Fed cuts rate 75 bps to 2.25%
Submitted by
CalculatedRisk on Tue, 03/18/2008 - 9:58am (341 comments)
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What happened to 100 bps?
Anti-climatic?
First?
Up yours, Wall Street!
how looooow can it go?
well, only 2.25% lower I guess. I seem to recall that 0% interest rates for years, didn't do much to revive Japan in the 90s.
this is really bumming me out, as I am planning on European travel this summer...
2 dissenters
Watch Miss Market puke!
I guess the dollar index will hit 50.
My rally! It's MELTING!
Here we go. Buckle up.
at a certain point, aren't moves like these seen more as panic by the Fed, rather than as intended to calm the waters?
ZIRP!!!
market going down - emergencey meeting in 15 minutes to lower rates again.
Where can I get Fisher or Plosser jerseys? Fed.com?
Uh oh . . . the Fed did not get the memo that they're supposed to do exactly what Wall Street wants them to do. Wall Street will not be happy . . .
Market shooting back up again -- bipolar.
C&C, who dissented and why?
--
To keep the dissenters to 2. Had they wanted 1% cut dessenters would ave been 3-5.
Jas
Gold & silver took it in the pants. Guess somebody considers this a sign of "restraint" (ha ha ha).
The Market is already pricing in a 1000% chance at the next FOMC meeting of a 2.25% cut.
Why - They have a brain!
Who - Fisher, Plosser dissent from 8-2 vote to cut rates
C&C,
Both wanted NOT to cut rates? Cool. I was wondering if they wanted a bigger cut.
At least the $/Y is rising. Why? Because.
Cheers,
Well, we got a knee-jerk drop, followed by another quick pump that's rolling over now. Hmmm.... how long until buyer's remorse sets in? I'll start my stop watch.
C'mon, isn't the 'dissenters' stuff window dressing? Do they really 'dissent'? Or, does Ben adjust the tally to give the story that the Board wants to convey?
Schmucks and shysters. Thanks for the $4.00 gasoline, Ben.
Won't this make the dollar plunge even further?
Won't this make the dollar plunge even further?
ya think?
My gut tells me the selloff is coming soon.....
Or maybe a huge rally....
Market is doing the headless chicken dance.
Milkman writes:
Won't this make the dollar plunge even further?
Yes, but for the moment, the Fed's executioners decided the dollar should receive only a heavy beating with a 75bp rather than a 100bp bullet.
Meanwhile, the prisoner is lying in the corner, bleeding...
Hey, Jas, please start the 'March on Washington and The Fed for an Honest Currency.'
The Reverse Cross of Gold.
I'll start sharpening my pitchfork.
wow, 75bps and Wall St isn't even saying "thank you."
Susan Bies on Bloomberg. Lee Hoskins and she are talking very much sense, and Dick Hoey of Bank of NY-Mellon is looking very desperate. Hoey is actually looking sick. He must be holding a lot of toxic trash.
Susan Bies for Fed Chair.
I don't see how these Fed rate cuts address the issue. There is a lot of toxic waste out there, we don't know where it all is and who has concentrated amounts of it. So no matter how cheap you make money, for the time being it still seems the wiser choice not to extend credit until things look more certain.
If a used car lot offers me 0% interest and a $100 sales price for a broken-down Yugo... it's still not a good deal.
Interesting, they also dropped the discount rate by 75bps (which means it is still only 25bps higher than Fed Funds rate, instead of the usual 50). Not surprising, I guess.
My gut tells me the selloff is coming soon.....
Or maybe a huge rally....
Anonymous | 03.18.08 - 2:30 pm |
Fantastic, can I play?
channels soothsaying powers
I think the market will go up or down but it won't stay the same.
What do I win?
--
Dollar would start to bottom once the US recession spreads to the rest of the world.
American financiers are Typhoid Mary!
Jas
Serious question--what happens when the rate goes down to 1% and the Fed uses up its $800 Billion? When does congress get involved--if ever?
Another obvious sell-out move by the Fed Board to private interests, ignoring its mandate to limit inflation. "Forget the people who cant buy enough food due to inflation - lets bail out the rich who made dumb decisions"
We have lost our democracy.
The only answer to 1984 is 1776.
In light of these rapid interest rate cuts... doesn't it seem like it was very unwise for the Fed to raise rates in those 14 quarter-point steps? Didn't that throw a lot of people into difficult straits as their ARMs adjusted upwards? Could any of this have been avoided or ameliorated by not raising interest rates in the first place?
So the street isnt happy with a Fed funds real rate under zero eh? The dollar was looking at a gaping maw right down to the 7th rung of hell. Atleast the 75 basis keeps a floor on it for now.. orderly please.. keep it orderly.. The cuts arent doing shit anyway... Would have been better to keep rates above CPI and continue to pump liquidity via alternate channels.. f u taxpayers
A week from now it won't matter that they cut 75 or 100. The rate is so low that lowering it more won't make much difference.
Mel, Congress gets involved when Jas and the pitchfork crew (or, better yet, empty gas cans?) show up in D.C.
We need the Congressional inquiries on high gas and food prices to start soon.
We need a lead revolutionary!
I guess Aunt Nellie's income from her money market fund and bank CD's (when they roll over) will decline. Rates are now well below inflation - especially agflation and health care which are major items in her budget.
Nellie's choice - food or medicine. Maybe cut the pills in half and hope.
Jim
Wow, market taking another dive, and both gold & silver have recovered. Guess reality is setting in. That was fast.
Thanks for the responses. I'm trying to understand this. It seems crazy to put so much effort into saving Wall Street.
(1) Rates drop
(2) The dollar drops
(3) That makes gas cost more (cars and heating homes and shipping food)
(4) That increases inflation, but the increase doesn't show up in the stats because core inflation doesn't count food and gas
(5) People are going broke, their money is losing value
(6) But Wall Street gets another brief rally before the fall
Holy shit. This is bad.
F*ck the dollar. Burn baby burn. Nobody in this country has a job and nobody can pay their bills.
Why should the dollar be worth anything? What are the fundamentals for it?
Everybody on this board loves to talk about mark to market...so lets mark the USD to market. Put your standard of living where your big fat mouth is.
"safe_as_apartments writes:
My rally! It's MELTING!"
Made me spit up my coffee.
I take the .75 rate cut as the Fed asserting to the street "I'm not your bitch!" Even though it pretty much is.
Anybody see the Family Guy where Stewie loans Brian some cash and when he doesn't pay beats the crap out of him yelling "Where's my money, man"
Well think of Wall Street as Stewie and Bernanke as Brian.
Crispy&Cole writes:
2 dissenters
Noted!
charlie i agree. not only is the conjure clock at 12, but now we're in liquidity trap time also. interest rates are now negative adjusted for inflation. The market may pop a bit today, but there is no news on the horizon to sustain it... except for act II, which is coming soon and is the first bank to fail.
Interest rates drops now do nothing for the consumer, who is the root of this problem. Nor will it change the housing dynamic. But, then again, the Fed is mostly interested in helping the banks recapitalize and this will help that.
Bank of America lowers prime rate to 5.25% after Fed cut
wow, 75bps and Wall St isn't even saying "thank you."
iceman | 03.18.08 - 2:32 pm
And who says "thank you" to a crack hooker?
Every time we drop, someone comes in and buys and tries to send it back up.
Pump PPT, pump! We'll see how long they can hold this out. Again fundamentals are only getting worse.
And I don't know who in hell would want to be long over the Easter weekend. This thing has to break down by the end of THursday.
the Fed is mostly interested in helping the banks recapitalize and this will help that.
That's what I see this as, keeping banks afloat. It's not going to get consumers spending.
" doesn't it seem like it was very unwise for the Fed to raise rates in those 14 quarter-point steps?"
Well in a nutshell if you don't raise when times are good what do you have to cut when times turn sour?
Also, there is a cost for the fed to hold rates below market. Contrary to popular believe the fed does not have much impact on setting overall interest rates as you are seeing now in the mortgage market. The recent flight to quality to the 3 month and 6 month is part of what is giving the fed the ability to make drastic rate cuts currently.
Finally, it is easier to get the american sheeple to accept runaway price inflation when the economy is in the tank.
It would have been wiser to raise the interest rate quicker to a more normal level rather than let the housing market become dependent on low interest rates.
ipodius,
spot on - consumer can't meet his nut - coming to CC debt sooner rather than later?
the Fed uses up its $800 Billion? When does congress get involved
It's important to know that that $800B in "assets" is just money that you & me owe the Fed, in the form of Treasuries.
Should the Fed run out, I'm sure Congress would more than be willing to sell them more. Free money is free money after all, just ask Mugabe.
And as for 1984 & 1776, just remember the day after the revolution you're still going to be stuck with the same largely miseducated and overentertained populace. While I am no JJ, I do share some of his negativity toward the base intelligence level of this society . . . we've got a lot of Stupid floating around in various communities.
