Time to Warm Up The Helicopters?
A few items worth passing along this morning: The "contained" housing slowdown, and the "contained" subprime issue have now blown up hedge funds in the US, Australia, England, Germany, and France.
Deals for funding, stocks buybacks are now getting hit, as funding dries up for KKR, Home Depot, Cerebus/Chrysler, etc. The SEC is combing the books of Merrill Lynch and Goldman Sachs, looking to see how accurately the CDOs are priced on their books.
Speaking of intervention, the ECB got the choppers out yesterday, airdropping 94.8 billion in Euros onto the continent. The Federal Reserve announced they are "providing liquidity to facilitate the orderly functioning of financial markets."
Overnight, Fed Funds Rate had spiked towards 6%, and now after the 2 liquidity injections, are back to the 5.25% overnight lending rate that is the Fed's target. Rumor has it that the recent ECB & US Fed injections are now bigger than GDP of Argentina!
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A survey from the WSJ found almost half -- 44% -- of respondents want a rate cut. (So much for free market economics!)
Are people truly that naive? Do they not understand what rate cuts will do the U.S.Dollar?
Then there is the concept of Moral Hazard. I am int he camp of WIlliam Poole, who has stated that speculators in these markets need to absorb their losses themselves. A rate cut that causes inflation is essentially a "cruelest tax increase."
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Sources:
Fed Issues Statement as It Moves To Reassure Jittery Markets
DAVID WESSEL, JOELLEN PERRY, MONICA HOUSTON-WAESCH AND GREG IP
WSJ, August 10, 2007 11:10 a.m.
http://online.wsj.com/article/SB118673195378094167.html
Friday, August 10, 2007 | 11:29 AM | Permalink
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» Helicopter Drop from The Big Picture
Amusing cartoon, via Jim Sinclair: What's so amazing about this is the following: When the inter-bank rate, set by the open market (but based on the Fed Funds Rate) surges 75 basis points above that Fed Funds Rate, what else can the Fed do but warm up ... [Read More]
Tracked on Aug 12, 2007 9:51:31 AM
Comments
"Are people truly that naive? Do they not understand what rate cuts will do the U.S.Dollar?"
Yup. People are that naive. I hope Ben isn't....
Posted by: Tom B | Aug 10, 2007 11:56:53 AM
Who would have thought Zimbabwe economics would catch on so fast? Or is it Weimer Republic economics?
Like a bunch of skullers in a sinking vessel: Print, print, print....
Posted by: Winston Munn | Aug 10, 2007 11:57:16 AM
Bigtime agree on the "moral hazard" argument. Cramer's rant just made me think: you guys got yourselves into this mess, you guys make the massive, exhorbitant wages, you guys bit the bullet and take the consequences.
Posted by: John Koetsier | Aug 10, 2007 11:57:36 AM
Barry...perhaps the dollar has already discounted a fed cut.
The global coordinated "cut" also reduces the risk you suggest.
I think the fed cut/dollar crash is concensus, and overcooked.
Posted by: Fred | Aug 10, 2007 12:04:00 PM
"So much for free market economics!"
Free markets are good for someone else - like the people who clean up the offices on Wall Street. For TPB, not so much.
Posted by: F. Frederson | Aug 10, 2007 12:05:23 PM
Completely agree. Irrational risk takers need to take their lumps.
Too bad so many of them will keep their bonuses and salary for years of irresponsible, negligent or criminal behavior. They should become bag holders like their shareholders.
Posted by: wunsacon | Aug 10, 2007 12:06:34 PM
A rate cut that causes inflation is essentially a "cruelest tax increase."
Hello! The Fed's job is always and everywhere inflation creation. The system "systematically" makes the great majority of people poorer while enriching the few. Without the Fed and with a truly free market monetary system, prices would slowly decline over time, improving the standard of living of everyone.
Posted by: Mike M | Aug 10, 2007 12:07:18 PM
More money only means more inflation. A rate cut would be disastrous for the economy long term.
Posted by: Josh | Aug 10, 2007 12:10:18 PM
Amen Barry on all your points. $35 Billion in repo actions today with all of it being in MBS paper should do nothing to calm anyone's nerves except the speculators who gamed the system to make hundreds of billions of dollars. Market efficiency is out the window, and has been for quite awhile. The elites will once again be saved while the little guy who took it in the shorts with these exotic mortgages will be wiped out. PATHETIC!
Posted by: SPECTRE of Deflation | Aug 10, 2007 12:10:38 PM
Regardless of either outcome. This system is dying. Its unsafe and unstable. At some point the public will figure out and want change. Is anyone suprised that precious metals are up today? Maybe thats because there are trillions more dollars at work?
