Gross, Rosenberg on the Fed and Rates
Submitted by
CalculatedRisk on Tue, 09/18/2007 - 4:29pm (129 comments)
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Make my day Benny
Pretty good article here about why they went with 50bp instead of 25.
Gold Price Chart, 1980 - What Happened to Gold in 1980?
Can't believe it has come to this. The real Chairman of the Federal Reserve Jim Cramer & his pigmen buddies are now making the rules:
He believes this 50-basis-point cut is the first of several cuts. "I see three more rate cuts," Cramer said. Therefore, he doesn't want investors to sell when they hear that the rate cut doesn't matter. Maybe the housing industry won't turn on this cut, but it should in three more cuts, he said.
The Fed is now an impotent instrument destined for the Herbert Hoover dustbin of economic history. Now excuse me while I go purchase some Street.com subscriptions to get some inside skinny on the next rate cut.
3.75 sounds about right, give or take.
Gross has been advocating the inevitability of a rate cut for months while the Fed has been touting the health of the economy. Gross 1, Fed 0. His advice to move investments overseas has also been correct.
Clyde, It's amusing. Bill Poole was correct - no inter-meeting fed funds rate cut - and Cramer claims he was correct. Weird.
Steve, clearly the Fed thinks there is a strong chance of a recession now. The worst thing that could happen now is a pick up in measured inflation - what does the Fed do then? BTW, Malpass (quoted in the article) has consistently been wrong - just a couple of months ago Malpass was calling for rates hikes because of strong GDP growth in the 2nd half of '07.
Rosenberg makes a good point:
David Rosenberg, chief economist at Merrill Lynch, said it was hard to combat a deflating credit and asset bubble. He said that while markets soared when the Fed cut rates by 50 basis points in January 2001, they soon fell back.
Best to all.
What does the FED do when inflation heats up. Flipflop? Or does B. expect to be out of the hotseat by then?
touche,
You are right about Gross' call. He must be feeling pretty good about this. When the Fed was raising rate, his track track record had been terrible.
I wonder whether this 50 bps decrease will unleash inflationary forces that will cause the bond market to sell off. The disconnect between gold, oil and bonds is baffling to me.
International is indeed where the ROI is.
The Fed is guarding against the recession outcome, said David Malpass, chief economist at Bear Stearns. He said the move would shore up business confidence and reduce the risk of a pull-back in investment.
Steve,
All the Fed can really do in the end is encourage people to borrow more money. Given that all our current problems now appear to be related to excessive borrowing, it's difficult for me to understand how further borrowing helps.
Again, I can't help but thinking that we're not avoiding recessions - we're merely postponing them all to some point in the future.
Isn't that what borrowing is?
I suppose it might make me feel better if this borrowed money was being used for investment instead of speculation, but that doesn't appear to be the case. Every dime appears to get hoovered into leveraging futures, stocks, or bonds.
If the speculation continues unabated I believe the prospects for the US economy over the next decade are grim.
Have to side with ac against Steve and see this pretty much like The Nabob:
The Nattering Naybob Chronicles
Steve, I checked Rosenberg's comments - and added it to the post. When the Fed cut in Jan '01 (50bps) the markets rallied 5.6% - only to lose 20% over the next couple of months. Not that history will repeat.
Best Wishes.
Quick fix America is going to hell in a handbasket.
You had better be rich or making a min of $150K/yr or you will be feeling pain for yrs to come.
Again, I can't help but thinking that we're not avoiding recessions - we're merely postponing them all to some point in the future.
Is that the ac definition of a depression: several recessions at once?
If the speculation continues unabated I believe the prospects for the US economy over the next decade are grim.
That's why I was rooting for a hold, and hoping for a .25pt raise. A big economy can't survive on financial services. NYC and CT - yes, but not the whole country. I want to see the financialization of everything to stop. Bernanke disappointed me big-time.
Well, time to find some overseas funds to park my money in.
David Rosenberg, chief economist at Merrill Lynch, said it was hard to combat a deflating credit and asset bubble. He said that while markets soared when the Fed cut rates by 50 basis points in January 2001, they soon fell back.
I doubt there's any reflating housing or the related asset-backed securities. But most commodities and equities are at or near new highs - there is no "reflation" here, just a continuation of an existing bubble. Vast amounts of paper wealth and stimulation to production can be created in very short order.
I think the commodity speculation in particular poses a serious danger of creating oversupply similar to the current housing glut. Commodity producing countries saw unemployment rates close to 30% during the Depression.
We may look back one day and think how much better off we would have been if the Fed had waited just a few more weeks before cutting rates.
David Rosenberg, chief economist at Merrill Lynch, said it was hard to combat a deflating credit and asset bubble. He said that while markets soared when the Fed cut rates by 50 basis points in January 2001, they soon fell back.
While this is true, a notable difference in Jan 2001 was the valuation level of the equity markets, particularly the NASDAQ, just two examples, both INTC and CSCO were both higher in Jan 2001 than they are today and their earnings are better today than they were then.
It's not that I don't think we have some bottom testing to do or that we may even establish new lows in the next few months, its just that I think there's a bit of difference between the equity market of Jan 2001 and the one we have today. Now, if Merrill tells us they are cutting forward earnings estimates by 30-50%, I'll withdraw this comment.