CR,
You should sprinkle more of your opinions and concerns in the blog.
it's been under 48 hours since the last discount rate cut...
so by noon tommorrow, should we expect another?
Is there any way to get long the PPI?
How can you not be fully invested in a market with such a glowing outlook? C'maaawwwwwwwwn.
Fed is running out of ammo. If they cut to 2%, they would probably only have about 2 cuts left of .50 a piece. This way they prolong the process of easing by about 2 months by having three more cuts to 1%, .50,.50, and .25.
Wow. And we're now up 663 visitors.
Congratulations, CR for being the place where everybody knows your name.
NORM!!!
I just called Webster's. They are going to add ZIRP into their 2009 issue.
s&p support 1300? seems to hold there..I can smell fear though
Why - They have a brain!
Who - Fisher, Plosser dissent from 8-2 vote to cut rates
thanks C&C. Its good to see disenters.
Now what stopped the 100 basis point cut? 75 basis points is odd... 50 would have signaled "we're helping, but in control."
100 pts would have sent the message that the "Fed is here to help you."
75 pts... was it to leave more ammo? Did the UAE threated to drop T-bills at 2.0%?
TJ,
The curve is weird already!
Got Popcorn?
Neil
According to this chart at the Cleveland Fed (hope link still works)
http://www.clevelandfed.org/research/policy/fedfunds/2008/March/17/image1.gif
. . .the approximate expectations today were for a Fed funds cut of:
0 bps----by 0%
25 bps---by 0%
50 bps---by 5%
75 bps---by 20%
100 bps--by 42%
125 bps--by 8%
150 bps--by 25%
In other words, 75% expected more than the 75 bps the Fed just cut.
Some Wall Street Banks Seen Riskier than Kazakhstan, Turkey, Nigeria...
Yahoo! 404 - Page Not Found
Troy, we have to return to the original Constitution: only property owners vote. That will weed out much of the political pandering/stupid spending that we see, I think.
We'd engage in a lot fewer overseas wars with a gold/silver-backed currency, too, as the Founders specified.
Separately, we can discuss whether to allow females to vote.
Jas, we are awaiting our call to pitchforks and gas cans!
Scooby writes so lets mark the USD to market
Thats happening as we speak.
ipodius said: "Interest rates drops now do nothing for the consumer, who is the root of this problem."
Well, with the one exception in the country, me. I'm refinancing my house from the lowest 30-year fixed rate of my lifetime to the new lowest fixed-rate of my lifetime, while pulling out cash to pay-off some debt and fix-up my house.
All for just about the same monthly mortgage payment as I was making before. And I'll be paying it back with a fixed dollar amount that won't go up much even if inflation goes through the roof.
The only drawback is that I won't be paying off my mortgage until 4 years after I'm dead instead of in the year of my death. I can live with that.
Sebastia
last 30 will be interesting to say the least..
Revolutions have never brought any improvement, only turmoil.
Ask any country that has a history.
Jas is looking for a new complex of expensive homes near Seattle to torch. The cans and pitchforks will be back shortly.-
The paragraph on inflation is pretty amazing. The Fed keeps cutting - and keeps talking more and more about their inflation concerns.
I guess they are trying to keep inflation expectations somewhat in check - while the work hard to re-inflate the economy.
The economic weakness is no surprise - they are looking at the same data as everyone here.
Best to all.
TWO dissenters preferred "less aggressive action"?!
Not only is this less than the market wanted; it shows a huge bias against further easing.
Surprising, and interesting.
Wow..really wow!! Here in plain sight ungoverned, unaccountable, unmitigated. The shadow gov rules. If you think revolution who ya gonna fight? How you gonna fight? The big boys have taken care of their own, you just paid the bills. Look at it, its all green..gonna stay that way. PPT? The fed says so, they thought of everyone in their circle. You in? Thought not. Maybe a few nights of no sleep, but thats nothin. It belongs to me MAN and you pay cause they can make it so. Talk about power. With a flip of a switch we can bail out our friends, make you pay, ruin your life. Glad Im on the sidelines. Cash is king? Sure Jimmy, whod thought 200 year ago this is where wed wind up going from one crisis to another. Try saving .Good luck. $800Billion? Theyll find more. Its their game, their rules, want a seat? Its in the corner Everything is under control, move along.
I take the .75 rate cut as the Fed asserting to the street 'I'm not your bitch!' Even though it pretty much is.
Oh, Mr. Market, stop it. I'm not your b!tch.
Shut up and come here, Bennie babe!
Why do you always treat me like crap?
'Cause that's the way you like it!
Oh, Market...
"some indicators of inflation expectations have risen"
No Sh*t?
Crude has recovered nicely after yesterday's "oil for stocks" rally. Looks like the playerz were able to dump some shares off on the retail sheep today and get back into crude.
Well, with the one exception in the country, me. I'm refinancing my house from the lowest 30-year fixed rate of my lifetime to the new lowest fixed-rate of my lifetime, while pulling out cash to pay-off some debt and fix-up my house.
Well Seb I've been at 5.25% for a while now (fixed 30). So I'm not sure I can do much better, or at least enough to make a difference to cover transaction costs in the timeframe (i don't intend on being boxed up in the living room like you). Good luck on that cash-out refi right now too. That's going to affect your interest rate.
And anyhow, that is a non-economic event as the vast majority would do it (IF and that's a BIG IF) they can just to stop drowning. Your addition aside, who is going to spend the money now, and on what?
I'm a mild bear Seb, and even I stopped spending at the beginning of the year. I have no intention on taking on any debt until this passes, or will I buy anything of significance. I will save. And frankly, most other people I talk to in my bracket are doing the same thing.
The economic weakness is no surprise - they are looking at the same data as everyone here.
Except Seb, of course.
Seb, enjoy that great rate on that falling asset!
Me, I'm watching home prices in La Jolla tumble. It will be like living on the French Riviera, when we finally pull the trigger and pay 100% cash (I can do that today, but why piss away money when prices are falling with no end in sight).
TWO dissenters preferred "less aggressive action"?!
Not only is this less than the market wanted; it shows a huge bias against further easing.
Surprising, and interesting.
I think it shows serious concern about a run on the dollar.
Given the history of currency runs during financial crises, such a concern is probably well-founded.
Dow now up 300 points after the rate cut?
I'm not an economist, but this makes no sense at all to me.
The spreads on Jumbo loans are still HUGE. 1.25% above a conforming 30-year. While the fed keeps lowering rates, these have been going up. It's now at 7.5% with paying 1 point. CA is soo screwed.
The PPT came in right on schedule just as we were about to go under 12100.
Foilhat-wait for last 30 minutes..
Its not just inflation expectations that have been rising, consumer prices are soaring at the fastest pace in decades.
I have a novel idea. Perhaps the fed could better contain expectations by ACTUALLY containing inflation.
Just a thought.
Dow now up 300 points after the rate cut?
I'm not an economist, but this makes no sense at all to me.
What? Hedgies can now afford interest payments on almost 25% more margin debt.
Makes perfect sense to me!
Seb, enjoy that great rate on that falling asset!
jg, I hate to say this, but you don't do work on your house to make an asset worth more. You do it for personal comfort. I didn't care about the new kitchen I put in, in terms of house price. I did it because it makes the house more usable for me and it makes me happy. Not everything is about money or asset value. My clothes depreciate, yet I wear bespoke suits. What good is having it if you can't spend it once in a while on things that make you happy? No wonder some of you are miserable looking for total collapse.
" The Fed keeps cutting - and keeps talking more and more about their inflation concerns.
I guess they are trying to keep inflation expectations somewhat in check - while the work hard to re-inflate the economy."
Well they can't say what they mean, otherwise that screws up the sanity producing doublespeak.
jg said: "Seb, enjoy that great rate on that falling asset!"
That's the beauty thing: Prices where I live continue to rise, and housing prices are still only 3-3.5X income.
If the key to not losing much is to not overpay in the first place...
S.
Foilhat-wait for last 30 minutes..
Fat chance
The US government is supporting the market. Short the $ not the market.
Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.
when asked about his dissenting vote, Plosser noted, "Are you nuts? I'm not going near that Pig. Last time Bernanke tried to pull its tail it kicked him."
Shnaps writes:
Scooby writes so lets mark the USD to market
Priceless!!
When actions and words are going in opposite directons.. always look at actions for the true intention.
The fed is so cute with it's little "we are worried about inflation" paragraph every massive cut, yet they keep cutting.
They ain't that worried.
And the way to oblivion continues. Gotta keep the Wall Street Pigs happy! Enjoy the $4 a gallon gas!
Anybody want dollars? I didn't think so...
What? Hedgies can now afford interest payments on almost 25% more margin debt.
Yep. No PPT required.
"I will save".
Do not let BB hear you he will have to keep cutting.
"the U.S. government can also reduce the value of a dollar in terms of goods and services," BB
BTW, I agree with Mish on a lot of things, but he's wrong on deflation.
