Quote of the Day: Liquidity Trap
Is the Fed out of bullets? I wonder:
"When an asset like real estate becomes overvalued, even if you drop interest rates to zero, you can't force consumers to borrow more, because they've already borrowed too much. Nor can you force lenders to lend, because they're already puking on 'bad paper.' It's called a liquidity trap."
-Bob Campbell, San Diego Real Estate Timing
via Fleck
>
Even more proof ? Consider this article, variations of which have been in the media the past few days: Fed Interest-Rate Cuts Fail to Lower Borrowing Costs:
"The Federal Reserve's interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.
Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines."
Bill King noted a similar story on ABC News:
"[Monday] night, the lead story on ABC evening news (World News) was ‘though the Fed has cut interest rates sharply in recent weeks, banks and credit card companies are hiking rates on consumers.’
Chase, Bank One and Bank of American were cited. The ABC News reporter said banks are hiking consumer interest rates and fees to cover losses on their crappy paper.
Yes, it’s that blatant and transparent.
>
Lovely. We get all of the wonderful inflationary effects of rate cuts -- but none of the economic benefits.
Can you say "The Fed is pushing on a string?"
(Very good children. I knew you could)
>
Sources:
Housing mess too big for a quick fix
Bill Fleckenstein
Contrarian Chronicles2/11/2008 12:01 AM ET
http://tinyurl.com/yqabfs
Fed Interest-Rate Cuts Fail to Lower Borrowing Costs
Scott Lanman
Bloomberg, Feb. 13, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_c9_tQiZOLo&
Thursday, February 14, 2008 | 11:30 AM | Permalink
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Comments
Let's not forget that the banks still have $150bln in leveraged loans (floating) that they are forced to knock doen in price each time the fed cuts. 125bps in 10 days was no favor. Paper is soon to be marked at 85 cents...soon to be worth much less.
Posted by: shoeless | Feb 14, 2008 11:43:20 AM
" The Fed is pushing on a string "
" The threads of misconclusions are woven into the fabric of our lives "
Posted by: Ross | Feb 14, 2008 11:44:16 AM
"The latest concern is paralysis in the $250bn US market for auction-rate securities (ARS), which fund state governments. A series of deals has failed over the past two weeks. The risk is a slide in ARS prices along the lines of the mortgage debacle, leaving banks with yet another chunk of losses."
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/13/cnusa113.xml
Just another example of containment...
Ciao
MS
Posted by: michael schumacher | Feb 14, 2008 11:51:11 AM
I discussed this Barry yesterday:
http://www.urbandigs.com/2008/02/credit_spreads_widen_ignoring.html
with all stimulus + rate cuts, here is what I see:
a) corporate spreads WIDENING: IG & HY
b) CDX Index shows this
c) Failed auctions show liquidity strained; risk aversion
d) CMBX indices cliff diving
Even Yellen acknowledged that rate cuts were meant to ease spreads, and it has not worked. Only LIBOR eased as a result of targeted liquidity injections to banks.
Posted by: UrbanDigs | Feb 14, 2008 11:54:24 AM
You now have one trading day left in the week and we've already thrown over $90 billion to the banks in T.A.F and repo's
IN LESS THAN ONE WEEK
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm
Still think the housing problem is over??
Guaranteed it goes over $100 billion by tomorrow.
Contained my ass.
Ciao
MS
Posted by: michael schumacher | Feb 14, 2008 12:08:52 PM
Wow, everything looks so worrisome today...
Probably a good day for an afternoon short squeeze.
Posted by: Vermont Trader.. | Feb 14, 2008 12:13:57 PM
you know, the more I think about this, I just dont see how they will allow the bond insurers to purely get downgraded without some escape plan first.
Some free market capitalist world we live in. Where is Kudlow when you need him. But he only likes free markets when it lets stocks go up. If it would mean stocks go down, he's all for intervention.
I agree that muni markets shouldnt be disrupted, but seriously, these insurers are not AAA, and its a complete farce that there is collusion to delay ratings being changed for a bailout to be setup first.