David Rosenberg, chief economist at Merrill Lynch, said it was hard to combat a deflating credit and asset bubble. He said that while markets soared when the Fed cut rates by 50 basis points in January 2001, they soon fell back.
Oh, and BTW that's my entire criticism of the Fed here - they had the OPPORTUNITY TO DEFLATE other bubbles besides housing, but they DID NOT. These bubbles are alive and well (so far).
This is different from January 2001 when the bubble had decisively burst months ago...
Except for the incipient housing bubble. And we know how that turned out.
The bubble is turning into high inflation. And some guys wants to inflate again. Gross save his eggs at 3.75% and you'll see him pop up the champagne, but real problems will begin.
Before this one is over, if the Fed does not change course, we may all pay the penultimate penalty of having walked down the path toward hyper-inflation. The sheer arrogance of the Fed may not be in question today, especially by a gleeful US Stock Market smelling "bail out" for the insider cronies; but in a different reality, that of a burgeoning currency crisis six months down the road, with Fed credibility shot, the situation may have a much darker complexion. At that point, there may be little in which to rejoice.
Personally, I had hoped that the new Fed Chair would be a man of greater character, and that much of the negative press associated with his prior academic writings was perhaps exaggerated. The action today resonates as being even more poorly thought out than Mr. Greenspans bathtub ruminations on Adjustable Rate Mortgages and more likely than not, serves as notice to one and all that we may be embarking on yet another new and grand Fed experiment; one in which we will all get to find out how many times an hour the price of coffee and T-Shirts can change value.
Market Observation - Tim W. Wood 12.04.2009
Slam
I sort of have this idea that the major players are going to slowly over time, bit by bit, reveal the total scope of their losses and along the way, working with the Fed and their allies in congress and the administration, generate the trading profits that offset the bulk of those losses. I mean, I can't think of any other way you could use stealth to manage your way out of an insolvent situation, if it is as they say, not a liquidity crisis, but a matter of insolvency.
I for one want to know what the Fed sees that, in their opinion, warrants 50 bps cut to the target rate as well as the discount rate. With oil this high, gold this high, the dollar this low, they must be aware of something else behind the financial curtains that persuaded them not to opt for just 25 bps cuts.
Hey Gross said there is no Bernanke Put - he held out a whole 25-30 days.
Stuart, my speculation is that some major players are in very serious trouble and its all hush hush. If it became public knowledge, then the crisis in confidence that plagued Northern Rock would spread like wildfire. A rocketing stock market might tend to allay some public fears long enough for the master magicians to see if there's another rabbit in the hat.
the markets rallied 5.6% - only to lose 20%
i think i lost something like 186k that day....
The rate cuts were expected. Just look at the backdrop of folks lining up outside Northern Rock.
The credit bubble has been pierced - we don't know what the fall out would look like. Lower short term rates would no doubt be helpful but would that help the solvency problem. Would CDOs now trade at par?
The whole system has a bias towards inflation and leverage. Accounting standards allow financial institutions to mark assets to models as well as "make believe". Does anyone know what the "worth" of all those "Other Assets" on the balance sheet of a Goldman or JPM or Citi are? The last time when there was much less financial leverage the Fed dropped from 6% to 1%. Japan is still at 0.5%. Are investors who took it on the chin in the Bear funds ready to speculate again just because of a 50bps drop in the Fed rates? Are they ready to buy asset backed derivatives to the tune of $trillions once again?
I believe we have just begun the unraveling of the credit bubble. The foundations of the credit edifice looked very shaky on a global basis - that's why central banks have been pumping liquidity. No one wants to see Northern Rock's in every major economy. The central banks want inflation and a reinflating credit mechanism. Will they succeed? Eventually yes in all likelihood but is it a slam dunk in the short term? Doubtful IMO.
Bobby,
I suspect you are right - maybe tied to an already rapidly dropping velocity of money - when the economy is utterly dependent on accelerating credit growth and rapid turnover.
I am very confused. I see most if not all commodities moving higher. And yet no response. I guess this is a Keynesian approach - worry about the short term and the longterm will work itself out.
When was the last time these folks: bought a doz. eggs, a loaf of bread, a tank full of gas, a meter of electrical cable, an airplane ticket, rented a car, sent a pkg by FedEx.
I agree wages have up until now been very tame but this will change.
In short, if you're an American under 30 - 35yrs and not already financially well off then...well...then...you are fucked paying off BIGTIME debt USA for decades to come.
When was the last time these folks:
bought a doz. eggs = Probably Aug, 1999
a loaf of bread = Yesterday
a tank full of gas = Last Week (forgot the day)
a meter of electrical cable = March 1986
an airplane ticket = June 2000
rented a car = June 2000
sent a pkg by FedEx = July 2006
The bright side is that nobody will care to quote US$/bbl of oil because it will now be Cdn$/bbl of oil.
Canadian dollar zooms. They got oil, wheat, raw resources, and gold.
Always look on the bright side of life!
I've been wondering how much of the saber rattling with Iran has to do with them denominating their oil sales outside the dollar. I mean, after all, according to AG, the needs of the financial system and global economy were/should have been the reason for going to war with Iraq.
IMHO
The fed saw something so bad that they went the 50. But it does not mean they will do more.