Bernanke will use the helicopter if necessary.
Anon, oh I think the fed cares about inflation. The same way I care about global warming, baby seals, and polar bears.
Bill gross says overtly he is advocating on behalf of buying agencies and then says we were ahead of the curve and have been buying treasuries. Imagine if a sell side analyst with such stature went on tv and said such things. He would be with ebbers.
Lawless. Jum cramer crowing about how bullish he is. Second half recovery. Oh yeah. Recession, yeah that was last exit. Missed it. Tee it up we are back..
i just shot a big wad towards a leh short at 45.5
Could be a 400 plus point day!
REBear writes:
Market is doing the headless chicken dance.
REBear | 03.18.08 - 2:31 pm
____I have seen the headless chicken dance, up close and personal. That was one funny comment!
Fisher and Plosser: When is it going to be our turn to play good cop?
Ben: We all take turns, remember?
They have been trying to 'talk away' inflation for quite some time... but done nothing whatsoever.
It is interesting that they said which way the dissenters leaned. A clear signal, I think. There is a change in sentiment and to go much lower is to give up all options - therefore all power. Since rate changes are known (supposedly) only to have very long term effects, an argument to wait for some feedback can now be made.
All for just about the same monthly mortgage payment as I was making before. And I'll be paying it back with a fixed dollar amount that won't go up much even if inflation goes through the roof.
Ugh...
At least you have an idea of how the refi is impacting the over-all balance sheet. You are at least choosing to become progressively poorer in order to sustain living beyond your paycheck. (If you aren't living beyond your means, why do you have debt to roll over?)
I'm aware that some people are playing various versions of arbitrage between tax advantaged interest and the returns they believe they can get elsewhere. Risky, but understandable.
But, I've known so many people who played those games for years before they hit the wall. Monthly payment stays the same, but the balance sheet goes negative. One day, they think everything was fine and the next moment they are shocked that they are facing bankruptcy.
You have the "silver bullet" retirement plan or do you expect that returns on your 401K are going to pay your mortgage in retirement?
Sebastion
"The only drawback is that I won't be paying off my mortgage until 4 years after I'm dead instead of in the year of my death. I can live with that."
I retired at 51, my home is paid off. Keep working for the banks you little debt slave somebody's got to do it and it may as well be you right. Thanks
"The US government is supporting the market. Short the $ not the market.
squeezed "
He's right, ya know. 'Bout time it was said around here.
jg,
Home prices didn't go crazy where Sebastian lives like they did in CA. Nor did they here in Houston. I wouldn't judge his decision based on your localized market just like I wouldn't base national trends on our markets.
Best,
RE:
Fisher and Plosser: When is it going to be our turn to play good cop?
Ben: We all take turns, remember?
When does the dollar get to stop bending over and have its chance behind Bernanke?
Maria Bart has a big 'ol stain around her zipper - and it's not spilled coffee.
She reads the statement from the Fed about the ugly outlook and says its an opening for more rate cuts.
God help us.
Cramer's ability to be completely wrong and then be completely wrong (again) and then be completely wrong (again and bonus have it posted on u tube) is well...
You have to admire it after awhile...
respectfully, you should all/most be ashamed of yourselves.
You all predicted Armageddon two days ago, you all predicted the first day of the Depression 2 days ago.
Are you guys and gals embarrassed?
Okay, here's how it is, and I know nothing.
They will do things that no one here can predict, and keep it patched together until Obama becomes President and then it will be his problem.
That's the long and short of it.
And I know nothing.
If history is our guide, our peso will continue to crash and salinas will continue to shame our nation.
Re: his, in turn, caused an even more dramatic decline in the dollar reserves. These decisions aggravated the already delicate situation, to a point in which the crisis became inevitable and devaluation was only one of many necessary adjustments. Nonetheless, nothing was done during the last 5 months of Salinass administration even after the elections were held in July of that year. Some critics presume this was done in order to maintain Salinass popularity, as he was seeking international support to become director general of the WTO.
Great Cramer comment!
Snail, you do know nothing.
FNM at 28? PUT time.
Marcus,
I have seen it once. I will never forget it.
Snail Mail,
You are very incorrect and wrong. I in fact predicted the first day of the Depression to happen next week on March 25th at 6am. Get it right.
All I know is, close above S&P 1320 will be a followthrough day and the second confirmation that you need to be long here.
Angry Saver writes:
BTW, I agree with Mish on a lot of things, but he's wrong on deflation
I am not in your camp. The aggressive writedowns are a form of deflation. The question is how much. Maybe there is a long way to go, dont know. I suspect some discounting is based on fear and negative impressions rather than actual underlying values of certian assets.
House prices too are a form of deflation - they are loosing value. And the perception is that they will be worth less tomorrow, than today. Purchasing decisions are based on expectations if the expectation is neg. then transactions fall. I am inthe camp that says we have a long way to go on housing prices for that expectation sets in to motivate sales.
Snail, you are right. From the way you right we can tell you know nothing.
It is interesting that they said which way the dissenters leaned. A clear signal, I think.
I too read that as indicating the rate-cut party is probably over. It's not going to do any good lower than this anyhow. Surprised the market didn't read it that way. Or maybe they did. Who knows how they react anymore?
Kicker said: "At least you have an idea of how the refi is impacting the over-all balance sheet. You are at least choosing to become progressively poorer in order to sustain living beyond your paycheck. (If you aren't living beyond your means, why do you have debt to roll over?)"
Because I used to live over my means, don't anymore, and just want to zero-out some debt that's more nuisance than threat to my solvency.
S.
Just out of curiosity...
Have there ever been two dissenting votes before?
Re: A few days after a private meeting with major Mexican entrepreneurs, in which his administration asked them for their opinion of a planned devaluation; Zedillo announced his government would let the fixed rate band increase to 15 percent (up to 4 pesos per US dollar), by stopping the previous administration's measures to keep it at the previous fixed level. The government, being unable even to hold this line, decided to let it float.
Long for how long? And then sell when......?
Next stop 0%
The race to zero is also related to: A puppet state is a state[1] [2] [3] that is nominally independent, but in reality, under the control of another power.[4]
"Puppet state" is a term of political criticism, used to denigrate a current government which is perceived as unduly dependent upon an outside power. It implies that government's lack of legitimacy, in the view of those using the term. The term is closely associated with the state of Manchukuo, established under Japanese auspices in Manchuria in 1932. Although the term might reasonably be used to describe a significant number of states in the past, only Manchukuo is routinely designated as a "puppet state".
http://en.wikipedia.org/wiki/Puppet_régime
Long for how long? And then sell when......?
LOL! Even if I knew, if I told you then your transaction would decrease my gain. LOL too funny that.
Rate cut party over? Are you guys F%ing insane? Remember when the TSLF was announced and all the headlines were that it meant rate cuts were ending? Well here we are after ANOTHER 75bps, and any fool that says the wording means no rate cuts going forward is wrong in a big way. 1% by end of June, then we will talk.
The herd on wall street is GROSSLY invested in believing in Oz.
All of your short term shorts listen up... Every time the Fed cuts rates it DEBASES the US dollar. Here's the proper way to consider this... cutting interest rates is like adding base metals to a US dollar that started out as all gold. Everytime they cut rates, they debase the dollar. This rate cut was smaller than expected hence the debasement wasnt as bad. All other market extrapolations follow from this simple understanding. The stock market and commodities are the smallest markets. The real action is in bonds and forex. Its the verdict from these markets that really counts and ultimately matters if you were BB. The stock market and others are more psychological which plays to the animal spirits but matters least. So make your bets but keep them long term in this active Fed environment. The inflation / deflation debate is the most active and the most troublesome. Long term deflation wins... No way a consumer led recession doesnt infect rest of the world and no way deflation doesnt come out on top. Short term inflation is still very active.
So what happened around 2:53 pm? ETRADE was unable to update real time quotes for a couple of minutes, and at the same time Yen and Euro went into free-fall...
Any ideas? Did ECB and Japanese Central Bank buy US$?
Troy, we have to return to the original Constitution: only property owners vote.
jg | 03.18.08 - 2:50 pm | #
We could also return to the Constitutionally mandated Gold Standard, without disenfranchising anyone.
Hiker,
If you must be long, bail at the end of March. Earnings will beat lowered expectations if lucky and outlooks will stink.
Gold down 18 on the day; I guess a dollar meltdown was priced in, and that didn't happen. Today.
"All I know is, close above S&P 1320 will be a followthrough day and the second confirmation that you need to be long here.
ZackAttack"
Just like the close below 1280 was a confirm to be short, ya?
You techs are the PPT's tool.
Well that's interesting. Most economist think Fed Funds should be near the 2 yr note... which is at 1.3445%
Think a little lower woulda' killed 'em???
Vanguard Founder view
Financial Sector a 'Drag,' Says Vanguard Founder - CNBC
The FFR is not going to 1%, as that would do no good. Perhaps another .25 and that's it. I'll call this bottom at 2%, but I wouldn't be surprised if they held at the next meeting.
