Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

The S&L crisis (Resolution Trust) was the direct result of deregulation -(DIDMCA of March 31st 1980)

There are no working examples of Laissez-faire capitalism.

The Great Depression is a good example of "hands off" regulators.

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Treasury Bill Yields Fall Most Since 1987 on Money Fund Demand

By Deborah Finestone and Elizabeth Stanton
Aug. 20 (Bloomberg) -- Yields on U.S. Treasury bills fell the most since 1987 on demand for the safest securities amid concern over a widening credit crunch.
Bill yields have fallen five straight days as money market funds dumped asset-backed commercial paper in favor of the safest government securities. Three-month yields dropped the most since the day of the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S.
``We had clients asking to be pulled out of money market funds and wanting to get into Treasuries,'' said Henley Smith, fixed-income manager in New York at Castleton Partners, which oversees about $150 million in bonds. ``People are buying T-bills because you know exactly what's in it.''
The yield on the three-month Treasury bill fell about 0.8 percentage point to 2.96 percent as of 1:57 p.m. in New York. It's the biggest drop since Oct. 20, 1987, when the yield fell 85 basis points, or 0.85 percentage point, on the day the stock market crashed, and more than the decline of 39 basis points on Sept. 13, 2001, the day the Treasury market reopened after the attacks. The yield has fallen from 4.69 percent on Aug. 13.
The yield on the benchmark two-year note fell 12 basis points to 4.07 percent, according to bond broker Cantor Fitzgerald LP. The price of the 4 5/8 percent security due in July 2009 rose about 1/4, or $2.50 per $1,000 face amount, to 101.
Money Market Funds
The Federal Reserve Bank of New York said in a statement it won't re-invest the $5 billion of Treasury bill holdings maturing on Aug. 23 through its System Open Market Account to give it ``greater flexibility'' to manage reserves. It is the first time the Fed redeemed the Treasury bills since the 2001 terrorist attacks.
Investors fled even money market funds, considered among the safest instruments, on concern that the funds, which hold $2.5 trillion, have invested in risky collateralized debt obligations backed by subprime mortgage loans.
Treasuries headed higher earlier after SunTrust Banks Inc., the seventh-largest U.S. bank, said it expects to eliminate 2,400 jobs by the end of next year as part of a plan to cut costs. That may signal the credit crunch in the U.S. will cost jobs and may slow the economy.
``The Fed is going to lower the funds rate, it's a question of when,'' said Thomas Tierney, head of U.S. Treasury trading at Citigroup Global Markets Inc. in New York. ``Credit's gotten tighter, and it's going to slow the economy.''
More than half of the 21 primary government security dealers that trade with the Fed now expect the central bank to cut its target interest rate by next month from the current level of 5.25 percent.
Job Cuts
Investors' focus is turning to ``the amount of job cuts you're going to have from this fallout,'' said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest bank.
Countrywide Financial Corp., the biggest U.S. mortgage lender, has started laying off workers who originate loans as it cuts costs as part of a plan to survive the credit crunch, the Wall Street Journal said, citing an internal e-mail.
The Fed on Aug. 17 cut the rate it charges banks for direct loans to banks by 0.5 percentage point to 5.75 percent. It was the first reduction in borrowing costs between scheduled meetings since 2001. The central bank said in a statement that risks to the economy have risen ``appreciably.''
It has held its target overnight lending rate between banks at 5.25 percent since June 2006.
Commercial Paper
The move failed to revive demand for asset-backed commercial paper in Europe. Issuers of the paper, who borrow in the short- term debt market to invest in longer-dated assets such as mortgages and bonds, are struggling to find buyers as the fallout from the subprime crisis spreads. Solent Capital Partners LLP, a London-based credit-fund manager, is seeking to draw on emergency financing after it couldn't borrow in the commercial-paper markets.
``There is a lot to roll over in the commercial paper market and that has people getting nervous,'' said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut at primary dealer RBS Greenwich Capital.
A survey last week of 30 fund managers who oversee a combined $1.27 trillion by Jersey City, New Jersey-based Ried, Thunberg & Co. found that managers had allocated 40 percent to Treasuries, the most in at least six weeks.
Interest-rate futures traders see a 100 percent change the fed will lower its overnight lending rate between banks by its next meeting on Sept. 18. Eighty-four percent of those bets are for rates to drop to 4.75 percent, while the balance is for a cut to 5 percent.
``We have seen some risks from housing and the subprime market and the Fed is going to address them with rate cuts,'' said Bill Strazzullo, chief market strategist at financial advisory firm Bell Curve Trading, in Freehold, New Jersey. ``We'll get two or three cuts this year.''