Gotta say with bank runs and general panic, I was about to get the popcorn out. Now I will wait awhile.
OTOH, if employment stays up, the wife and I can continue to consume.
House approves bill helping mortgage borrowers(marketwatch.com)
The bill eliminates down payment requirements on FHA loans. The requirement is currently 3%.
Lawmakers also passed an amendment to the bill offered by Frank that would raise the agency's loan limit from its current $417,000 to as much as $729,750.
Inflation is better than unemployment.
And hyperinflation? Please.
Forgot to provide the link
House passes bill aimed at helping mortgage borrowers - MarketWatch
Wow. From all the post-announcement comments it looks like everyone is expecting inflation. Am I the only deflationist left?
Today's rally was a gift from Ben. It let smart money unload their positions at an attractive level, and the bears load up on the ultrashorts. Thank you Ben!
I still think we are in a secular deflation...and I've thought the Fed was at least a point too high for the last year.
The problem is the damn ECB has kept their rates too high (and it has just screwed their growth rates to hell).
Are there ETFs that invest in BOE bonds?
Thanks.
I want to see the House help mortgage borrowers by reducing 30 year fixed rate mortgages to 3%-4%.
This is a sure way to get the housing market back on track.
Hazard,
I have a 5% fixed for 30 years. Yeah, I'd love to have a 3% mortgage...assuming I still have a job.
All that stuff is resetting now and the only way the Fed would help borrowers is to lower rates 300-400 bps back to where rates where when those mortgages were originated--we all know that ain't happening. Even if it did, credit and documentation standards are dramatically tightened.
At the end of the day, all that stuff is going to reset anyway and a weak dollar is going to send commodity prices higher. I think the Fed just manufactured a new problem to deal with.
The only glimmer of hope that I really see is the Fed Funds rate was ~5% going into this, below the target rate. So, if the Fed had only lowered the target rate 25 bps, it would have maintained the status quo. By lowering the target rate 50 bps, it basically gave us a 25 bps cut from where the target rate was pre-target rate cut.
The only way to get housing back on track is to raise pay by 50% or cut prices by 50%. A 1/2 percent rate cut, even if reflected in mortgage rates, does nothing.
AZ,
Some of us see a race between the asset bubble and the printing press...not sure which is tortoise and which is hare!
Hazard,
That won't fill the bill in the coastal markets (or NV or AZ or or or the other places that had the biggest runups in HPA).
Gee, I would have sworn AG said something about keeping Saddam from being in a position to cut off the flow of oil from the Middle East.
That's why I was rooting for a hold, and hoping for a .25pt raise. A big economy can't survive on financial services. NYC and CT - yes, but not the whole country. I want to see the financialization of everything to stop.
Never fear - if the dollar sinks BELIEVE me people will be working in non-fiancials... they will be making great money IN DOLLARS too... Of course those dollars will be worth a lot less compared to say a barrel of oil... but a weak dollar puts US mfg & farming assets pedal to the metal. Chug chug, clunk clunk.
I've seen that trick before in my 30 plus years of factory life.
Well, its either raise income by 50% or so or else drop the mortgage rates by that amount.
Assuming, of course, the intent is to keep the housing market going on at a 2005 pace.
The problem is the damn ECB has kept their rates too high (and it has just screwed their growth rates to hell).
There is a cure for that - dial up BB. Rates down, euro weaker... wooohooo, who's next [looking toward Japan]...
I'am european and the problem is not coming from the ECB we are at 4% it's not that high, plz stop inflate the world thx.
Actually, I did think that perhaps the Fed decided to call Cramer's bluff. He and his kronies have been preying and preying for a rate cut to solve all the problems for weeks.
If this rate cut turns into a total disaster thats the end of the second guessing.
The bill eliminates down payment requirements on FHA loans. The requirement is currently 3%.
The problem is the solution?
Sounds like a good plan to me.
Does anyone know (or know where to find out) how US banks performed on a P/B basis during the late-70s inflation?
It's 3:51am in London and I'm having trouble thinking through from first principles the trade-off for banks of having their assets eaten by inflation while making money on a wide spread.
AG on The Daily Show tonight
"I'am european and the problem is not coming from the ECB we are at 4% it's not that high, plz stop inflate the world thx."
Dumping the dollar as a reserve currency would fix that maybe you need to talk to your bank.
The problem I see is not that they lowered by 50 this time. It is that they'll lose all credibility if inflation roars back next month and they're forced to raise it back. This way, the Fed would look very incompetent and would lose credibility.
So next time, in order not look silly, it has to choose between staying put, or lower. It can't easily raise back again.
USD/CAD = 1.01
Yaaaay!
I don't think the dollar can sink in isolation: we're too global now. If the dollar tanks, other CBs will have little choice but to follow suit with their currencies, maybe with the exception of commodity producers. (Unless, that is, a region emerges that can take over consumption from the US. If that was to happen, long-term consequences for the dollar and US economy would be really dire). At this point, I don't think overseas assets are really that much safer that US.
Dryfly,
Do you really see increased US Man. because of this or am reading you wrong???
Cheers,
Watch the ensuing race to the bottom by other central banks. They are not going to let the FED undercut them on rates. ECB and BoE will be cutting right around the corner. This is war by another name.