--
So far, selling into the Fed-induced rallies in the Scam Market has worked well.
Fed is composed of morons who claimed at the end of July that everything was dandy except for slightly slower growth. Just look at these morons -- in every meeting since July the statement says that the economy is "weaker than we thought" or something to that effect.
American People have finally gotten the Fed and USG they deserve.
Sell America short!
Jas
Do you think the analysts (consciously or not) lower earnings forcasts to protect themselves?
The whole system just strikes me as absurd.
ipodius, what makes you think they are done at 2%? Really I am EXTREMELY interested in how you have come to that conclusion.
ipodius,
Now are you thinking about the combo of baby seals and polar bears?
just sayi
Rally appears stalled just over 300. Will it last until close?
"Sell America short!
Jas"
All bitching, no new ideas....Ladies and Gentlemen, Jas Jain!!
People worry about moral hazard issues in normal times. But in times like these, they put those concerns on the back burner. -- David Brooks, today's New York Times
Yeah, three years ago I couldn't go anywhere without hearing some yokel yammering on about moral hazard. Thank god those days are behind us!
Anonymous said: "Do you think the analysts (consciously or not) lower earnings forecasts to protect themselves?
The whole system just strikes me as absurd."
Absolutely they do, and absolutely you're right. They lower their forecasts when the trends are down and raise them when the trends are up.
S.
here is the FDIC calculator to see if you savings are insured. ro to the bottom of the page
http://www4.fdic.gov/EDIE/
David Brooks is a moral hazard.
Re: Did ECB and Japanese Central Bank buy US
Re: Most economist think Fed Funds should be near the 2 yr note... which is at 1.3445%
Re: The first puppet states, in the sense of new states whose creation was made possible by the intervention of a foreign power, were the Italian republics created in the late 18th and early 19th centuries with the assistance and encouragement of Napoleonic France.
I think we are seeing IMF Central Bank support which is related to the global nature of this pandemic, i.e, outside interest will step in to buy our peso and to put on a show of socialized solidarity, much like bailing out Bear in an antitrust effort. In this window dressing effort to keep reality off the balance sheets, there will be a great number of actors on the stage holding hands and praying the same prayers -- prayers, wishes and hopes that the little people will buy into this matter of distrust and dishonesty!
I loved the comment, on CNBC, that "Now the investment banks have the Fed's balance sheet at their disposal"
How convenient! The world is their oyster!
GOD HELP US
Because I used to live over my means, don't anymore, and just want to zero-out some debt that's more nuisance than threat to my solvency.
Sorry....
But if I had my way banks would be required to sound klaxon alarms any time a consumer did a debt consolidation loan. Doing it once can help people on the edge turn things around but it should ring major alarm bells. Few people have enough of a grasp of their personal balance sheet to understand that they have to cut spending after the consolidation (even if the monthly payment is lower).
From my experience, anybody who does it multiple times is usually on a one-way ticket to bankruptcy unless they win the lottery.
It's too easy to hide a hemorrhaging personal balance sheet by looking only at the monthly payment. The car that is now being financed over 30 years is going to have to be replaced.
So, what's your strategy? I've known a few people whose financial advisors keep them leveraged up as possible on the house to max 401K contributions and investments while taking a minimal hit to lifestyle.
I couldn't stomach it, but it at least has the chance of working.
The investment banks will "dispose" of the FED's balance sheet allright! Too funny!
As better half and I sat and watched CNBC Asia on Sunday night, she asked me to explain the debate about inflation/deflation. If deflation is the removal of dollars and inflation is the lesser purchasing power of dollars, aren't they the same thing?
Best synopsis I could come up with was that with Bernanke's action, opening up the Fed balance sheet would at least make sure that the funds were there to meet the margin calls and the bank would limp along in some fashion. No Fed backing of JPM and there would be bankruptcy and thus no BSC. Her response was that the nominal amount was what Bernanke was shooting for and not the real value amount. Bingo...support the nominal even if the real value diminishes to zero.
And that's when I went to the inflation camp, despite the loss of asset value in housing.
This really is uncharted country.
Anyone doubting that the Fed will eventually go to ZIRP is dreaming. They were scared witless by the BSC debacle, and more IBs are waiting in the wings, not to mention a whole load of regular old bank failures on the way. This isn't over by any stretch.
I loved the comment, on CNBC, that "Now the investment banks have the Fed's balance sheet at their disposal"
Somehow, I don't think this is what Alexander Hamilton had in mind...
I'm finding myself halfway between the bulls and the bears here.
Bullishly, I don't believe that the stock market will be allowed to crash any time soon--the PTB can't have both housing and the stock market falling precipitously. Though I was leaning in the "never crash" direction months ago, the last few days confirmed it for me. The Fed will nationalize the stock market if it has to. (Housing is another story: it has crashed and will continue to crash because the Fed can't control it--RE ownership is too dispersed and value relies on fundamentals more so than stocks).
On the bearish side, I expect a rough ride over the next year or two, for reasons often mentioned here: declining MEW, debt-burdened consumer, low job creation, and weak dollar.
The only thing I know for sure right now is to not buy a house )in 99% of the country).
homedad43,
Deflation -- fewer dollars, making them MORE valuable.
Inflation -- more dollars, making them LESS valuable.
What you're seeing elsewhere is "price" inflation (as in Consumer Price Inflation [CPI] or Producer Price Inflation [PPI]). That's where the semantics become a huge issue.
TJ and the Bear,
Implicit in your comment is your assumption that the Fed is not implicit in the takeover of Bear.
The problem is the people on CNBC look like J6P's sons and daughters.
Fox and CNBC have wrung every ounce of elitism out of their broadcasts. T
This economy is a cancer patient that sits around, smokes medical marijuana, and skips the chemo altogether.
sorry.. complicit...
what makes you think they are done at 2%
There comes a point of diminishing return. There are always side effects that flow back. Oil, inflation, commodities and not least of all the dollar. The real rate is now negative...are mortgage rates responding? Is there more liquidity for the lower rates? Would a cut to 1% do anything else here? The answers are all no.
A confluence of indicators and functions say that anything much below 2% is useless for the desired effect, and in fact would be negative.
TM-I'm losing money and still laughing on that one..
Noble,
Not sure I follow. Can you elaborate?
ipodius,
We're far past the point of diminishing returns, yet they still keep going.
Re: "Now the investment banks have the Fed's balance sheet at their disposal"
What packages or security instruments are they going to spin out with this new mafia-tainted windfall? Does this mean average investors are going to rush to mutual funds and invest all they have left in new derivatives that are backed by The fed who is backing up this sham with bogus collateral?
In order for these new derivatives to have future value, don't we have to have past performance or current mark-to-market valuations of the previous generation of synthetic CDO/Squared Russian Roulette Fed-backed-linked-swapped-collateralized bailout notes?
ipodius,
Thanks for the elucidation of your position. A reduction from 5%-2.25% has done nothing, but that did not stop BB abd company did it? If rate cuts are over, the DOW will see 10,000 in June.
Kicker said: "From my experience, anybody who does it multiple times is usually on a one-way ticket to bankruptcy unless they win the lottery."
I think you're mistakenly coming from the viewpoint that I'm the subject of one of those MSM delinquency/foreclosure headlines.
The last time I refinanced (nearly 200bp lower rate!), I just refinanced and left my equity where it was.
This time, I've got substantial equity, am only taking out a modest amount, and my payment will only be about 20% of my net income, with no other debt.
And I'm not the only one.
Sebastia
tj I will stick to this definition:
Deflation is the contraction of money and credit.
Inflation is the expansion of money and credit.
Prices have nothing to do with it. And right now, credit and the money supply are CONTRACTING. We are destroying capital and asset value faster than we can create it. That's deflation. Gas prices have nothing to do with inflation, and neither does the cost of food. But opinions vary. You just have to stick to a methodology and follow it to its conclusion.
Fed to peons...."bend over...and yes this is going to hurt"
Fed to banks...."a billion for you....and for you...and you..."
Re: This economy is a cancer patient that sits around, smokes medical marijuana, and skips the chemo altogether.
Denial may be the strongest medicine!
Re: Fed to peons...."bend over...and yes this is going to hurt"
Peons to Fed, that feels good, harder and more harder!
the DOW will see 10,000 in June.
In my view it will kiss past 11,000 but I could be off.
Judging by Wall St's reaction to the 75bpts, I'm certain the Fed is feels a little remorseful about needlessly emptying at least 1 round of ammo they could have easily hung on to... for what's coming down the road.
