As there was NOT an ocean liner named Queen Elizabeth III, so there should not be a Quantitative Easing III.
Why?
There is no need for it. The economy now has all the monetary base it needs to grow and interest rates (short and long term) are low enough. Low interest rates are not preventing any profitable investments.
What Needs to Be Done?
The problems are now all policy. Loan growth is low because there are massive new, tighter restrictions on getting a loan. Mortgage refinancings are far below what should be occurring because good quality borrowers are prevent from obtaining a new loan, by either over restrictive credit policies or by their existing loan being "underwater". FDIC rules for management of banks causes real loans to be examined much harder than speculations in securities.
In sum, the problems are ALL now policy problems under the purview of Obama. And he is doing nothing ... need I refer to the old fable about Nero fiddling while Rome burns?
Partial Solutions.
1. FNMA and Freddie Mac should lower credit standards to permit refinancings of ANY loan currently not in default. I mean ANY loan, regardless of credit score or low-to-value ratio. After all, the government ALREADY has that risk, and the loan gets better IF the debt service payments fall.
2. Force banks to make real loans and not speculate in securities. The banking system does NOT exist to faciliate the speculation in securities or derivatives or any similar thing. It exists to make LOANS: old-fashioned commercial and industrial LOANS.
All this is rather obvious. One wonders why these have not been done. After all, it's 2011, not 2009. Policymakers have had two years to "study" the problems. They have failed. Maybe those people should have their pay and benefits cut for "failure to achieve objectives".
Word of the Day
"Fugacious" - adjective [$10] literary
Fugacious means fleeting, evanescent, hard to capture or keep.
Sentence: Fat fees and fugacious fame of hedge fund managers is a fraud on the foolish rich. Example: John Pauson's flagship fund is down 38% this year. So much for his "genius". He and most of those knaves just roll the dice with OPM, get lucky one year and the next year loses. Sigh ...
Showing posts with label monetary policy. Show all posts
Showing posts with label monetary policy. Show all posts
Friday, August 26, 2011
Monday, December 6, 2010
Deficiency at the Deficit Commission
What is the huge missing piece in the proposal of the Deficit Commission?
Leadership is making the all Federal employees bear a fair share of austerity. Including Congress. Had the commission had a majority of persons from outside the DC Ruling Class, you can be certain it would have included something like a 20% pay & benefits cut for Federal employees with the cuts concentrated at the top of the pay scale. They are grossly overpaid, having received years of inflation and step increases while the common man & woman have borne pay stagnation or cuts, and large benefit cuts.
The same applies to Federal contractors. When a company has troubles, it goes to suppliers and demands price cuts. The Federal government has huge purchasing power - why didn't the Deficit Commission propose cuts in all contractor costs?
The answer to these glaring failures is simple: the Commission was almost all DC insiders, they are part of the problem.
Create a truly independent commission - with a supermajority of persons outside of government and outside of DC (and NYC and LA and Chicago). Get people who have experience in cutting costs.
And require ALL spending cuts come before ANY tax increases. Otherwise we will simply see the same old shell game: more taxes, no spending cuts implemented.
More
Is anyone amazed that with almost 10% unemployment and 17% underemployment, that a Democratic President has NO plan or program to help create jobs? Barry is a complete cluster FUBAR, with no ideas or leadership. The People chose badly. Remember who touted him as the great savior, and disregard them in the future.
And More
Uh ... with all the handwringing and anguish over QE2, has anyone bothered to look at the FACT that the monetary base is LOWER than it was a year ago. That's tightening, not easing. Battleship Ben: your shells are falling short, add more powder. Accelerate the buying of those Treasury securities.
Actions
Krypto wants me to sell some gold; that sector is now overinvested due to recent gains. I'll do it via a gold stocks fund. Proceeds to cash to await better bond prices.
Word of the Day
"Irrefragable" - adjective [$10] an Eliot word (i. e., from readings of T. S. Eliot)
Irrefragable means 1. (of a statement, argument or person) unanswerable, indisputable; 2. (of rules, etc.) inviolable.
Sentence: That the Deficit Commission was poorly and fatally constructed by Barry is irrefragable as it was dominated by the Congressmen who are part of the problem.