And as for commenters who want to move their assets overseas, do you really think the US is going to go into hyperinflation by itself?
In Babylon, Assyria, Ancient Greece, Rome, the Islamic Empire, Ming Dynasty, Monarchial France/Russia, etc, PM's were the only surviving asset. No different now.
"So next time, in order not look silly, it has to choose between staying put, or lower. It can't easily raise back again."
Don't worry, they have absolutely no intention of raising.
I wished, I hoped, I believed that at the end of the day the Central Bank would save the dollar.
Sadly I was proven mistaken.
Lowering FFR to bail out crazy lenders and overleveraged speculators...
eliminating FHA loan downpayments, and raising limits to near 3/4 million bucks.
have I taken crazy pills????
I'm starting to think that maybe I should go and lever up totally... buy the BIGGEST most ostentatious house that credit (not my money) can buy... SUV's, flat panels, you name it...
I'm starting to capitulate.
why save
why plan
why do anything?
anybody have any encouraging words? I sorta woudn't mind some. (seriously)
TIA
Actually, if Europe or Far East emerged as the consumer of last resort, short-term it could boost US exports and revitalize the economy to some extent. But long-term, the dollar would lose its status as "world currency", the era of exorbitant privilege would come to an end, as well as the special place US occupies right now. Other countries would quickly catch up.
You beat me there, Abe. Good point about commodity-producing countries. Perhaps. Canada, Australia? And maybe the Swiss franc, although the Swiss have been selling off their gold at a frenetic pace, the idiots.
I swear Jon Stewart just had the best interview of Greenspan I've ever seen. Especially for people who really had no idea what the Fed does.
Metrics:
I thought he had AG squirming there for a min or so, then let him off the hook. You're right, it would probably be worth watching a conversation between the two in lieu of a 60 min interview.
re:
anybody have any encouraging words? I sorta woudn't mind some. (seriously)
Well, we learnt TODAY and not after a drip drip easing over 18 months that this Fed, like AG's Fed, doesn't care a whit about inflation , that it is, as said on the bigpictures blog - Wall St's b*tch.
Their cred is shot - and cred once lost is only regained painfully, if at all.
We can plan and organize accordingly.
-K
YTL: Patience grasshopper. This game is just getting started. A 50 bps cut in the overnight bank lending rate means nothing. Keep saving.
dryfly
Yea, it may mean the difference for folks working vs some elites idealist viewpoint of economics.
Even though I hang out with those elites, I really prefer to work.
At least it may be cheaper to finance part of that foreclosure purchase we have all been thinking about.
encouraging words for bears?
Hey the fed cut 50 basis points in a panic admid bank failures, runs and the possibility of a complete financial meltdown with unforeseeable consequences.
And you are complaining????
The last time things had the potential to go so bad, we ended up with Adolph, Stalin, Franco and that Caesar want to be in Italy. Be careful of what you wish for.
Some have speculated that oil and gold are the next bubble. But can a product that is limited in quantity really become a bubble?
Houses . .. they could keep putting them up, keep refurbishing them and reselling them. Seemed to be no shortage of housing -- in fact we overbuilt. But there is a finite amount of oil. Same with gold. (Personally, I think oil is a better investment than gold, as we need oil to function at all as an economy, and gold is a rather inert and fairly useless substance -- in comparison.)
So how would a bubble take off and "propser" with exhaustible commodities?
Even tulips could be grown every year. Don't really understand why tulips were so rare at the time...
The tech bubble . . . that was more of a stock phenomenon, but again, something that could be created almost out of thin air.
I'm just wondering how bubbles work with rapidly dwindling commodities.
Anne
The bubble would be in intangible investments that are derived from oil.
Futures for example, or a bet on OPEC oil production.
Do you really see increased US Man. because of this or am reading you wrong???
Short answer - yes. Longer answer would take time but currency exchange matters where stuff gets made - more now than ever.
Automotive & housing related will still suck due to the sector deflation going on there.
But other sectors - med, aerospace, energy, ag products... heck anything commodity based whether mineral, animal or vegetable... and the equipment related to its production is increasing and has been for a while... as the dollar fell & commodities spiked it started happening.
All the stuff about the Canadian dollar for example... hell we might come out as well as they do. Most of their equipment is US made. Too expensive to make in Canada. There is a lot of value added in that stuff too.
The downside of course is we end up working hard for a weaker less valuable dollar.
"I'm just wondering how bubbles work with rapidly dwindling commodities."
Not sure that gold is dwindling all that rapdily. If I recall correctly, most of the gold ever mined is still in existence...
nor oil for that manner (it's dwindling, but not rapidly)
a bubble IMO can happen whenever irrational expectations leads to mania.
a gold bubble happened in 1980, why not again?
(I'm not saying I think there will be a gold bubble, just that it's possible).
In fact, if you recall the reasoning behind the housing bubble, it was all due to (false) scarcity... remember "they aren't building any more land" arguments?
To put my question another way, tulips, tech stocks, and housing were all ludicrously overvalued assets. (Housing still is overvalued.)
Twelve ounces of oil, on the other hand, is cheaper than 12 ounces of Starbucks coffee or a pint of ale. So how could oil become ridiculously overvalued as an asset?
thanks for the positive thoughts...