It isn't surprising the Fed cut rate by 75bps, and made an equivalent move in the discount rate. What is interesting is that the Fed had two dissenters to the vote, Governor Plosser from Philly and Governor Fisher from Dallas, both wanted a smaller cut. Plosser is a well known hawk on the FOMC, so this was not surprising. However, this combined with a stronger inflation message, could imply the end of strong rates cuts. Keep in mind, the market responded very favorably to the move, despite at one point having priced in a 100% chance of a 100bp cut (the GS and LEH news did help). This also supports the possibility that we could be near the end end of the rate cuts or at least at a point where we see a significant reduction in its magnitude (ie 25bps). Of course the Fed's future reaction will be very reactionary to market news and data. My Opinion...
ipodius,
Your definition is correct; I was just overly simplifying.
You're also correct about the current conditions. The money supply is contracting. That's why it's important to always distinguish between inflation/deflation and price inflation/deflation and note that price inflation is exactly what the CPI & PPI measure.
The latter two are influenced by the former but not entirely subject to it, as our current circumstances illustrate all too well.
A reduction from 5%-2.25% has done nothing
Oh and I disagree. It would have been far worse had they not cut this much. FAR worse than one IB. They are not helping you, they are saving the financial system. As soon as you wrap your head around that and accept it, you'll feel better.
I will feel better when rates are at 1% in June and You can apologise at that point.
I have a question for all the deflationists:
Did you ever listen to Ben Bernanke's helicopter speech?
Anonymous writes: "Just like the close below 1280 was a confirm to be short, ya?"
Well, first, it was actually 1270.
And, no, you look at everything together. The last time you had a crash from these levels of oversold was 1987.
And, if you query my posts from that day, you'll note that I stated you should get long right there.
As I'm stating right here that this has the potential to be a classic followthrough day.
Call me a tool, blow me, beyotch.
Somehow, I don't think this is what Alexander Hamilton had in mind
but prolly ol' TJ certainly did.
JJL if I am incorrect I will absolutely admit it. I'm not Jas
tj, I'm with you on your definitions!
I don't have realtime shadow stats handy, but I'm assuming M3 is contracting while M1 is expanding, but M2 would be nominally staying the same due to sterilization.
Is this even remotely accurate?
Fed needs to cut home prices by 20% and bail out sellers and give tax credits to home buyers!
The Fed needs to cut auto prices by 25% and give rebate checks to any buyers!!
The Fed needs to triple all tax refunds and put an end to federal taxation, no more IRS, no more taxes!!!!
The Fed needs to devalue gold and give refunds to anyone that bought gold in the last 5 years!
The Fed needs to restore good times in America and give gold watches to all members of NAR!
The Fed needs to give XMAS bonus to al wall street employees, from janitors to CEOS!
The Fed needs to fund Tanta and CR and give them bonuses and anyone that has a pro-economic blog should be given dollars per words typed!
Ame
beemer,
Thanks, but I was just poking good natured fun at the unsolicited yahooish one line investment advice that always appears here after a Fed move. Today's FFR reduction doesn't change any of my investment positions.
Best,
Did you ever listen to Ben Bernanke's helicopter speech?
Yes but I have serious doubt that it means what you think it does.
Fair enough ipodius! If I am wrong I owe you a CR subscription to the monthly newsletter!
Okay, M-A-, gold backed currency and votes for all. I'm in.
Hey Sebastian, nice re-fi!
How old are you?
Did you ever listen to Ben Bernanke's helicopter speech?
No, but I did live in Japan for the 90s, where my last rent stayed where I started it, 1995-2000.
The next 5 years are going to be rather . . . complex. Some things might get pricier. Some will go down. Corporate profit margins might become squeezed. Wages under pressure. Jobs in the so-called service economy disappearing. Manufacturing and export-related jobs increasing.
Troy,
Huh??? I'm fairly strict in my interpretation of the Constitution and Bill of Rights. The founding fathers would hardly recognize our current government (and Fed and GSEs and...).
I think you're mistakenly coming from the viewpoint that I'm the subject of one of those MSM delinquency/foreclosure headlines.
No...
My impression has always been that you are one of those people born with high risk tolerance and that "drinks WallStreet's Kool-Aid".
Usually that means high incomes, growing net worth but leveraged to the max.
Hence the questions about leverage.
lol...JJL does that mean that CR and Tanta are the counterparties to this?
Re: emorseful about needlessly emptying at least 1 round of ammo they could have easily hung on to... for what's coming down the road.
Forget about those resets in October, everyone gets a free home now and a big heavy bag of pesos!
Angry Saver, yes, I've listened to (and reread) the helicopter speech.
The question is how to get the money into the hands of spenders, not savers, during a deflation. The answer is "carefully, and so with great difficulty."
Carefully, because there are some "easy" routes that lead swiftly to hyperinflation -- triple digit inflation. And hyperinflation is by most measures worse than deflation.
tj -- I was referring to Jefferson, who said:
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
ZackAttack said: "As I'm stating right here that this has the potential to be a classic followthrough day."
You're speaking my language. I'm especially interested in today's heavily-positive breadth, when it comes after a series of days with heavily-negative breadth. A classic indicator of climax selling followed by broad accumulation.
Combine that with confirmations from low valuations, low interest rates, and high bearish sentiment, and it's tough to see how you could go too far wrong by getting long this market.
S.
"So, what's your strategy?"
Mine was to get a better job. It's amazing how quickly debt disappears when you jump your income by 25%
Ipodius, TJ,
Mish's money supply definition is one sided. You need to look at money supply relative to output.
If money supply is increasing, but output is increasing faster, prices can still deflate. Likewise, a if output falls faster than the money supply prices can increase.
Asset prices are not necessarily an indicator of money supply either.
Calculated Risk got this mention in Dan Froomkin's "White House Watch" blog entry at washingtonpost.com on "Bush's Financial Katrina:"
"And talk about a legacy: As the Calculated Risk blog recently pointed out, Bush may now be on his way to leaving behind a $10 trillion national debt when he leaves office."
Dan Froomkin - Bush's Financial Katrina - washingtonpost.com
Congrats once again, CR.
Troy,
Okay, thanks for the clarification.
Angry Saver,
Read & re-read that speech numerous times since 2003. "Money" is a hard thing to pin down, but so far the government hasn't engaged in outright monetization. Let's hope it doesn't get that far, but I didn't buy gold just for the fun of it.
13-week T-Bill yielding 0.9%:
Quotes for ^IRX - Yahoo! Finance
I would say the market is pricing in further aggressive rate cuts. Will be interesting to see the CBOE futures implied value over the next few days.
Kicker said: "My impression has always been that you are one of those people born with high risk tolerance and that "drinks WallStreet's Kool-Aid"...."
Alas, no.
Notice that although I'm pounding the table to buy, it comes after a 17% correction in the SP500. That's low risk tolerance that comes from waiting for a good discount before getting heavily long.
S.
"Prices have nothing to do with it. And right now, credit and the money supply are CONTRACTING. We are destroying capital and asset value faster than we can create it. That's deflation. Gas prices have nothing to do with inflation, and neither does the cost of food. But opinions vary. You just have to stick to a methodology and follow it to its conclusion."
I have been trying to think in terms of real productive output and claims on that output as empty buckets. What we have because of rampant credit is to many claims of empty buckets on real production. As the market adjusts many of those buckets cannot be filled fully so it would seem that the deflationists should take the argument. However the fed gets to constantly resize the buckets smaller making the holders of buckets feel they still have the same when they are filled up. However they cannot do anything about the real amount of goods produced. It seems the obvious solution is to fill you bucket now and get it out of the system.
Any chance the Saudis and the Chinese will drop their peg?
Did you ever listen to Ben
Bernanke's helicopter speech?
Troy's got it...
I'm guessing helicopters would deliver greater than a 1% change in the adjusted monetary base.
Right now, the monetary base is screaming liquidity trap.
Re: it's tough to see how you could go too far wrong by getting long this market
The trouble is, it's not a free market anymore and your bet will depend on more tricks from the Fed to prop up bogus corporate fundamentals, which result in higher P/E's lower earnings and a very fast build up of a bubble that will pop as fast as it was pumped. Invest in this pimple but beware of one thing:
Yahoo! Canada Answers - I have a pimple on my butt and i need HELP!?
Mish's money supply definition is one sided. You need to look at money supply relative to output.
This is not Mish's definition. This is a classic monetarist (and Austrian) view.
<i>Notice that although I'm pounding the table to buy, it comes after a 17% correction in the SP500.</i>
And just how far did the S&P contract the last go-round?
Troy,
Japan's money supply never shrank on moving average basis. CPI was low, but not negative. Japan's asset prices suffered as all asset "bubble" prices do - poor and/or negative long term returns.
These rate cuts and lending facilities will stop NOTHING. This is way bigger than the Fed could ever hope to control.
The leverage/capital is so hopelessly out of whack that nothing can stop the coming deflation of asset prices.
Since cutting will have very little OR NO benefit....why not act like you care about the dollar's strength and do something to make the rest of the world believe you mean to defend it. The affect you could have on commodities could be tangible...the affect you could have on energy could actually benefit the spenders in your economy and provide saline to your patient(s).....people would feel less pinch, cut back less....the benefits trickle up to the banks in the form of less foreclosure. You don't have to force rates to the moon.....BUT FOR CHRIST SAKES....STOP CUTTING!