Posted by: UrbanDigs | Feb 14, 2008 12:16:52 PM
all solutions involve taxpayer-funded government bailouts of Wall St fat-cats. i love it. heads i win, tails you lose. this is the best of all systems.
Posted by: scorpio | Feb 14, 2008 12:18:18 PM
how about downgrading the mono's tomorrow after the close. That scenario is slowly setting itself up.
Remember what happened that last time we had a holiday.....not saying we are going to free fall however with the short attention span that passes for fundamental analysis these days it will be totally forgotten by Tuesday.
Seriously we have so many conflicts of interest just being allowed to occur I shudder to think what is in store for us when the machine can't be counted on to prop up markets any longer. That they've managed it this long is a direct result of cheap easy money and absolutely no understanding of risk management. How anyone could willingly hand over money to a system that "never saw any of this coming" is just comical.
Liquidity is not the real issue here.....
Solvency is.
Ciao
MS
Posted by: michael schumacher | Feb 14, 2008 12:25:31 PM
Wow, we're already at the pushing-on-a-string meme?
Posted by: Estragon | Feb 14, 2008 12:30:09 PM
MS,
The ARS market is about to hammer my little highly-leveraged county--rates on its floating bonds shot from 3% to 10% from one month to the next.
http://www.al.com/news/birminghamnews/index.ssf?/base/news/1202894183182130.xml&coll=2
Kind of like a subprime option/ARM borrower facing a reset, I wonder if we can jingle mail the keys to the county's bondholders...
Posted by: Don | Feb 14, 2008 12:30:10 PM
I agree with you MS..its why Im long SKF and EEV..but they CANT allow the markets to fall and correct themselves. They did after dot com bubble and I got killed because I believed the reports of the companies I bet on; and proven later that those reports were lies and revised.
Damage done. I got no bailout though and learned the hard way with hundreds of thousands lost. But this time, its housing that is fueling and financial securities along the line of fire. We need to get wrecked and they are throwing anything they can think of to prevent this, and that is going to come back and haunt us
Posted by: UrbanDigs | Feb 14, 2008 12:31:42 PM
Barry,
The soultion is pretty easy. Simply force consumers to borrow more.
Have the Federal gov't send every American a check for $90,000 (each Americans share of the national debt). Then each month bill them $568/month (6.5% @30 yrs) to pay it back.
Americans would spend the $90,000 on all sorts of things, boats, cars, you name it. It would give the economy a huge boost.
Some people would recogonize their responsibility and pay back their gov't grant....errr...I mean loan.
Unfortunately, others wouldn't. We'd throw those people in jail or a work house after a year of non-payment. (We'd have to build a whole chain of debtors prisions and work houses to accomodate a few million Americans.) Heck, we could fence off Rhode Island and ship them in. Let those debtors fend for themselves.
As for the the loans that aren't paid back, but still on the books, we simply transfer them to the Social Security Trust fund as an asset for future generations to collect. (In the future, we will have new technology that will allow us to collect from those deadbeats trapped in New Rhode Island.)
Since time is of the essence, I will present my plan to the President by the end of the month.
Posted by: Christopher Laudani | Feb 14, 2008 12:46:16 PM
What MS said. 12:25. It IS a solvency problem. What's on YOUR balance sheet?
If I kept my books like the banks and the Gov. I'd be in prison!
Posted by: Ross | Feb 14, 2008 12:49:13 PM
CL said:
"(We'd have to build a whole chain of debtors prisions and work houses to accomodate a few million Americans.) Heck, we could fence off Rhode Island and ship them in."
Forget RI. You misunderestimate human nature. We'd better start fencing off Texas.
Oh wait....
Posted by: deflator mouse | Feb 14, 2008 1:02:15 PM
lol, and I was still laughing about "No soup for you!"
Posted by: Moe Gamble | Feb 14, 2008 1:08:06 PM
we are just slowly paying for the bullshit intervention that allowed us to "rally" off of October lows in 2002.