Leadership is making the all Federal employees bear a fair share of austerity. Including Congress. Had the commission had a majority of persons from outside the DC Ruling Class, you can be certain it would have included something like a 20% pay & benefits cut for Federal employees with the cuts concentrated at the top of the pay scale. They are grossly overpaid, having received years of inflation and step increases while the common man & woman have borne pay stagnation or cuts, and large benefit cuts.
The same applies to Federal contractors. When a company has troubles, it goes to suppliers and demands price cuts. The Federal government has huge purchasing power - why didn't the Deficit Commission propose cuts in all contractor costs?
The answer to these glaring failures is simple: the Commission was almost all DC insiders, they are part of the problem.
Create a truly independent commission - with a supermajority of persons outside of government and outside of DC (and NYC and LA and Chicago). Get people who have experience in cutting costs.
And require ALL spending cuts come before ANY tax increases. Otherwise we will simply see the same old shell game: more taxes, no spending cuts implemented.
More
Is anyone amazed that with almost 10% unemployment and 17% underemployment, that a Democratic President has NO plan or program to help create jobs? Barry is a complete cluster FUBAR, with no ideas or leadership. The People chose badly. Remember who touted him as the great savior, and disregard them in the future.
And More
Uh ... with all the handwringing and anguish over QE2, has anyone bothered to look at the FACT that the monetary base is LOWER than it was a year ago. That's tightening, not easing. Battleship Ben: your shells are falling short, add more powder. Accelerate the buying of those Treasury securities.
Actions
Krypto wants me to sell some gold; that sector is now overinvested due to recent gains. I'll do it via a gold stocks fund. Proceeds to cash to await better bond prices.
Word of the Day
"Irrefragable" - adjective [$10] an Eliot word (i. e., from readings of T. S. Eliot)
Irrefragable means 1. (of a statement, argument or person) unanswerable, indisputable; 2. (of rules, etc.) inviolable.
Sentence: That the Deficit Commission was poorly and fatally constructed by Barry is irrefragable as it was dominated by the Congressmen who are part of the problem.
Friday, November 19, 2010
Friday = Saturday
I am declaring today a holiday, or perhaps a time translation merging Friday into Saturday. Or am I influenced by intense advanced waves from Saturday that my mind now has been taken over by the state function that it will have on Saturday morning?
LOL.
In any case, my post today will simply be a link to the text of Battleship Ben's speech today in Europe (which I listened to), explaining the problems caused by nations that undervalue currencies.
http://www.federalreserve.gov/newsevents/speech/bernanke20101119a.htm
I guess Ben reads this blog. It's time for Asia nations to develop domestic demand and get off our back!
Word of the Day
"Profundity" - noun [$10]; Profound - adjective [$10]
Profound means having to showing great quality or insight.
Profundity means the state or quality of being profound.
Sentence: The immense profundity of Battleship Ben's speech today crushes his pipsqueak critics, who are shown to be simpleminded fools with no insights.
LOL.
In any case, my post today will simply be a link to the text of Battleship Ben's speech today in Europe (which I listened to), explaining the problems caused by nations that undervalue currencies.
http://www.federalreserve.gov/newsevents/speech/bernanke20101119a.htm
I guess Ben reads this blog. It's time for Asia nations to develop domestic demand and get off our back!
Word of the Day
"Profundity" - noun [$10]; Profound - adjective [$10]
Profound means having to showing great quality or insight.
Profundity means the state or quality of being profound.
Sentence: The immense profundity of Battleship Ben's speech today crushes his pipsqueak critics, who are shown to be simpleminded fools with no insights.
Wednesday, March 26, 2008
Bailout ?
The press is infatuated with that word, "bailout", and unthinkingly applies it to all sorts of actions. I wrote about the "Unreliable Media" in one of my first blog posts on February 13, 2007. My informal, long term study of the media has proven to my satisfaction that the press/media is almost always wrong on some material part of any story. Their incessant use of "bailout" in the instance of the JP Morgan takeover of Bear Stearns is another.