PLEASE!
YOU'RE KILLING ME SMALLS!!!! KILLING ME!!!
Meredith Whitney rocks (and she's really cute, too)! This rally (albeit a powerful bear market rally) can be timed almost to the minute she appeared on CNBC yesterday and disclosed she is personally long LEH. Went long LEH immmediately after her penetrating analysis of IBs vs. banks.
Sebastian, you were pounding the table to buy last summer.
Why do you always conveniently leave that part out?
Previously undisclosed pictures of Sebastien's Home Sweet Home
http://maineoutdoorstoday.com/blog/wp-content/uploads/2007/07/trailer.jpg
tg, it sort of like when Kellog's changes the size of the box from 14oz to 12.8 oz and keeps the same wholesale price. Is that deflation or inflation?
Peter Strazinski asked: "Hey Sebastian, nice re-fi!
How old are you?"
I remember Clint Eastwood as Rowdy Yates on "Rawhide." Old.
S.
Yeah, rate cuts do nothing for lower forward earnings. Stocks will go down as the "P" disappears and the "E" declines precipitously in the "P/E".
Bear market rallies are always vicious due to all the short covering.
Ipodius,
The Austrians talked about output, MISH never does. His analysis is excellent though.
In a fiat world with helicopters, a determined and idiotic monetary policy can always prevent deflation.
If Zimbabwe can do it, so can the USA.
ipodius,
Cereal boxes? Getting a little esoteric, aren't we?
@ZackAttack
how high do you think the Dow will go in any of these rallies?
It's going down all right (9000 by end of the year?) but what's the chance it can still get to be over 13,000 this year....
Has there ever been an EMERGENCY RATE HIKE?
Cereal boxes? Getting a little esoteric, aren't we?
I have no idea where that came from. Maybe I need a shot of espresso
ipodius,
Is that why my Hershey bar is smaller, but on sale at the old price?
Anonymous said: "Sebastian, you were pounding the table to buy last summer.
Why do you always conveniently leave that part out?"
And if one had bought in July or August using even simple market-timing, one would have caught a nice multi-month uptrend to new highs in October.
Just because I'm long-term bullish doesn't mean "regardless of price or trend." It just means "unless recession is a real possibility" using significant economic data.
S.
The main key to moving forward from here is to provide disclosure and find the bottom of the hole.
Until that happens, all of this is window dressing. We are close to the end of rate cuts without addressing the issue of who is worht what.
Read the Bloomberg editorial " Bear Stearns's Ruin Will Shake Sovereign Funds: Andy Mukherjee".
Bear Stearns's Ruin Will Shake Sovereign Funds: Andy Mukherjee - Bloomberg.com
The US depends on foreign money to survive every day. If there are major losses still to come, as there will be, who will invest?
Check out the DOW chart. Looks like a typical "head and shoulders" pattern forming.
Dow Jones Industrial Average Index ($DJI) - Stock chart, Index chart - MSN Money
TJ,
Gold is like insurance. You need it, but you don't want to actually use it.
I don't buy gold as an investment, but I do buy the wife jewelry - precious metals and gems. Kills two birds with one stone.
Has there ever been an EMERGENCY RATE HIKE?
You may just see one this time.
Nice rally in stocks. Too bad it will be all for not if the rumors about a major UK bank going bk are true. BoE and ECB govenors have all cancelled planned trips. Could just be a coincidence, but it strikes me as very odd.
Anon WRITES:
From the way you right we can tell you know nothing.
Right on Anon!
Angry Saver,
Got lots of insurance!!! Actually, I have bought it as an investment (albeit speculative one), too, given where I believe things are headed. Doing well so far.
I love that idea!!
10 Year U.S. Treasuries Lite, new and improved, looks like the same old Treasury, but now with less yield, less future value, but still at the old price! That is good!
"Just because I'm long-term bullish doesn't mean "regardless of price or trend." It just means "unless recession is a real possibility" using significant economic data. - Sebastian"
In other words, you would be still be carrying significant losses today. (Note - I don't believe anything you say, actually) You are a total joke, Seb. And a very bad trader, by your own recommendations.
Dow closes up 400+, and yet the miners go underground. GOLDILOCKS LIVES!!!
Seriously now... how long does it take before the latest batch of drugs wear off? One day?? Two???
Quick question, Sebastian: If the NBER declares a recession in starting in late 2007 or early 2008, will you admit that you were wrong about the recession call?
Re: Seriously now... how long does it take before the latest batch of drugs wear off? One day?? Two???
Supply and demand dude, yah gotta wait for the man to deliver then smoke the crack, then wait for the man to deliver..... very cyclical indeed!
Fed move should begin dollar-decoupling talk from China & OPEC. Wealth destruction at the same time with price inflation...bizarre. I'm seeing wages begin to retreat as more high-skill workers are competing for a smaller pool of jobs. We are going to overshoot into rapid deflation soon. IMO. If you've got a 401K you might want to liquidate your positions (unless you've got something like HIINX or other good internationals...). unbelievable...
Question.
Why is it if the Federal Reserve is lowering their rates that homeloan rates aren't coming down. I live in a bubble community and this is NOT helping matters at all. What don't I understand...and please be kind.
Thanks.
Sebastian seems to be on the right side of the market, ladies and gents. FWIW today and last Tuesday generated a classic Marty Zweig buy signal based on clustered 90+ adv/dec vol. sessions. Coupled with the extreme fear represented by the sentiment nos. I'm with Sebastian that at least for short term 3-4 mos. more $ to be made on longs. Disc. long LEH, NLY, MOS, CF (the latter 2 overhedged with OTM April calls.
This made me think of the fed rate cut for some reason and Tantas/Crs confessional booth to be opened Friday
Sister Mary Catherine entered the Monastery of Silence.
The Priest said, "Sister, this is a silent monastery.
You are welcome here as long as you like,
but you may not speak until directed to do so. "
Sister Mary Catherine lived in the monastery for 5 years
before the Priest said to her,
"Sister Mary Catherine, you have been here for 5 years. You may speak two
words."
Sister Mary Catherine said,
"Hard bed."
"I'm sorry to hear that," the Priest said,
"We will get you a better bed."
After another 5 years, Sister Mary Catherine was summoned by the Priest.
"You may say another two words, Sister Mary Catherine."
"Cold food," said Sister Mary Catherine,
and the Priest assured her that the food would be better in the future.
On her 15th anniversary at the monastery,
the Priest again called Sister Mary Catherine in to his office.
"You may say two words today."
"I quit," said Sister Mary Catherine.
"It's probably best," said the Priest,
"You've done nothing but bitch since you got here."
The Austrians talked about output, MISH never does. His analysis is excellent though.
I'm not seeing a shortage of output capacity in manufacturing. Asian mercantilism pretty much guarantees a huge surplus of manufacturing capacity.
Ditto for services. I'm guessing that when you have "pet spas" that there is a lot of slack in the service sector.
Oil, oil sucks. But that's the only output argument that comes into play.
What I am seeing is a shortage of un-encumbered income.
tj & the bear writes:
ipodius,
Cereal boxes? Getting a little esoteric, aren't we?
I don't think so. I noticed the same thing last summer when potatoes started appearing in 7lb bags, down from 10lb. All these assclowns screaming that there isn't any inflation remind me of Bush Sr.'s stumped look at the supermarket bar code scanner, or Junior's being poleaxed by the $4/gallon gas question. To the consumer who does his own shopping and has a decent head for prices, the thought is "he doesn't get out much, does he?" I won't even mention pasta prices. But I'm sure there's some staple that I don't buy that's going through the floor, only I haven't noticed. After all, the economists keep saying so.
Sebastian writes:
"Combine that with confirmations from low valuations, low interest rates, and high bearish sentiment, and it's tough to see how you could go too far wrong by getting long this market."
It's not tough for me to see. The dollar is crashing, there is a ton of horrible debt out there and the consumer has nothing to spend. I do appreciate the anticipation of a question I was about to pose, though. I WAS going to ask why anybody would go long. I have my answer. Thank you, Sebastian.
Why don't mortgage rates come down? Because of the risk associated with them now that the refinance, liar-loan, gravy train is over. Confronted with the scary concept of only lending money to people who can pay it back, banks raise mortgage rates. The other option would be for people to try to get housing prices back down to something affordable, but that is "un-Amerikan" so all efforts are being made to prevent that.