BTW Vader, although I'm bearish on the economy at this time, I've never been a permabear...
on the contrary, I'm looking at my options, and I see that the risks of inflation rose exponentially today... to combat that I have to either
-eat it
or
-increase my risk considerably.
it's like the red queen's race.
http://en.wikipedia.org/wiki/Red_Queen's_race
In the end, my investing style (sensible fundamental based investing) and lifestyle (non-materialistic frugal) were poor decisions.
the dark side is starting to glimmer for me... not because I think that endpoint is any good... but because I'm concerned that all my saving/investing/effort will be wasted... just stolen by taxation or inflation anyway.
might as well party and go BK, as opposed to scrimping and saving and still get sucked down by the masses.
HR 1852 passed in tghe house ?
what does this mean in $$$$
"Affordable Housing Fund. Authorizes up to $300 million a year from the bills excess profits for affordable housing, instead of returning such funds to the General Treasury.
Higher Loan Limits. Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The amendment also retains the bills provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 if market conditions warrant.
"Twelve ounces of oil, on the other hand, is cheaper than 12 ounces of Starbucks coffee or a pint of ale. So how could oil become ridiculously overvalued as an asset?"
Simple. Here's how:
Oil starts climbing due to increased global demand (since we have 'goldilocks economy') and more importantly dollar devaluation.
Initially, investors and CNBC talk about the incredible rise in oil. then they make up reasons for it. "china is growing 25% per year, india is also growing at 10% per year". "Hurricaine Calculated Risk is going to wipe out refineries" and "Cantarell oil field is in decline and may only have 3 years left of production!!!!"
Hedge funds lever up in the oil futures markets, further raising the price of oil.
Joe schmoe starts hearing about
"you know, we're at peak oil" and "they're not making any more oil" and "global supply is limited, but global demand will rise by 20% per year".
due to this, joe schmoe and mary crow start setting up futures accounts to trade oil futures. they also buy Exxon mobile
this causes oil to rise even faster.
now everybody knows that "oil will go up forever, we're almost out". so people and businesses hoard it...
people see the meteoric rise in oil... so they transfer money from other stocks and bonds to oil... and they HELOC their house to bet on oil... and so on...
there you go... oil bubble.
Twelve ounces of oil, on the other hand, is cheaper than 12 ounces of Starbucks coffee or a pint of ale. So how could oil become ridiculously overvalued as an asset?
Anne you are trying to think rationally about something that is emotional - give up & accept.
Why is gold valuable? Its a lousy metal, weak heavy and fairly scarce... has a few useful traits - good conductor of electricity and can sometimes be used as a catalyst (I think - Pd and Pt are better though). Oh and its pretty (my wife would add that first). So why the value?
Because it is. No other reason.
Personally I think oil won't be a true bubble (that is go up in price just because it is) but will still skyrocket in price due to scarcity and demand based on usefulness. Lotsa folks worldwide want cars will want to drive them... we'll all be competing for oil on price and the weaker the dollar gets the better their currency competes.
I guess you're right about gold . . it isn't really dwindling. Oil though really is a finite commodity that is burned up, and there seems to be an insatiable need for it globally alongside decreasing production and refining. Still, even if it went over $100 a barrel, I don't see how it could be called an asset bubble per se.
Remember that oil's price to some extent is controlled by OPEC. Too much price and the victim errr host dies or finds an alternative. In either case OPEC loses.
You make a good case, Yearning to Learn, for calling oil's inevitable rise a kind of bubble...
Bear in mind too that an attack on Iran could cause an oil shock. Wonder if that factored at all into the Fed's thinking (adjusts tinfoil hat).
Ottawan @ 10:29 pm,
Southern California - or at least Los Angeles -- has had a housing boom and bust/bubble pretty much every 20 years or so since about 1889.
I find it both amusing and disconcerting that the economic geniuses in Congress feel they can sustain this one with taxpayer-funded guarantees.
Yearning to Learn |
Yep have to look at bigger picture. Ben is doing what he said should have been done in the Great Depression.
Don't mean it will change a thing. Just that some future Fed head will come up with a theory of why the Great Depression AND the Horrible Depression of 2007 could have been prevented.
To a very great extent we can only attempt to profit or survive by dodging what the elites do. My cynic view is that Democracy is best because it is least likely to kill off the peasants. The elites can take take over wealth from other elites without a war.
"Too expensive to make in Canada."
"the weaker the dollar gets the better their currency competes."
Maybe they'll just start buying companies and be done with it may as well cart the profits back home or maybe the whole damn company. Good way to eliminate any competition also.
Yes, there is an oil bubble brewing. But don't worry about catching the ride up when you can catch the ride down with ticker symbol DUG. Of course, the tick is identifying the turning point. It may be when China's economy inevitably turns south, maybe after the 2008 Olympics and the US is in the deepest recession since the 70's.
But don't worry about catching the ride up when you can catch the ride down with ticker symbol DUG.
DCR also.
Everyone is talking about the 50 bp cut in the Fed Funds rate.
Hasn't anyone noticed that the DISCOUNT RATE has been dropped by 100 basis points in the past month!?
The Fed has been much more aggressive in cutting than most believe.