A reader's question was passed to me privately: Was use of taxpayer money justified in the Bear Stearns case ? Now that is quite an interesting question and is connected to my first paragraph here. Let's review the facts. I've written before about my opinion of Bear Stearns as a firm, so will used the acronym, "BS" for its name. Now first we need to examine if taxpayer money in fact was used to "bailout" BS and who at BS was "bailed out".
1. BS needed a guarantor of its counterparty trades or it would have had to file for bankrupcty to prevent a disorderly liquidation of its assets. So BS called the Fed for help in finding one.
2. JPM was the clearing firm for BS trades and had desires for some of BS businesses, plus had a fine credit rating and reputation for successful acquisitions.
3. The Fed asked JPM to look at buying BS and becoming guarantor of BS trades.
4. JPM said yes, but wanted a non-recourse loan from the Fed for the worst of BS assets.
5. Fed said fine, it would lend JPM that money on a non-recourse basis.
6. Final terms are that BS stockholders get $10/share for a stock that was worth $150/share recently, and even over $80 just a few days ago. AND BS counterparties and lenders get a JPM guaranty.
So who was saved from big losses ? The BS lenders and counterparties. Who are they ? Probably every other big bank, mutual funds, Street firm and pension funds and every other financial institution in the world. Who saved them ? J. P. Morgan bank did, in exchange for buying a firm for a low price and with the Fed non-recourse loan.
Now let's examine that loan. In substance, it appears to be a sale of assets to the Fed as they bear the losses and receive any profits, other than the first $1 billion of losses are borne by JPM. We don't know the price of those assets being "sold" to the Fed, but the impresion is the "market" price, likely the market prices as booked by BS at its end of quarter as updated. So those assets already have a big, big haircut. Blackstone will manage the assets for the Fed and will slowly liquidate them or let them run out as the underlying loans are paid or default and have realized losses. By the way, I suspect those assets are paying interest currently and the interest is a lot more than the discount rate, hence the net Asset-Fed loan is cash-flow positive. Long term reality will determine whether the Fed loses money or makes a profit net of current interest income and the Fed gets that "profit".
So what if the assets eventually lose money, i. e., realize less than the already heavily written down "market" value plus net income ? The non-recourse loan is an asset on the Fed's balance sheet and will have a writedown. How does the Fed - a bank - fund the loan ? The Fed gave a $30 billion balance to JPM as bank reserves which flow into the entire US banking system. Now all profits of the Fed are given to the US Treasury, namely, its income on that huge balance sheet of US Treasury securities the Fed holds in its role as the reserve bank of the US. [The Fed's cost of money is zero as it simply gives out dollars it creates.] So if the Fed eventually loses money on the BS asset loan, it will give less $ to the Treasury. So what happens ? The Treasury sells more T-bills to offset the loss which may in turn be bought by the Fed in its open market operations, hence the "loss" may be monetized. Or others will buy the extra T-bills issued by the Treasury, and it is funded into the US government debt which will never be paid off as the US economy continues to grow. Interest only is paid. Maybe some little bit of taxpayer money some day gets taken, likely indirectly by an infinitessimally small tax increase in the distant future. Or not if the theoretical loss is monetized.
So this is quite complex and the road to the taxpayer's pocket is quite a lengthy and winding one. Another way to look at it is the Fed will eventually monetize any losses on the BS loan.
[This is very different from the original "bailout, viz., Chrysler in the early 1980s, when the Treasury directly guaranteed Chrysler bonds. Even then, Chrysler survived and paid the bonds off and the Treasury made money on warrants it had smartly gotten as part of the package.]
Is the Fed's action justified ?
YES, this is precisely the raison d'etre of the Fed, the reason that it was created in 1913, in response to the Panic of 1907. In that panic, J. P. Morgan, Sr. led the banks to use reserves to save the US banking system with help from John D. Rockefeller. Those two individuals were the giants of the times. Congress rightly decided that the government needed to create a governmental reserve bank to act as a lender of last resort to give the US dollar and banking system more governmental backing and not need to rely on private individuals in times of crisis.
A collapse of BS would have locked up a huge amount of trades, counterparty obligations and loans on a huge swath of the US financial system in a lengthy bankruptcy process at a very fragile time. It would be incredibly stupid and really insane to let that happen now. The obligation of the Fed was to prevent it. So they did. That is their core job. Bernanke did his job correctly ... PERIOD.