Posted by: Shrek | Aug 10, 2007 12:10:43 PM
reposted from the other thread as it's sort of relevant here:
The biggest threat to cash is the brokers insistence (ala Morgan this morning) calling for a rate cut THIS month.
If that is allowed to happen I cannot imagine what message other countries will take from that---I know what they will do (and most of you do as well) but how do you sell that many dollars and bonds at the same time???
That's panic.......right after the euphoria induced melt-up it will cause here.
Ciao
MS
Posted by: michael schumacher | Aug 10, 2007 12:13:47 PM
i get surprised when people expect justice from our system.
i accept that justice will never exist in any system created by humans.
things are always done by administration with short term in mind. For now....the most important thing is the next presidential election.
I do not think governments care about inflation as long as they dont have to pay for it....i think they may even not care if they have to pay for it....since its paid with borrowed money, not like they are going to cut their other spendings.
current government all over the world do not want the economic growth party to stop.....and they will inflate things 50% if that will help things look positive.
Posted by: techy2468 | Aug 10, 2007 12:13:56 PM
Just a reminder to send Alan Greenspan his "Thank You" cards for this delightful mess...
Posted by: Josh | Aug 10, 2007 12:14:41 PM
A coordinated worldwide rate cut? What will Japan cut to? ;)
Posted by: Idaho_Spud | Aug 10, 2007 12:20:28 PM
I think Marc Faber is right, and we are going to go into an inflationary spiral with a recession to boot.
http://www.gloomboomdoom.com/subscribers/download/051009.pdf
Posted by: M.Z. Forrest | Aug 10, 2007 12:25:20 PM
lets say we are the US administration, and we want people to be employed, we dont want economy to tank and we dont want people to lose their homes (which they are not able to afford).
if we cut the interest rate all the way to say 1% or 2%, USD is going to tank, which means nobody will like USD as a World's reserve currency, means in future we may have to pay with stuff instead of USD for stuff we import.
but Oil producers are going to just dump USD for trading, unless we let them raise the price of oil as per the decline in dollar (very simple to do since most oil operations involve us oil companies, and us oil companies are very good friends of administration).
the other problem with 1% rate, is inflation......not a problem of current administration....that a problem for future administration....most likely a opposition party....whom we are going to setup for a failure.
so in summary...cut the rate and let things inflate....let the dollar tank. and the party goes on....... am i wrong? i am sure there are more variables than i can fathom, please correct me?
Posted by: techy2468 | Aug 10, 2007 12:25:26 PM
Its 12:30 pm. Fire at will for the plunge protection team.
Posted by: Bluzer | Aug 10, 2007 12:28:10 PM
Watch out -- short squeeze on the markets right NOW
Posted by: anon | Aug 10, 2007 12:28:41 PM
The longer you let the snowball roll down hill or, in fact, encourage it, the bigger the impact when it finally hits something.
Posted by: AD | Aug 10, 2007 12:28:59 PM
It's being done right now despite an official rate cut. Fed rates spiked at 6 overnight.....it took that $35 billion in cash to settle them back to 5.25. If that's not a rate cut.......
walks like a duck, looks like a duck.....]
it's a duck.
Ciao
MS
Posted by: michael schumacher | Aug 10, 2007 12:29:20 PM
This desire for a rate cut comes on top of the fact that many petro-dollar countries and emerging market countries that hold a significant amount of US debt already have negative real interest rates (inflation > central bank lending rates)!
When things start to re-adjust, no matter of intervention may be able to help.
Posted by: W.Edwards | Aug 10, 2007 12:33:26 PM
Damn short squeeeeezzzeeee... Let's see if it holds.
Posted by: radelow | Aug 10, 2007 12:33:55 PM
What the heck is the Fed doing taking in MBS paper? Do you think the $16B they took in was the high-quality stuff? Who's on the hook for the toxic loans it undoubtably holds?
I had no idea they could do that.
Posted by: gn | Aug 10, 2007 12:38:42 PM
These are repo's. To the best of my knowledge they buy them from the bank short term (aka days or weeks) and then the bank has to buy them back. Basically it is just short term funds to the market.
Am I right on this?
Posted by: radelow | Aug 10, 2007 12:41:29 PM
ultimately in this cycle (whenever it ends), I believe that it will be the sovereign wealth funds that buy at the top of the market.
the central bank liquidity + sovereign wealth fund money that finally sees some "value" in global equities will support this market like in 1998....we'll have a genuine blow-off top come next year (fortuitiously around the summer olympics?).
of course this can be totally wrong...my little black box says that it's ok to hold over the weekend...hahaha.
good luck everyone.
Posted by: johntron | Aug 10, 2007 12:42:23 PM