As for the Fed "saving the bank system" - big deal. If the banking systems fails, I lose everything. If we hyperinflate or the dollar goes belly up and we get the Amero-peso, I still lose everything. I fail to see how letting a bunch of Wall Street crooks drag out the game for a few more quarters so they can collect even more loot helps anything. Just let'em crash and burn, IMHO.
ipodius writes:
tg, it sort of like when Kellog's changes the size of the box from 14oz to 12.8 oz and keeps the same wholesale price. Is that deflation or inflation?
ipodius | 03.18.08 - 4:02 pm | #
Or just becoming poor?
layperson,
Typical run-of-the-mill mortgages are linked to 10 & 30year Tbills in a typical environment, so as Fed lowers rates, it reduces attractiveness of us currency and rates go down...but, banks are actually pricing risk as well as the cost of capital, so rates are ticking up...you know, risk, that thing we forgot about for the last 7 years...hope this helps.
Ralph,
There's no denying there's serious price inflation. It's price inflation that's used to scale the GDP, too. Great times, eh?
so rates are ticking up...you know, risk, that thing we forgot about for the last 7 years...hope this helps.
blackhat | Homepage | 03.18.08 - 4:23 pm | #
Mortgage rates are actually dropping huge right now on fiexed fannie/freddie and Jumbo.
Layperson... good explanation here:
A Fed rate cut could send some mortgage rates even higher - Mar. 18, 2008
Has there ever been an EMERGENCY RATE HIKE?
It's never required. Investors never lend below the "risk free" rate for the same maturity, as it would be more profitable just to buy T-bonds. But if they think the gov's interest rate is laughably low for the rate/time/credit risk involved, they're free to charge as much above it as the market will bear. And most debtors can't just go to the Fed if they don't like private lenders' rates. See current mortgage/T-bond spreads for an example.
Great times, eh?
Yes, asset prices, money supply and credit shrinking and prices for goods and services increasing. Where have we heard this before?
Something tells me the bond market has to crack...one way or the other.
Cheers,
After today's pump, the P/E ratio of the Russell 2000 Index is right at 50.0 on a trailing 12-month (TTM) basis.
Because earnings are now heading into a dark valley of unknown duration, and earnings of small-cap domestic companies will fall faster than large-cap or internationally diversified companies, it's possible that the P/E of the R2000 could go as high as 90-100 in the months ahead, assuming no change in price from here. It's almost sure to be at least 60-70 by the end of the 2nd quarter, assuming no change from here.
If you think you missed shorting opportunities on grotesquely overvalued little companies in 1999, just hang on.
The ride is bumpy but will be very rewarding for R2000 shorts.
Regarding emergency rate hike:
Theoretically, a big run on the dollar would be interesting to watch.
Maybe if G.W. Bush mistakenly draws a cartoon of Allah or Mohamed it could happen.
The Greatness of Anonymity:
ones ideas can be expressed without attribution, but weighed based on the merit of the idea. When one comes to a mask party, but refuses to where one, what are the other guests supposed to think of this individual?
x,
I beg to differ. It's like saying the market is up because of today's 400+ gain. No, it's volatile. I got a quote on a rate 1 week ago at a higher rate than 2 weeks ago, but lower today. Based on my observable spread, it's a full 1% difference depending on whether mortgage-jeckle or mortgage-hyde is in the house. Also, just my prefernce, but I don't care what rate it is--it's the principle that matters. Government subsidizes the interest anyway...but yes, fha should trend down as it closely follows those tbills which are now worth less than t.p...but fha guidelines are still tightening...
Rich,
Small caps look over-valued to me also. Where do you get your P/E data for the Russell?
The small cap fund managers featured in the media today sound exactly like the dot.com managers in 1999.
"Oversold, buying opportunity, earnings growth, market share, EBITDA, etc."
Narrow-sighted Sebastian-esque crap.
It goes to show how little idiots learn from experience.
blackhat ,
i am just pointing out what i am seeing.
Typical run-of-the-mill mortgages are linked to 10 & 30year Tbills.
The linkage is that investors in MBS (like the primary dealers) short the 10YR Treasury to hedge interest rate risk of holding fixed rate MBS.
Used to work pretty good, until it didn't. Hence the blow-up with BSC.
With the model blown, the MBS market has to price in both increased risk and interest rate risk.
tj & the bear writes:
There's no denying there's serious price inflation.
What, there's another kind? I understand wage inflation, which what workers with bargaining power demand in response to price inflation. But when people talk about inflation, they mean price inflation, they kind where you trade your wallet for a wheelbarrow. Reading other comments here, I get the impression that the Austrian school defines zero inflation as zero growth in the money supply? To my understanding, that's deflation. If it had been true over the last 100 years, I could buy a house for $10, but it would take me 20 years to earn that $10, is my impression. Please post links that I may learn further.
I'm not in yet, my Grandpa used to say don't jump on a V, wait for a nice long U.
x,
point well taken. lendor's i've spoken with don't know what the hell is going on, or where this is going...but the rates are rattling around and properties are not correcting fast-enough...
We are evenly split on whether the Fed will cut 50 or 75 basis points this afternoon. 100 or more basis points would reflate equity markets but put the dollar in freefall unless the Fed also wraps restrictive language around it signalling a firm pause.
We return to our analogy of Scylla and Charybdis. The Fed's task is to navigate between a falling dollar and broken bond on one hand, and the real economy and the equity markets on the other. Its a difficult task, made even more difficult as we approach what the Fed likes to call 'the zero bound.' We call to mind Chairman Bernanke's game plan as discussed in his academic writings:
"Bernanke and Reinhart (2004) discuss three alternative, though potentially complementary, strategies when monetary policymakers are confronted with a short-term nominal interest rate that is close to zero. As discussed in the introduction, these alternatives involve:
(1) shaping the expectations of the public about future settings of the policy rate,
(2) increasing the size of the central banks balance sheet beyond the level needed to set the short-term policy rate at zero (quantitative easing); and
(3) shifting the composition of the central banks balance sheet in order to affect the relative supplies of securities held by the public."
Jesse's Café Américain
rich,
There are multiple ways to calculate P/Es and earnings fluctuate a lot. this is why Buffett suggests using P/S as a proxy. He says P/S has represented bubbles/busts far better than P/Es, and has always reverted to the mean. If you look at P/S for R2000, I see a downside of maybe 10-20% until we get to fair value. The 'S' is P/S will not go down a lot because 'S' is GDP. Even if we get into nasty deep 2 year recession of negative 3%, that's only an extra 6% downward potential.
Of course, maybe the R2000 will undershoot on the downside, then shorts make much more. But that's speculation.
Ralph,
You are correct. A "stable" money supply expands at the same rate as the economy, so a static money supply would have been deflationary, relatively speaking.
Regarding prices, deflation is the norm. Increased production efficiency, either through mass production, heightened worker productivity and/or automation, usually brings the prices of products down. Witness electronics over the past two decades.
It is here:
P/Es & Yields on Major Indexes - Markets Data Center - WSJ.com
It says 45.60 for R200 TTM.
But that was before today's pump.
Earnings reached an all-time record in the 2nd quarter of 2007. They increased on a TTM basis by 8% in Q1 07 and 13% in Q2 07. When those two quarters are thrown out and replaced with red earnings numbers for the corresponding quarters of 2008, TTM P/E ratios will sky-rocket, assuming today's prices. Small-cap P/Es will be back to those of the Nasdaq at its peak. And that will be at the time when domestic U.S. small-cap earnings look the bleakest and fuzziest.
Like I said, it's pretty close to shooting fish in a barrel. The ride is rough, and there's nothing wrong with taking some profits off the table. But don't miss it.
Turbo-
Any more details?
BoE and ECB govenors have all cancelled planned trips
It will be interesting if they cut.
P/S, P/B, Dividend yield. Anything but P/E.
The reason shills on wall street talk about P/E, operating earnings and earning growth is because its makes it SO easy to be bullish.
The reality is different.
rich,
Also remember that your earnings multiple of 45x might contain some negative earnings which are not really meaningful because if a company REALLY is making negative cash flow on an annual basis, year after year, to the point where you can justify taking it into your DFC calculation, the company will go bk and Russell will drop them from their index. So really, you have to be careful. not to mention nonrecurring earnings surprises and write-offs. I'm not saying those write-offs can be ignored (heaven forbid), but I am saying that they ARE INDEED one time in nature, or sometimes 2-time in nature. So Again, anything that cannot be capitalized annualized on a sustainable basis has no business being an input to a P/E calculation.
Does your 45x contain negative earnings or not.
It's ridiculous to use P/S instead of P/E because S doesn't take into account major headwinds that small companies are facing.
Rising costs and limited pricing power.
Higher corporate tax and health care burdens.
Higher financing costs and debt burdens.
Anyway, P/S ratios are way too high. Not many small companies are worth more than 2-3 times sales.
Not sure if someone has pointed this out but in respect of Lehman's earnings.
Page 13 and 14 are of interest. Lehman's took $600 million profit on marking to market some of its debt. It makes a profit because its credit rating has fallen. Without this it made a loss for the quarter.
from the release: "Represents the amount of gains on debt liabilities for which the Company elected to fair value under SFAS No. 157 and SFAS No. 159. These gains represent the effect of changes in the Companys credit spread and exclude any Interest income or expense as well as any gain or loss from the embedded derivative components of these instruments. Changes in valuations are allocated to the businesses within the Companys Capital Markets business segment in relation to funding requirements of the underlying positions."