Use of the word "bailout" by the press is simply wrong ... again.
PS: Suppose the Fed did nothing and BS collapsed. That would have led to huge losses in the financial system ... and huge tax writeoffs on corporate and individual tax returns ... and hence huge drop in US government tax collections. So the Fed prevented that and likely save the US government, and hence the US taxpayer, huge sums. A very profitable intervention, indeed, for the US taxpayer.
PPS: I added a bit to CVX yesterday.
Word of the Day
"Plangent" - adjective [$10]
Plangent means loud, reverberating
Sentence: The plangent speaking style of many Babblevision, Blabberg and other newscasters drive me to turn them off.
A reader's question was passed to me privately: Was use of taxpayer money justified in the Bear Stearns case ? Now that is quite an interesting question and is connected to my first paragraph here. Let's review the facts. I've written before about my opinion of Bear Stearns as a firm, so will used the acronym, "BS" for its name. Now first we need to examine if taxpayer money in fact was used to "bailout" BS and who at BS was "bailed out".
1. BS needed a guarantor of its counterparty trades or it would have had to file for bankrupcty to prevent a disorderly liquidation of its assets. So BS called the Fed for help in finding one.
2. JPM was the clearing firm for BS trades and had desires for some of BS businesses, plus had a fine credit rating and reputation for successful acquisitions.
3. The Fed asked JPM to look at buying BS and becoming guarantor of BS trades.
4. JPM said yes, but wanted a non-recourse loan from the Fed for the worst of BS assets.
5. Fed said fine, it would lend JPM that money on a non-recourse basis.
6. Final terms are that BS stockholders get $10/share for a stock that was worth $150/share recently, and even over $80 just a few days ago. AND BS counterparties and lenders get a JPM guaranty.
So who was saved from big losses ? The BS lenders and counterparties. Who are they ? Probably every other big bank, mutual funds, Street firm and pension funds and every other financial institution in the world. Who saved them ? J. P. Morgan bank did, in exchange for buying a firm for a low price and with the Fed non-recourse loan.
Now let's examine that loan. In substance, it appears to be a sale of assets to the Fed as they bear the losses and receive any profits, other than the first $1 billion of losses are borne by JPM. We don't know the price of those assets being "sold" to the Fed, but the impresion is the "market" price, likely the market prices as booked by BS at its end of quarter as updated. So those assets already have a big, big haircut. Blackstone will manage the assets for the Fed and will slowly liquidate them or let them run out as the underlying loans are paid or default and have realized losses. By the way, I suspect those assets are paying interest currently and the interest is a lot more than the discount rate, hence the net Asset-Fed loan is cash-flow positive. Long term reality will determine whether the Fed loses money or makes a profit net of current interest income and the Fed gets that "profit".
So what if the assets eventually lose money, i. e., realize less than the already heavily written down "market" value plus net income ? The non-recourse loan is an asset on the Fed's balance sheet and will have a writedown. How does the Fed - a bank - fund the loan ? The Fed gave a $30 billion balance to JPM as bank reserves which flow into the entire US banking system. Now all profits of the Fed are given to the US Treasury, namely, its income on that huge balance sheet of US Treasury securities the Fed holds in its role as the reserve bank of the US. [The Fed's cost of money is zero as it simply gives out dollars it creates.] So if the Fed eventually loses money on the BS asset loan, it will give less $ to the Treasury. So what happens ? The Treasury sells more T-bills to offset the loss which may in turn be bought by the Fed in its open market operations, hence the "loss" may be monetized. Or others will buy the extra T-bills issued by the Treasury, and it is funded into the US government debt which will never be paid off as the US economy continues to grow. Interest only is paid. Maybe some little bit of taxpayer money some day gets taken, likely indirectly by an infinitessimally small tax increase in the distant future. Or not if the theoretical loss is monetized.
So this is quite complex and the road to the taxpayer's pocket is quite a lengthy and winding one. Another way to look at it is the Fed will eventually monetize any losses on the BS loan.
