3 went up a huge $36 billion, which would seem to indicate that the central bank is buying insurance against some possible disruptions as the calendar changes from 1999 to 2000, analysts said.

``The money supply has gone through the roof and the increase, adjusted for inflation, is the biggest in the nation's history,'' said Don Hays, president of The Hays Market Focus Advisory Group, an investment consulting firm.

``The Fed may be flooding the nation with cash because of jitters among central bankers that the Y2K computer bug could do more damage to the financial system than most people expect,'' he said.

``I just don't have another excuse other than Y2K to imagine why the Fed would flood the system, unless there is something that's happening behind the scenes that we don't know about,'' Hays said.

``This huge liquidity is the reason for the big rally in stocks since October,'' Hays said. ``It's a replay of the market's run-up exactly one year ago, when the Fed rushed to flood the system after the panic from the Russian loan default and the Long Term Capital Management hedge fund disaster.''

The Fed came to the rescue of the LTC fund, which teetered last year on the brink of bankruptcy due to the global market turmoil. The fund's losses threatened to slam the financial system, which in turn could have hurt the economy.

But the increase in money supply and financial system liquidity may also ``reflect Greenspan's thinking that the stock market is on a very unstable foundation because of valuations and Y2K might be the trigger that could keep it from coming down softly,'' Hays said.

One of Greenspan's goal's over the last four years of extraordinary gains in stocks has been to ``talk'' the market down, or to set the mood for the market to come down from its lofty levels in a gradual way and to avoid a panic on the Street, which would demoralize business confidence. But the market has not yet suffered a serious reversal.

And the Fed may fear that Y2K could be the thing that could yet punch a big hole in the market bubble, analysts said.

Three years ago, in December 1996, Greenspan sent global stock market reeling with a comment about investors' ''irrational exuberance,'' and Wall Streeters now say the Fed head is not practicing what he preaches.

There are few signs of panic in the run-up to the new year, when computers may confuse the year 2000 with 1900, messing up date- sensitive functions.

Corporate America says it is confident that it has fixed the Y2K problem, but the Fed is apparently not taking any chances.

The concern is that disruption on a large scale could stun corporate earnings, slam the stock market and drive the economy into recession, analysts said.

``We don't have the slightest idea how Y2K is going to play out,'' Hays said. ``From listening to all the 'informed' sources, I have to come to the conclusion that no one else does either.''

Paul Kasriel, chief U.S. economist for Northern Trust Co. in Chicago, said there is no doubt that the cash from the Fed has been the elixir for the market's rally.

``People are not borrowing just to stuff the money in their mattresses,'' he said. ``They borrow to spend and it ain't a coincidence that the stock market has picked up as the money supply has exploded.''

The Fed can boost confidence in the financial system and make the economy grow faster by making more money available to banks, which eventually leads to cheaper loans.

It can also discourage lending when the economy grows at a fast clip, and threatens to fuel inflation, by withdrawing money from the banking system, or by raising short-term interest rates.

Kasriel said the money supply growth was revved up in October, which is about the time that stocks began their recovery from a selloff that threw the Dow Jones industrial average for a loss of 1,300 points -- a classic correction of 10 percent -- between September and mid-October.

The other major market gauges were also battered, with the Standard & Poor's 500 index slumping 12 percent and the Nasdaq Composite index skidding more than 6 percent.

Since then, the Nasdaq has been rewriting the record books, making highs on an almost daily basis. In addition, the S&P last week hit a new high while the Dow Jones industrial average came within less than 50 points of beating its Aug. 25 record of 11,326.04.

``Without the money supply growth, I am convinced that the market would be in much weaker shape at this time,'' Hays said.

Kasriel said that things could get interesting for the market next year as a result of the Fed's action.

``The Fed may choose to ignore the rapid growth in credit and money that it has a hand in creating,'' he said. ``But investors ignore it at their own peril.''

Kasriel said that, unless the Fed can rope in credit demand, it will have to raise interest rates more than the half percentage point that he has been expecting in the year 2000. The Fed this year has already boosted interest rates by three quarters of a point.

``It is beyond me how the stock market could continue to be immune to further increases in both short-term and long-term interest rates,'' he said.

So the big question is: Will the 73-year old Greenspan leave his job the same way he came in, in 1987, with a stock market crisis?

For the week, the Dow Jones industrial average was down 61.48 points at 11,224.70. The Standard & Poor's 500 index was off 16.26 points at 1,417.04 and the Nasdaq Composite index was up 99.65 points at 3,620.25.

-- (M@rket.trends), December 17, 1999.

Liquidity is a relative thing.

Electronic money is only as good as the computer disks it's stored on. Or the operating system it's processed through. Or the phone lines it's transmitted over.

Base your risk assessment on that.

-- rob minor (rbminor@hotmail.com), December 17, 1999.

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