Now this may be in accordance with the accounting rules but surely someone should be asking the question about whether this is maintainable. It will only recur if their credit rating continues to decline.
Tried to check Goldman's results but not detailed enough to identify the adjustment.
The cynic in me just wonders whether if this went against them in the quarter it would have been highlighted as a one-off?
Rich,
I don't like small caps here either, but you might consider using some other valuation metrics besides P/E just for a sanity check. Earnings are volatile, especially for small caps.
ipodius writes:
Has there ever been an EMERGENCY RATE HIKE?
You may just see one this time.
ipodius | 03.18.08 - 4:11 pm | #
Yes, UK 1992. Lamont hiked rates from 12 to 15% for an afternoon while Soros shorted the s**t out of cable.
Apologies if already posted but you all should be sure to check out Broken Arrow on the Daily Show (Monday 17 March show)
The Daily Show with Jon Stewart Official Website | Current Events & Pop Culture, Comedy & Fake News
probert,
the 45X does include negative earnings, and when you are talking about indexes negative earnings are important. The index P/E is meaningless without them. Otherwise, when companies go from positive to negative earnings, there's no way to track results through P/Es.
Russell does drops weaker components once each year. But Russell's evaluation is backward looking and not predictive, so the index doesn't gain or lose much from reconstitution, and noboy agrees on whether it's a gain or loss net.
Look, by the fourth quarter of this year, there's a good chance that a MAJORITY of components in the R2000 will have negative earnings. So not counting negative earnings in a deep recession really is meaningless.
Sell America short!
Jas
Jas Jain
Jas,
This is the worst thing you can do now. US stocks already lead the world and US$ will raise while gold&silver will fall. That's the trend for the next two years or so.
O-Joe
It's ridiculous to use P/S instead of P/E because S doesn't take into account major headwinds that small companies are facing.
I agree with the healthcare and similar issues,
BUT if this is what bothers you, all you need to do is adjust your targeted P/S downward. So if normally we think 0.7 is the median P/S, and corporate margins will be 4.5% instead of 6% (i.e. 25% lower) all you do is adjust your P/S by that 25%. so instead of 0.7 your target P/S will be 0.7 * 75% = 0.53
So if it's 0.53 the downside is maybe 30-40% in R2000 which would be more attractive than what I have been assuming.
So that's one way you can do it. The absolute last thing you want to do is take a P/E ratio off of some data service and go on CR and pump your R2000 short using this P/E.
Strutter,
The financials, especially the IBs, are so opaque that it's basically a leap of faith to buy or sell them.
It's been nearly impossible to raise bank funding in Sterling again - similar to, but not quite as bad as pre Northern Rock last fall. It's just speculation at this point, but I wouldn't be surprised if another UK bank has had to go hat in hand to the BoE. Given that the ECB may be involved, I'd guess this time it's a major UK clearing bank, and I'd bet Barclays. Like I said earlier though, this may be coincidence and the hallucinations of overwrought hedgies.
<i>US$ will raise while gold&silver will fall. That's the trend for the next two years or so.</i>
So, one day makes a trend, eh? Great technical analysis there.
You are correct. A "stable" money supply expands at the same rate as the economy, so a static money supply would have been deflationary, relatively speaking.
Nitpick...
A "stable" monetary base expands at the same rate as productivity gains. Productivity gains are the only way the monetary base can grow but purchasing power can be preserved into the future.
Greenspan's "productivity miracle" was Greenspan's reason for increasing the rate of the growth in the monetary base after '95.
The US has been able to grow its monetary base at closer to 5%-10% without higher inflation because Asia has been "importing" our inflation. When they finally decouple (not yet) the US will be seriously screwed with either very high real rates or high inflation (and high nominal rates).
Neither will be good for US asset values.
Kicker,
Exactly correct! AG's action would've resulted in massive inflation had it not been for cheap imports and the reserve currency status of the dollar.
Look, by the fourth quarter of this year, there's a good chance that a MAJORITY of components in the R2000 will have negative earnings. So not counting negative earnings in a deep recession really is meaningless.
rich,
You either forgot, or have no clue, why we (me and you) use P/E ratios.
P/E ratios are a proxy for DFC valuation. The value of an asset is the value of all FCF from now until the day the sun burns the earth, discounted at an appropriate rate. Usually for normal companies people look at earnings over the next 10-20-30 years because they can't see further.
For example: I have a building, I buy it at cap rate of 7% (a P/E of 14) because I think the next 14 years will give me current income. I can make adjustements for discount rates inflation and maintenance to get a more precise number...but whatever.
Same thing with a stock. Small-cap widget maker's value is the DFC of each year's earnings, discounted by appropriate rate. So I don't give a DAMN (or, ALMOST don't give a damn) that earnings will be negative in 2008 & 2009. If I know that in the decade after this the company will turn around, those numbers are only a tiny difference.
And if a company truly has negative FCF from now to infinity then guess what? chapter 11, dropped from Russell 2000.
The markets are forward looking, you and I and everyone else KNOW that earnings will turn around. The market will not drive indices to the ground simply because of 1 year's earnings. Show me when is the last time this happened??
Same thing with a stock. Small-cap widget maker's value is the DFC of each year's earnings, discounted by appropriate rate. So I don't give a DAMN (or, ALMOST don't give a damn) that earnings will be negative in 2008 & 2009.
If only the market were so rational...
We're looking at years of stagnation, in my opinion, and grinding recession. With real estate and autos down, the prospects for domestic growth are dim. And there will be wrenching global changes, as the world adjusts to a diminished U.S. consumer.
U.S. needs better government to provide a base for productive business. We are woefully inefficient with regard to health care, which is a huge share of our economy. The financial system is a mess and is in need of a major overhaul. However, there is no consensus on these items, which means years of wrangling before we get back on the right path.
Ultimately, I'm hopefully that all these changes will make this a better country and a better world...
Probert,
I agree. P/E is the least useful metric for valuing markets.
However, all the bad loans made over the last 5 years really spook me. Same with the market's recent manic depressive mood swings and the panic fed moves.
I like the sidelines here.
The markets are forward looking, you and I and everyone else KNOW that earnings will turn around. [probert]
Ah, but what if earnings don't recover as "everyone" expects? Remember, earnings have been artificially high for years because of exorbitant credit. When people realize that that is gone for more than just a year or two, the stock market will adjust accordingly...
Angry,
I with you on the sidelines. I'm hoping to get back in on the long side in about 1 1/2 years (fall 2009)...
Probert,
I agree. P/E is the least useful metric for valuing markets.
However, all the bad loans made over the last 5 years really spook me.
When did I say that I am not shorting anything?? I am still very much short this market, including Russell 2000!
--
"Jas, we are awaiting our call to pitchforks and gas cans!"
I am neither a revolutionary nor a politician. I am self-avowed critic and it is against my religion to offer solutions (conflict of interests for a critic). My job is to point out problems including those of CR. It is business and nothing personal.
Jas
When people realize that that is gone for more than just a year or two, the stock market will adjust accordingly...
This is what I call depression scenario because you're arguing that politicians + the owners of capital will have a persistent problem of generating FCF to owners. Do I think there will be a depression? I say it's 50/50. But I don't like to make bets on 50/50, I like when my odds are 90/10. I like to shoot fish in a barrel. Recession is fish in barrel, depression is cointoss.
Kicker writes:
A "stable" monetary base expands at the same rate as productivity gains. Productivity gains are the only way the monetary base can grow but purchasing power can be preserved into the future.
Hmm. So post-WWII when women stayed in the workforce, along the long change from average 1 earner HH to average 2 earner HH, does the monetary base expand to maintain stability? Productivity hasn't increased as the household is working 80 hours instead of 40, but the GDP sure has. Then times get tough and ten percent of households take on an extra job, once again increasing output but not output/hour. More money? Then along comes the millenium and three jobs are working the same SSN, two of them on the kill line at the Tyson plant unbeknownst (or perhaps not) to the bona-fide holder of the SSN. Plus all those construction workers outside the Home Depot. Does this all get counted, or was the miracle a mirage? I can totally see IT increasing productivity a lot for a decade or so, but was it overstated? Not trying to pick a fight, just curious.
I think one scenario is the owners of capital will be china/mideast. Or, alternatively, they will be the ones to determine the price of commodities, or BOTH. And if this happens, we will have an ugly stagflation and P/E ratios will be at 5x like in 1982, and P/S ratios will be at like 0.2 - 0.3x.
This is a stagflation depression, and if this happens Rich is right, I expect the same result as he does. But I don't know. We can also have a deflationary depression like 1930's in which case... well...ask dryfly
Well said, probert. I think I mistook your position when I posted.
I agree that recession is underway. Right now I'm thinking more in terms of prolonged and/or recurring recession, as opposed to great depression...