[This is very different from the original "bailout, viz., Chrysler in the early 1980s, when the Treasury directly guaranteed Chrysler bonds. Even then, Chrysler survived and paid the bonds off and the Treasury made money on warrants it had smartly gotten as part of the package.]
Is the Fed's action justified ?
YES, this is precisely the raison d'etre of the Fed, the reason that it was created in 1913, in response to the Panic of 1907. In that panic, J. P. Morgan, Sr. led the banks to use reserves to save the US banking system with help from John D. Rockefeller. Those two individuals were the giants of the times. Congress rightly decided that the government needed to create a governmental reserve bank to act as a lender of last resort to give the US dollar and banking system more governmental backing and not need to rely on private individuals in times of crisis.
A collapse of BS would have locked up a huge amount of trades, counterparty obligations and loans on a huge swath of the US financial system in a lengthy bankruptcy process at a very fragile time. It would be incredibly stupid and really insane to let that happen now. The obligation of the Fed was to prevent it. So they did. That is their core job. Bernanke did his job correctly ... PERIOD.
Use of the word "bailout" by the press is simply wrong ... again.
PS: Suppose the Fed did nothing and BS collapsed. That would have led to huge losses in the financial system ... and huge tax writeoffs on corporate and individual tax returns ... and hence huge drop in US government tax collections. So the Fed prevented that and likely save the US government, and hence the US taxpayer, huge sums. A very profitable intervention, indeed, for the US taxpayer.
PPS: I added a bit to CVX yesterday.
Word of the Day
"Plangent" - adjective [$10]
Plangent means loud, reverberating
Sentence: The plangent speaking style of many Babblevision, Blabberg and other newscasters drive me to turn them off.
Wednesday, March 12, 2008
The Salvo from Battleship Ben
Battleship Ben Bernanke showed quite a bit of flexibility and aggresiveness with the Fed move yesterday to create the Term Securities Lending Facility. The size of the move was quite significant at $200 billion, which is about 25% of the monetary base of the US now usable for funding mortgage securities. That's not a niggardly application of medicine. Also, this might take some pressue off the dollar as extremely low overnight rates may not be necessary now. At this time, less dollar pressure might mean stabilization of oil prices.
My thinking is that 2% to 2.5% is a good place to stop for the overnight rate. That's plenty low enough to give lots of cash flow relief to all with adjustable rate mortgages and home equity loans. Also, I would prefer for the Fed to actually buy mortage securities outright as a permanent policy. That market is really huge, bigger than the Treasury market. Over the long term, I think unduly concentrating the Fed's balance sheet in the Treasury market has caused some distortions. A story in the WSJ says the Fed chose not to buy those outright now, as they feared distortions. And that's true as individual mortgage securities issues are relatively small. Perhaps the Fed can buy pools of mortgage securities by simply taking down some of the mortgage collateral for the TSLF when the loans mature after 28 days. That would not distort the mortgage market for individual issues.
The WSJ had a story about an explosion in FHA lending. That is good. FHA is a fine program that was neglected for years. FHA needs expansion and modernization, but even now it is helping large numbers of the "common man" get a fair mortgage loan. I remember a song from the late 1930s-early 1940s with the theme, "Will You Still be Mine" about love lasting a long time. One of the humorous lines was "When we have finally paid our FHA note". So that program giving fair fixed rate, long term loans to the "common man" has been around a long time.
Also, GOOG received approval from the EU on its Doubleclick acquisition and that closed yesterday. That's good news.
Markets
Yesterday was a huge move up reminiscent of August 13, 1982 when the Fed cut the discount rate triggering a big move up and started that great bull market from 1982 to 2000. NYSE up to down volume ratio was 9:1, which was an old Marty Zweig bullish signal. It's been distorted some due to program trading, but in my mind the coincidence with a major policy move adds to its significance. And I hear lots of skepticism. Good.
The S&P shows a double bottom formation now and is setting up a "W" bottom pattern. A grinding climb to the 1390-1400 area and two closes over that level would created a bullish bottom pattern.
I am still selling gold & silver and buying stocks. I'd like to add to GOOG now on a dip, but have a lot already. I have a lot of the banks now but would add some BAC and JPM at a good price. Also, I'd like to add to AAPL. But I'll be patient and let the beefer bears give me a good price. They are out there. A wounded bear is quite dangerous. Be patient and careful. But the news is good and can get a lot better into spring.