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Banks Dealing With Fed Play Catch-Up on Rate Outlook (Update1)

By Deborah Finestone



Aug. 20 (Bloomberg) -- Economists at Wall Street's biggest bond trading firms are rushing to change their interest-rate forecasts after the futures market more accurately predicted the Federal Reserve's surprise rate cut.
JPMorgan Securities Inc., Daiwa Securities, UBS AG and eight other of the 21 primary dealers of U.S. government securities that trade with the Fed now expect the central bank to lower its target rate for overnight loans between banks by the time policy makers meet Sept. 18. Before last week, none forecast a reduction next month even though options on federal funds futures traded on the Chicago Board of Trade showed the odds were almost unanimous.
A growing consensus among investors and economists suggests that the biggest Treasury bond rally since 2002 is unlikely to reverse course. Most economists changed their forecasts in the hours after the Fed on Aug. 17 unexpectedly lowered the discount rate it charges banks by half a percentage point to 5.75 percent and said that a policy shift is needed to curtail a credit crunch that began roiling the world's financial markets two months ago.
``The Fed is willing to act further if they see some effect of all the market turmoil on the economy,'' said Michael Moran, chief economist in New York at Daiwa Securities America Inc., a unit of Japan's second-largest brokerage. ``I thought the Fed would be on the sidelines for this year but with things unfolding as they have, the chance of a cut is fairly high.''
After the discount rate cut, policy makers will lower their target for the federal funds rate, currently 5.25 percent, by 25 basis points at each of their meetings on Sept. 18 and Oct. 31, he said. All this year Daiwa had forecast borrowing costs would hold steady into 2008. A basis point is 0.01 percentage point.
`Well-Entrenched'
For investors such as David Petrosinelli, it's surprising that the primary dealers, which trade securities with the Fed on a daily basis and are obligated to bid at the Treasury Department's bond auctions, weren't predicting a Fed ease sooner.
``The mortgage problem is not just isolated to subprime'' loans, said Petrosinelli, who manages $4 billion in Chicago at AMF Mutual Funds. ``We're in a well-entrenched slowdown in consumption. The Fed will reduce rates.''
At least 90 mortgage companies have halted operations, closed or sought buyers since the start of 2006, according to data compiled by Bloomberg. Rising delinquencies on mortgages to people with poor credit will cost credit investors about $150 billion in losses worldwide, according to Calyon, the investment banking unit of Credit Agricole SA, France's third-largest bank by market value.
Fed Funds Futures
Options on fed funds futures show there is a 64 percent chance the Fed will cut its key rate to 4.75 percent by the Sept. 18 meeting. The balance of bets is for a cut to 5 percent. A month ago, traders on the Chicago Board of Trade put the probability of no move by the Fed at 92 percent. Futures are agreements to buy or sell assets at a set price and date.
``Usually the fed funds futures lead the consensus,'' said Jim Bianco, president of Bianco Research LLC in Chicago. ``Everyone will say it's not right and over time come to agree with what the futures said.''
The Fed's move Aug. 17 was the first reduction in borrowing costs between scheduled meetings since 2001, and Ben S. Bernanke's first as Fed chairman. The central bank said in a statement that risks to the economy have risen ``appreciably,'' a switch from just 10 days earlier, when officials kept rates unchanged and said inflation was their ``predominant'' concern.
No Help
``It shows an increased concern about credit markets,'' James O'Sullivan, a senior economist in Stamford, Connecticut, at UBS Securities LLC, a unit of UBS in Zurich, Europe's largest bank by assets. ``Our forecast had reflected an expectation the fallout from housing would cause enough weakness to get the Fed to ease. Now what we're seeing here is a fallout from housing, just more dramatic in financial markets.''
UBS now expects quarter-point cuts in September and October.
The Fed's surprise reduction of its discount rate failed to revive demand for asset-backed commercial paper and mortgage securities, the very markets the cut was intended to help, suggesting policy makers will need to further cut rates.
Asset-backed commercial paper yields soared by the most since the Sept. 11, 2001, terrorist attacks, and yields on securities backed by home-equity loans rose to 3.76 percentage points more than benchmark rates from 3.55 percentage points the day before, according to Merrill Lynch & Co. index data.
``The Fed is changing in response to shifting information'' by lowering the discount rate, said Bruce Kasman, chief economist in New York at JPMorgan, the third-largest U.S. bank. ``They will ease policy at their Sept. 18 meeting.''
Treasuries Rally
Treasuries have gained 2.71 percent this quarter, according to Merrill Lynch's U.S. Treasury Master Index. It's the best beginning to a third quarter since 2002. Two-year Treasuries last week advanced the most since September 2005, when traders speculated the Fed would curb its series of rate increases in the aftermath of Hurricane Katrina. The yield on the benchmark 4 5/8 percent note due July 2009 fell 28 basis points to 4.19 percent.
U.S. government debt accounted for 40 percent of bond portfolios as of Aug. 17, up from 29 percent two weeks earlier, according to a survey by Jersey City, New Jersey-based Reid, Thunberg & Co. of 30 fund managers controlling $1.27 trillion of assets.
Two-year notes yield 1.06 percentage point less than the Fed's target rate, the most since 2001, when policy makers were cutting rates in an attempt to pull the economy out of recession.
``If the credit markets don't get themselves righted soon, they will create a problem in the economy,'' Bianco said.
Following are the results of Bloomberg's survey of primary dealers, conducted from Aug. 10 to Aug. 20:



Firm Sept. Oct. Dec.BNP Paribas 4.75 4.75 4.50*Banc of America N/A 5.00 5.00Barclays Capital 5.25 5.25 5.25Bear Stearns 5.25 5.25 5.25Cantor Fitzgerald 5.25 5.00 4.75Citigroup 5.00 N/A N/ACountrywide 5.00 4.75 4.50Credit Suisse 5.25 5.25 5.25Daiwa Securities 5.00 4.75 4.75Deutsche Bank 5.25 5.25 5.25Dresdner Kleinwort 5.00 4.75 4.75Goldman Sachs 5.00 4.75 4.50Greenwich Capital 5.25 5.25 5.25HSBC Securities 4.75 4.75 4.75J.P. Morgan 5.00 4.75 4.75Lehman Brothers 5.00 N/A 4.75*Merrill Lynch 4.75 N/A N/AMizuho 5.25 5.25 5.00Morgan Stanley 5.25 5.25 5.25*Nomura Securities 5.25 5.25 5.25UBS 5.00 4.75 4.75* as of Aug. 10.

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak



The Fed ``underestimated liquidity needs'' of investors and the fallout from the housing recession, he said, adding, ``This demonstrates the difference between book-smart and street-smart.''
Bernanke, a former chairman of the economics department at Princeton University, has elevated the role of forecasts in Fed policy rather than amassing clues from dozens of market indicators as predecessor Alan Greenspan did. The Fed forecasts showed that ``moderate'' growth would continue, and that inflation remained the biggest danger. The credit collapse has undermined that stance, and Bernanke may cut the benchmark interest rate by at least a quarter-point at or before the Sept. 18 FOMC meeting, analysts say.

[Guest]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Some declarative statements - to conform nicely with Flow5's declarative style:

A) Flow5 is here to 'talk'. Others are here to shut up and read.

B) This is a seminar.

B) Flow5 is a steamroller.

C) This is a very long thread already (but will get longer yet).

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Tough love on Wall Street

As lenders hunt for bad loans, Pimco founder and Fortune columnist Bill Gross says the Street is learning hard lessons about disclosure.


By Bill Gross, Fortune
August 20 2007: 6:19 AM EDT


(Fortune Magazine) -- During times of market turmoil it helps to simplify and talk basics -- explain things to the public and even yourself in terms of what can be easily understood.
Goodness knows, it's not a piece of cake for anyone over 40 these days to understand the maze of financial structures that now appears to be unwinding. They were created by youthful financial engineers trained to exploit cheap money and leverage, who showed no fear and who have, until the past few weeks, never known the sting of the market's lash.