Funny enough, this might hurt mortgage rates here, assuming they are based off the 10-year Treasury. the 2-10 curve has steepened dramatically in the past few months and looks to head even higher. No relief from those heavily in debt....
Asset deflation plus CPI inflation = the lower 50% of Americans being totally screwed.
Stagflation redux.
Over econbrowser (link below), Prof. Hamilton just posted a very clear analysis on today's FFR cut.
Econbrowser: 50 it is
Maybe they'll just start buying companies and be done with it may as well cart the profits back home or maybe the whole damn company.
Them and everyone else: Asians, Europeans, OPEC oil barons... they'll all be buying a piece of that cheap US labor capacity with their powerful currencies before this is done. maybe even Rockefeller Plaza again too.
Canadians in mfg I know aren't happy about it either. It wasn't long ago when the Loonie was 65 cents USD to the $CDN that mfg plants sprung up all along the 401/403 corridor from Windsor to Hamilton/Mississauga making parts for Detroit & Japanese transplants alike. Everyone said it was because of their health care system & great schools. Whatever.
Now at parity plus they are closing plants up there like crazy. Huge layoffs. Parity makes them a lot less 'smart' and 'less healthy' I guess [sarcasm]...
Currency exchange rates matters.
"Why is gold valuable? Its a lousy metal, weak heavy and fairly scarce... has a few useful traits - good conductor of electricity and can sometimes be used as a catalyst (I think - Pd and Pt are better though). Oh and its pretty (my wife would add that first). So why the value?
Because it is. No other reason."
Nah. That's not right at all.
It's not a good catalyst.
It's soft and easily divisible.
It doesn't corrode.
A simple touchstone can determine gold's purity.
There is a limited amount that grows by only a percent or two a year. In other words it's intrinsically expensive and hard to come by.
It's as close to perfect as a currency and as a store of value as anything we have found so far. Better than paper, I might add.
Gold has been the money of last resort for five thousand years.
Are you seriously saying that gold's scarcity is a reason for it NOT to be valuable. Get a grip, man.
What happens to capacity when it's been sitting around for a decade or two? Even manufacturing-directed entrepreneurship? Can the transportation grid support a large increase in the amount of goods that would have to be moved around?
True, restoring these things would create jobs, but they would also take time, even assuming the political will that would be needed for some of the things on the list showed up from somewhere. (Mickey Rooney and Judy Garland, perhaps.)
For many of us here who are either bearish or neutral on stocks, our misgiving on the 50bps rate cut had resulted mainly from the reactional surge in stock markets as a result of it giving the bulls a strong handle to pull a sharp rally.
We would have probably cheered the 50bps cut if the stock market has plunged instead and the head line read something like "FED acknowledge immminent recession".
How strange is the world we live in.
dryfly
I remember the schools be touted for a Toyota plant that went to Canada instead of Alabama. Some Canadian govt official opined that Canadians did not need picture books to understand complicated machinery while the Alabamians did.
Well pictures did matter, but its the ones on the currency.
thoth
I remember the last time gold climbed to the skies.
Its supply jumped accordingly.
Each rise in price means a different field goes from marginal to profitable.
Not to mention all the gold in folks drawers.
Well I think we still have huge credit crunch still underway. Unless anybody feels froggy and wants to help finance some subprime mortgages with your own money.
As for the FHA bailout I think you will still need more than a heartbeat and breath to qualify. If not screw it give me my McMansion and a 0% FHA loan to pay it off. Hell McMansions for everyone we all deserve it we are Amerikans.
I've been wondering how much of the saber rattling with Iran has to do with them denominating their oil sales outside the dollar
That's pure posturing on Iran's part, it makes no difference what currency they or anyone else quote their oil in. In every transaction, buyer and seller use whatever currency is convenient to them. Given that Iran sells no oil to the US, and buys little or nothing from the US (officially), there isn't much point in them using US$.
Of course the current White House has always been big on placing appearances above reality, so it wouldn't be out of character for them to respond as though it actually meant something.
Are there ETFs that invest in BOE bonds?
Thanks.
REBear
Try FCO Bear, memory serves mas o menos 20-25% of NAV.
The cut kinda shut Sebastian up.
Does that help?
The Fed is effectively going to punish folks who sit in Treasuries and FDIC-insured-CDs (the only folks with unspent wealth)....to induce them to take risks....the Fed wants the folks who have real money (you know, savers) to start picking through the wreckage to buy whatever smells less bad than the stink they just laid upon the dollar.
Given just how bad things stink, the Fed tactic may only result in making the Loonie a world reserve currency.
I remember the schools be touted for a Toyota plant that went to Canada instead of Alabama....
Well pictures did matter, but its the ones on the currency.
Just one little problem with your argument. That decision took place in June 2005, when the Canadian $ had already risen to US$.80, as opposed to US$.60 back in the Clinton years.
So shouldn't plants have been moving south, rather than north if it was just about currency?
dryfly, let's not forget that gold and silver have strong antimicrobial properties, too. In fact, there is a burgeoning market for silver in the manufacture of surgical tools and even military garb (because bullet wounds that would otherwise get infected are sterilized by the nano particles of silver in the fabric that is carried into the wound).
Also, gold may be "soft" but that is a plus, as it is very malleable. As thoth points out, gold is also the only metal that never corrodes. It is brought up from the ocean floor in ingots/coins after centuries, just as glittering as when it went down with the ship.