Words of the Day - reprise of some 'duces and one more.
[You can guess I have trouble remembering these $10 words ending in "duce"]
"Adduce" - verb, transitive [$10]
Adduce means to offer as an example, reason, or proof in discussion or analysis; alternatively, it means to cite as an instance or as proof or evidence.
Sentence: Bunkerman adduces the 9:1 up to down volume ratio that a bottom might have been set for the stock market.
"Conduce" - verb, intransitive [$10] (followed by "to")
Conduce means to lead or tend to a particular end usually desireable result: contribute.
Sentence: The Fed's TSLF conduces to more liquidity in the mortgage markets.
[This verb provides an active voice alternative to the common passive voice usage, "is conducive to"
"Congeries" - noun, plural [$10] (the "g" is soft, as in "jury")
Congeries means aggregation, collection
Sentence: Yesterday's congeries of the Fed policy move, double bottom and 9:1 up-to-down NYSE volume ratio provided strong indication that March 10 was indeed the "Spitzer Bottom".
My thinking is that 2% to 2.5% is a good place to stop for the overnight rate. That's plenty low enough to give lots of cash flow relief to all with adjustable rate mortgages and home equity loans. Also, I would prefer for the Fed to actually buy mortage securities outright as a permanent policy. That market is really huge, bigger than the Treasury market. Over the long term, I think unduly concentrating the Fed's balance sheet in the Treasury market has caused some distortions. A story in the WSJ says the Fed chose not to buy those outright now, as they feared distortions. And that's true as individual mortgage securities issues are relatively small. Perhaps the Fed can buy pools of mortgage securities by simply taking down some of the mortgage collateral for the TSLF when the loans mature after 28 days. That would not distort the mortgage market for individual issues.
The WSJ had a story about an explosion in FHA lending. That is good. FHA is a fine program that was neglected for years. FHA needs expansion and modernization, but even now it is helping large numbers of the "common man" get a fair mortgage loan. I remember a song from the late 1930s-early 1940s with the theme, "Will You Still be Mine" about love lasting a long time. One of the humorous lines was "When we have finally paid our FHA note". So that program giving fair fixed rate, long term loans to the "common man" has been around a long time.
Also, GOOG received approval from the EU on its Doubleclick acquisition and that closed yesterday. That's good news.
Markets
Yesterday was a huge move up reminiscent of August 13, 1982 when the Fed cut the discount rate triggering a big move up and started that great bull market from 1982 to 2000. NYSE up to down volume ratio was 9:1, which was an old Marty Zweig bullish signal. It's been distorted some due to program trading, but in my mind the coincidence with a major policy move adds to its significance. And I hear lots of skepticism. Good.
The S&P shows a double bottom formation now and is setting up a "W" bottom pattern. A grinding climb to the 1390-1400 area and two closes over that level would created a bullish bottom pattern.
I am still selling gold & silver and buying stocks. I'd like to add to GOOG now on a dip, but have a lot already. I have a lot of the banks now but would add some BAC and JPM at a good price. Also, I'd like to add to AAPL. But I'll be patient and let the beefer bears give me a good price. They are out there. A wounded bear is quite dangerous. Be patient and careful. But the news is good and can get a lot better into spring.
Words of the Day - reprise of some 'duces and one more.
[You can guess I have trouble remembering these $10 words ending in "duce"]
"Adduce" - verb, transitive [$10]
Adduce means to offer as an example, reason, or proof in discussion or analysis; alternatively, it means to cite as an instance or as proof or evidence.
Sentence: Bunkerman adduces the 9:1 up to down volume ratio that a bottom might have been set for the stock market.
"Conduce" - verb, intransitive [$10] (followed by "to")
Conduce means to lead or tend to a particular end usually desireable result: contribute.
Sentence: The Fed's TSLF conduces to more liquidity in the mortgage markets.
[This verb provides an active voice alternative to the common passive voice usage, "is conducive to"
"Congeries" - noun, plural [$10] (the "g" is soft, as in "jury")
Congeries means aggregation, collection
Sentence: Yesterday's congeries of the Fed policy move, double bottom and 9:1 up-to-down NYSE volume ratio provided strong indication that March 10 was indeed the "Spitzer Bottom".