In reality we never should have come out of the problems of the .com bust. But cheap easy money solves all until it can't any longer. Add in the fact that you had to fund a coming war (that was always going to last years instead of ONE YEAR) and get people to support it.....open the floodgates of credit, create the psychology of spending to defeat "terists" and guess what?
The last piece of this puzzle is the creation of the auctions at Treas. dept. in........wait for it...
October 2002. You see they just had this great idea to auction off "excess tax receipts" to any willing bidder. Fast forward to the present and we still have "auctions" of tax receipts. With a huge deficit how this can still be believed is just ridiculous.
Oh and that 5$ trillion spent in Iraq??....I bet that would come in handy right about now.
Ciao
MS
Posted by: michael schumacher | Feb 14, 2008 1:09:19 PM
The longer the monolines go without a credit downgrade, the more likely they can attract additional capital and survive somewhat intact. Maybe that is why Ackman talking his book so much, and unleashing Charlie Gasparino to stir up the masses.
Posted by: kk | Feb 14, 2008 1:15:33 PM
KK-
Ackman has been talking about this problem for over 5 years. Do a little research before you accuse someone of "talking his book". but it's ok to talk financials without any regard to fundamentals at all, or housing recovery without any analysis other than "fed model, blah, cash flows, blah."
They have been without clothes for longer than you realize. Buffet showed this to the masses for the first time but it is hardly anything new.
But I see how short sellers have single-minded agenda's.....that a long position doesn't have.......
caveat: short MBI from upper 50's
Ciao
MS
Posted by: michael schumacher | Feb 14, 2008 1:26:38 PM
drip drip drip drip
Posted by: Stuart | Feb 14, 2008 1:59:52 PM
Now I know we are near the bottom of the housing cycle when someone (The San Diego guy) feels free to say that zero rates wouldn't help. Let us drop mortgage rates to only three percent and see what happens.
Posted by: Norman | Feb 14, 2008 2:12:54 PM
Out of bullets? Depends on what the Fed wants to shoot. If they want to avoid a recession, than probably yes; but if they want to recapitalize the banks then no, all they have to do is keep the FedFunds below 5-10y Treasury Notes and they will help banks repair balance sheets.
Posted by: Richard Leite | Feb 14, 2008 2:14:33 PM
here is a small, but by example, significant solution to the liquidity trap and "pushing on a string"
the fed, thru an appropriate agency should lend money, directly to students who need a loan to attend a trade school, community or 4 year college.
why should students and their families pay the arbitrage from which the student loan companies profit virtually risk free?
that's right, they have recourse to default thru government guarantees AND get a percentage if collection takes place there after.
this might be a good investment for social security surplus money since social security is an inter-generational committment.
after all if we are going to let foreign sovereign wealth funds buy into banks etc why shouldn't our government invest a little of the taxpayers money in the future of our students.
Posted by: mock turtle | Feb 14, 2008 2:43:26 PM
MS, Ackman is in fact talking his book more than ever, maybe because he senses it is quickly coming to a point of now or never for his thesis to work. He needs for current holders to distribute their stock, but they seem to be digging in. The more time that passes, the more the markets realize that the monolines potential claims are long tail in nature, and many of the numbers thrown out as probable losses now seem like quite a stretch.
Buffett's offer tells us nothing that the market didn't already know. Solid business, profitable, low risk, what is not to like about that? As always, he wants to buy good assets at a big fat discount, hoping that a monoline is desperate enough to take him up on his offer. Of course they won't bite because without the muni business, they become vulnerable. LOL...cash flows, fed models, blah blah, your right, maybe I need to switch my long term process to include sentiment, momentum, and other indicators. I never bought into paying up to buy certainty, maybe I'll change my ways.
Posted by: kk | Feb 14, 2008 2:44:52 PM
Norman:
You have missed the boat - by a couple of days, it looks like.
I have a deal for you: I'll sell you my 4 year old Honda Accord for $42K/0 interest/6 year note. When will you accept delivery?
Posted by: Marcus Aurelius | Feb 14, 2008 2:46:18 PM