Don't sell it short (heh-heh).
BTW, thanks for the great comments, instructive and (usually!) on the mark.
thoth
I remember the last time gold climbed to the skies.
Its supply jumped accordingly.
Each rise in price means a different field goes from marginal to profitable.
Not to mention all the gold in folks drawers.
vader | 09.19.07 - 2:11 am |
Good points, however.....
The Bank of Spain said it would no longer be a seller of gold (should've been a tip off that the Fed would cut by 50bp).
The Chinese govt. is rumoured to be buying to "diversify" away from buying only US dollars.
Environmentalists have raised the costs of gold mining (no more leaching) extremely high.
When a trend begins, it can continue for a very long time.
At what rate have Central Banks, etc. been printing money vs. what rate gold supply via mining has been increasing? Ceteras perabas, gold is still cheap in paper money terms.
OK, I'm WAY over my head here but have been thinking about 2 things this afternoon - China moving out of the dollar and a comment in another thread attributed to Buffet that in order to value a position sell off 5% and see what the value really is.
Then I read this, "Tuesday's US Treasury Department's Treasury International Capital (TIC) report ... showed that foreign (like the Chinese central bank) buying of US government securities actually turned negative in July. " at Asia Times Online :: Asian news and current affairs
So my question is why can't/doesn't China hedge it's dollar position with USD puts, Euro calls, Gold calls, oil calls, or some other exotic derivative and then just dump 5% of it's dollar stash on the market to see how much that actually hurts the dollar? Use the proceeds for more hedging and continue to abandon the dollar?
If the Fed made the move they did because they see dark shapes in the water that the rest of us aren't yet privy to, and the economy is headed for serious trouble, then that will hurt the exports of China anyway. Why wouldn't China get out in front of it?
Perhaps a hopelesssly naive question, but I'd love to learn why.
Well I am profoundly saddened by the actions of the Fed but I guess we all know where the Fed stands now, so we should all be feeling much smarter. This Fed will defend the markets at all costs. It will not defend the US dollar. It will not fight inflation. With that knowledge we can all go out and invest accordingly. Commodities will go to the moon. Here comes $100 oil. Don't like it? Too bad, you don't expect OPEC countries to be paid the same face amount of increasingly worthless currency do you? Why would that be okay with them.
And good point chophouse. Better hope the Chinese don't read CR. If I were them I would be hopping mad. All they ever did was ship over some dodgy lead-painted toys and exploding tyres. What did we ship over? Increasingly worthless Treasury bonds and exploding mortgage securities.
RIP USD
Bank of England Voted 9-0 to Leave Rate Unchanged
Sept. 19 (Bloomberg) -- Bank of England policy makers voted unanimously to leave the benchmark interest rate unchanged this month, saying that inflation risks have ``probably receded'' after a jump in credit costs.
BOE Says Inflation Risks Have `Probably Receded' (Update2) - Bloomberg.com
Kroger, the largest US supermarket group, said on Tuesday that inflation in its core grocery business is running "at a level not seen in several years," underlining concerns over the broader economic impact of higher food prices.
Rodney McMullen, chief financial officer, said that the prices the retailer paid for products increased 21.6 per cent during the second quarter.
Page expired - MSN Money
More than that, a 50bp cut will act as electroshock therapy to the troubled credit markets. It will make every asset-backed bond and questionable collateralised debt obligation look more attractive. There is every chance that the Feds decisive action will restore confidence to markets that had lost it.
Yet the Federal Reserves action is troubling. Look at the market reaction: after the decision the S&P 500 share index traded higher than its level on August 7th, the Feds last scheduled meeting, and before the squeeze on credit began. Some risky assets emerging market currencies and the like moved towards their highs. But the dollar fell and so did long-dated US Treasury bonds: those that are sensitive to inflation.
The Feds action comes at a cost. It will cement a perception that the Fed cuts rates in response to market crises and so encourage speculation. It also risks the Feds credibility as an inflation fighter. In its statement the Fed says that it will continue to monitor inflation developments carefully. The Fed had better hope that bond investors and wage negotiators trust it.
One of the greatest dangers is that loose monetary policy undermines the integrity of the dollar. The US trade deficit is financed by foreign investors who are willing to hold US bonds and assets, and if they fear that inflation will destroy their value, they will sell. The 50bp cut turns a dollar rout from very unlikely to just about possible.
FT.com / Comment / Editorial - Bold Fed goes for half-point cut
Morning edition--about ready to leave for the gym and then the office.
I'm wondering how consumer confidence, which recently went down, will react to the rate cut. There is the positive effect of interest rates and the stock market--neither of which will have much direct effect on the average working class. At least, a small decrease in credit card rates (?) does not seem like much to me.
On the other side, the increase in oil is bound to effect the price of gasoline at some point. The price of gas seems to be the big factor in cosumer confidence. The big unknown, IMO, is that we could still get a significant hurricane that would affect natural gas and oil.
I am putting more money into gold, Asian and Canadian stock funds.