Thursday, January 31, 2008
End of the End
Yesterday was the "End of the End" of the real foundation of the subprime+recession risk for the economy. "Battleship Ben" finally ended the dithering and brought his big guns to bear. The Fed rate cut to 3% in the overnight rate to bring it to the low end of the "neutral" zone, possibly even to the stimulative area as these zones aren't marked with certainty. And the statement said that the shelling will continue until risks to economic activity cease.
Fed rate cuts aren't a laser beam - continued low rates are needed over a period of time to let people obtain or save real cash from those lower rates. Refinancings and lower monthly home equity loan rates will pump huge amounts of cash into the pocket of the common man. Just like the US Navy learned in WW II on the islands, shelling of enemy positions requires extended, thorough hammering with the big 14" - 16" shells to reduce resistance. So Battleship Ben's cuts of last week and this week and the FOMC statement of continued shelling is what was needed.
That doesn't mean the beefers won't keep trying, as they did late yesterday PM. Their modus operandi is getting clearer. Short a rip and then put out rumors of more losses. They are even openly manipulating the press to create fear in operations reminscent of the 1920s. Anyone who has read that great trading book, "Reminiscences of a Stock Operator" can recognize their despicable tactics. For example, that fellow, Ackman, who runs a short pool - I'll just use the 1920s term - put out press releases to scare more people about bond insurers and to try to forestall investment in them.
These guys use double counting to get headlines. If a CDO has loans that realize losses, that's a ONE real loss. If a bond insurer insured a class of the CDO securities, there is still just ONE loss. It's just a matter of who bears it, either the actual holder of the class or the bond insurers. Press double counting is rampant - Babblevision doesn't bother checking or even asking these guys for facts before pumping our the rumors and charges. Battleship Ben mentioned the double counting in a recent speech.
If one has bothered to listen to conference calls of BAC or WB, for example, you would know that their year end marks looked through the CDO to the actual underlying loans and marked against them. Even if the bond insurance is zero , they have no significant further losses. That "fact" was both part of the company presentation and the subject of detailed analyst questions.
Also, the Fed lowering interest rates means that net interest income of these big banks is very positive and growing. That's a huge number for these banks with huge deposit bases.
So I think this is all over but the "mop up" operations. Those might take awhile and beefers might screech and more rich might panic, but the "End of the End" is here.
If the beefers knock stocks down, I'm a buyer.
Fed rate cuts aren't a laser beam - continued low rates are needed over a period of time to let people obtain or save real cash from those lower rates. Refinancings and lower monthly home equity loan rates will pump huge amounts of cash into the pocket of the common man. Just like the US Navy learned in WW II on the islands, shelling of enemy positions requires extended, thorough hammering with the big 14" - 16" shells to reduce resistance. So Battleship Ben's cuts of last week and this week and the FOMC statement of continued shelling is what was needed.
That doesn't mean the beefers won't keep trying, as they did late yesterday PM. Their modus operandi is getting clearer. Short a rip and then put out rumors of more losses. They are even openly manipulating the press to create fear in operations reminscent of the 1920s. Anyone who has read that great trading book, "Reminiscences of a Stock Operator" can recognize their despicable tactics. For example, that fellow, Ackman, who runs a short pool - I'll just use the 1920s term - put out press releases to scare more people about bond insurers and to try to forestall investment in them.
These guys use double counting to get headlines. If a CDO has loans that realize losses, that's a ONE real loss. If a bond insurer insured a class of the CDO securities, there is still just ONE loss. It's just a matter of who bears it, either the actual holder of the class or the bond insurers. Press double counting is rampant - Babblevision doesn't bother checking or even asking these guys for facts before pumping our the rumors and charges. Battleship Ben mentioned the double counting in a recent speech.
If one has bothered to listen to conference calls of BAC or WB, for example, you would know that their year end marks looked through the CDO to the actual underlying loans and marked against them. Even if the bond insurance is zero , they have no significant further losses. That "fact" was both part of the company presentation and the subject of detailed analyst questions.
Also, the Fed lowering interest rates means that net interest income of these big banks is very positive and growing. That's a huge number for these banks with huge deposit bases.
So I think this is all over but the "mop up" operations. Those might take awhile and beefers might screech and more rich might panic, but the "End of the End" is here.
If the beefers knock stocks down, I'm a buyer.
Monday, January 7, 2008
Whither Now?
I think that quite a few pundits and beefers are using a 1990-1 template for this period in the markets. At that time, the commercial real estate industry was cratering due to massive overbuilding, the high yield bond market had high defaults and regulatory changes that were devastating, and the first Persian Gulf war was causing much fear. I remember that rumors abounded over the Christmas holiday then that Citibank couldn't sell commercial paper and was in danger of failing ... and that's when the Saudi prince got such a bargain by investing in it. Persons thinking history is repeating think a recession will occur, as in fact one did in the 1990 period.
And then, belated Fed easing was "pushing on a string" as they were far behind the momentum of the economic trajectory, so their efforts took quite a long time to show any effect.
A principle I use often is that history doesn't really repeat, if makes people think it will, then changes. People notice imprecise patterns and think the entire situation will repeat, but overlook important differences. Hence they error in their conclusions.
So what errors are the recession pundits making ? First, notice that the 1990 recession was quite shallow - it almost did not occur. On my 100 year chart of GDP, it's almost imperceptible. Second, see my description above - I listed three major negative factors for 1990. Today there is only one real factor: residential housing overbuilding and consequential value weakness and defaults in weaker mortgage loans. Third, the Fed is actually "slightly" on track - not completely behind - as they did start cutting rates in September. So they are pushing to re-accelerate the economy before it actually reverses course and slows.
But they aren't doing enough and their public dallying and unclear readings on the economy are hurting their efforts. And the overnight rate is still too high. And their monetary policy is still too tight.
I calculated the growth in the monetary base for the past year - it's only 1.3%. That's very restrictive for an economy growing at a nominal rate of at least 5%. So they still have a tight money policy and overnight rates are too high compared to core inflation.
So they need to get more aggressive on cutting rates and increasing the monetary base before more negative economic momentum can develop. Or that "pushing on a string" metaphor might become true.
PS: to clear up some readers' confusion, let me post this analogy that I wrote in the comments: "another way to explain my thinking, is that based on the real interest rate level and the non-growth of the money supply, the Fed now has its foot on the brakes, causing a slowdown. They need to take the foot off the brakes and tap the gas a bit to offset their errors of the past nine months."
And then, belated Fed easing was "pushing on a string" as they were far behind the momentum of the economic trajectory, so their efforts took quite a long time to show any effect.
A principle I use often is that history doesn't really repeat, if makes people think it will, then changes. People notice imprecise patterns and think the entire situation will repeat, but overlook important differences. Hence they error in their conclusions.
So what errors are the recession pundits making ? First, notice that the 1990 recession was quite shallow - it almost did not occur. On my 100 year chart of GDP, it's almost imperceptible. Second, see my description above - I listed three major negative factors for 1990. Today there is only one real factor: residential housing overbuilding and consequential value weakness and defaults in weaker mortgage loans. Third, the Fed is actually "slightly" on track - not completely behind - as they did start cutting rates in September. So they are pushing to re-accelerate the economy before it actually reverses course and slows.
But they aren't doing enough and their public dallying and unclear readings on the economy are hurting their efforts. And the overnight rate is still too high. And their monetary policy is still too tight.
I calculated the growth in the monetary base for the past year - it's only 1.3%. That's very restrictive for an economy growing at a nominal rate of at least 5%. So they still have a tight money policy and overnight rates are too high compared to core inflation.
So they need to get more aggressive on cutting rates and increasing the monetary base before more negative economic momentum can develop. Or that "pushing on a string" metaphor might become true.
PS: to clear up some readers' confusion, let me post this analogy that I wrote in the comments: "another way to explain my thinking, is that based on the real interest rate level and the non-growth of the money supply, the Fed now has its foot on the brakes, causing a slowdown. They need to take the foot off the brakes and tap the gas a bit to offset their errors of the past nine months."
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