BB's bet on low inflation is quite understandable. It is to be expected that East Asian Economies will go to any extent to keep their prime markets (both US/EC) intact (if not growing), because of their internal compulsions. They care a damn about their currencies turning weak nor the losses they would have sustained on investing in questionable Dollar assets. Their greatest resource (cheap labor) is still untapped in the hinderland. This mini crisis in the financial markets will be just a blip.
OT - Morgan reports
CORRECT - Morgan Stanley Q3 profit falls 17% - MarketWatch
Looks like MS is going kitchen sink rather than smoke and mirrors like LEH...
How is MS going kitchen sink? They've wrote down $900 million from a loan book totalling over $120 billion??? Credit spreads in low investment grade have nearly doubled during the quarter and they've lost less than 1%. Amazing stuff!
MS bought Saxon Capital for $705 million back in December. Worst they've marked that at cost, while its real value is nowhere near that now.
Thing whole thing smells of a coordinated effort on the part of vested interests (Govt, Fed, SEC, Banks) of a don't ask, don't tell policy.
Even if the Chinese Government continues to buy US Treasuries, anyone wanna bet that they shorten duration? They're not that stupid, and I bet that any future purchases will be US 2-years or less. They'll probably sell anything longer than that and move to shorter durations anyway.
This is just too funny: American family of five is seeking asylum in Finland. Reason not yet known. Maybe FED cutting rates was too much
Londoner,
I stand corrected - so none of the IB's is going true confessions this quarter it seems?
I've been doing a bit of Googling around the "how did banks do in the late 70s" question I posed earlier. It's not easy to find anything. However, this:
A Review of the Empirical data relevant to Commercial Loan Portfolios
Is generally interesting and somewhat relevant. On the one hand, "from 1970 to 1990, stock prices for banks were stagnant". I would assume that is in real terms -- if they were stagnant in nominal terms in the 70s, they would have cratered in real terms. Unfortunately, the critical graph is missing from the paper.
On the other hand, "there is a strong correlation between bank stock performance and NIM [net interest margin] growth, as the growth in NIM from 1948 to 1970 and from 1990-1994 was matched with strong growth in the bank stocks, while the stagnant period of 1970-90 was accompanied by flat growth in bank stock prices". Again the graph is missing.
This suggests that the late 70s are not a good comparison period for a late-00s scenario that combines NIM expansion with high inflation.
Is there anyone who was around then who remembers how things went?
Thanks!
What we have learned from the FFR cut is that to Fed data doesn't matter any more. They act based on what they hear through private channels from IBankers,private connections with wealthy, etc...
Sadly, it is those that would benefit from this cut. It is not going to help already overstretched consumer.
Spend! Spend! Spend!
U.S. Treasuries Fall as U.S. Rate Cut Sparks Inflation Concern
U.S. Treasuries Fall as U.S. Rate Cut Sparks Inflation Concern - Bloomberg.com
No Kidding.
WHEW! I thought it was Absolute Vodka.
Absolute Capital down 48% as redemptions are halted - MarketWatch
Business Comment: 'Helicopter Ben' faces a hard landing in history books
Wall Street raised a 300-point cheer to Ben Bernanke last night after he unexpectedly slashed US interest rates by half a percentage point rather than the quarter-point cut most investors expected. History will not treat the "Bernanke put" so kindly.
Business Comment: 'Helicopter Ben' faces a hard landing in history books - Telegraph
LOL
Sadly, it is those that would benefit from this cut. It is not going to help already overstretched consumer.
But the rally on wall street is supposed to have a positive psychological effect on the consumer thus motivating said cash-strapped, debt-ridden, house-poor J6P to go urgently searching for another fix from the debt pushers.
"I'm just wondering how bubbles work with rapidly dwindling commodities."
Check out the definition of contango.
If speculators drive the forward curve in the futures market too steeply, commodities start being stored instead of released to the market.
This creates a vicious cycle. As less is released, spot prices go up. This encourages the speculators, who bid up futures prices and steepen the forward curve. Which causes more commodities to go into storage instead of released onto the spot market. Prices in the spot market increase and the cycle repeats.
In a severe bubble, speculators can even start buying options on commodities that are still in the ground. In effect, producers are paid to not produce.
The bubble bursts when prices have reduced demand in the "real" market below whatever supply is comming on the market. Spot prices fall, speculators get burned, more product is released from storage, and spot prices collapse.
Bubbles are more likely to happen in commodities where the demand curve is fairly inelastic, storage costs are low, and the commodity can be stored a long time without any degradation.
Metals and oil have a history of bubbles for this reason. Among agricultural commodities, sugar is known for it's bubbles because it can be stored indefinitely.
Instead of a lynching, the mob each gets a flesh wound.
Inflation is cutting off a couple of fingers, the long term flesh wound for everyone, to save a few a very quick short term not so tough whack.
Do I spell pina colada right?
May I have another, hic.....
I was being flip.
I hope the 50 basis point reduction is so the guy in a plant or an IT department can get a project funded which does not have an ROI of 20%.
Being a micro guy I am very concerned that credit crunch will kill good productivity justified investments.
Can I ask a stupid question? How do you link individual video stories into your blog? I want to do the same
Hey all you fear mongering pessimists...In January of 2001 we were already in a bear market. It had started in October 2000. The EXACT same indicator, which said we had entered a Bear Mtk in October '00, has, as of today, not signaled one. I will be sure to let you know when/if it does.