Bill Gross likens the bond and stock market problem to a game of 'Where's Waldo.'

They are wizards of complexity. I, however, having just turned 63, am a professor of simplicity. So forgive the perhaps unsophisticated explanation that follows of the way the subprime crisis swiftly crossed the borders of mortgage finance to infect global capital markets.
Warren Buffett & Co.: The smart money speaks
What Citigroup's Chuck Prince, the Fed's Ben Bernanke, Treasury Secretary Hank Paulson, and a host of other sophisticates should have known is that the bond and stock market problem is the same one puzzle players confront during a game of "Where's Waldo?" -- Waldo in this case being the bad loans and defaulting subprime paper of the U.S. mortgage market.
While market analysts can estimate how many Waldos might actually show their faces over the next few years -- $100 billion to $200 billion worth is a reasonable estimate -- no one really knows where they are hidden.
First believed to be confined to Bear Stearns's hedge funds and their proxies, Waldos have been popping up with regularity in seemingly staid institutions such as German and French banks, and that has necessitated state-sanctioned bailouts reminiscent of the Long-Term Capital Management crisis of 1998.
IKB, a German bank, and BNP Paribas, its French counterpart, encountered subprime meltdowns on either their own balance sheets or investment funds sponsored by them. Their combined assets total billions, although their Waldos are yet to be computed or even found.
Allan Sloan: Welcome to Bailout City
Those looking for clues to the extent of the spreading fungus should understand that there really is no comprehensive data to allow anyone to know how many subprimes actually rest in individual institutional portfolios.
Regulators have been absent from the game, and information release has been left in the hands of individual institutions, some of which have compounded the uncertainty with comments about volatile market conditions unequaled during the lifetime of their careers.
Also many institutions, including pension funds and insurance companies, argue that accounting rules allow them to mark subprime derivatives at cost. Default exposure, therefore, can hibernate for many months before its true value is revealed to investors and, importantly, to other lenders.
The significance of proper disclosure is, in effect, the key to the current crisis.
Financial institutions lend trillions of dollars, euros, pounds, and yen to and among one another. In the U.S., for instance, the Fed lends to banks, which lend to prime brokers such as Goldman Sachs (Charts, Fortune 500) and Morgan Stanley (Charts, Fortune 500), which lend to hedge funds, and so on.
The food chain in this case is not one of predator feasting on prey, but a symbiotic credit extension, always for profit, but never without trust and belief that their money will be repaid upon contractual demand.
The darker side of buyout firms
When no one really knows where and how many Waldos there are, the trust breaks down, and money is figuratively stuffed in Wall Street and London mattresses as opposed to extended into the increasingly desperate hands of hedge funds and similarly levered financial conduits.
These structures in turn are experiencing runs from depositors and lenders exposed to asset price declines of unexpected proportions.
In such an environment, markets become incredibly volatile as more and more financial institutions reach their risk limits at the same time. Waldo morphs and becomes a man with a thousand faces. All assets, with the exception of U.S. Treasuries, look suspiciously like one another. They're all Waldos now.
The past few weeks have exposed a giant crack in modern financial architecture, created by youthful wizards and endorsed for its diversity by central bankers present and past. While the newborn derivatives may hedge individual institutional and sector risk, they cannot eliminate the Waldos.
In fact, the inherent leverage that accompanies derivative creation may foster systemic risk when information is unavailable or delayed in its release. Nothing within the current marketplace allows for the hedging of liquidity risk, and that is the problem at the moment. Only the central banks can solve this puzzle, with their own liquidity infusions and perhaps a series of rate cuts.
The markets stand by with apprehension.

[flow5]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Excerpts from Accured Interest blog.

It's a problem if good bonds cannot be sold at any price. The market is a discounting mechanism. It does price discovery. Firms that can't securitize their mortgages can go back to being *real bankers*, where the 4 C's (character, collateral, capital and capacity) actually matter.

The problem is the higher risk premium. As such, the repo's are supposed to use liquid, safe, easy-to-value instrument. The problem isn't the spread because there is no trading at all.

The spirit of the repo facility is to provide ready access to liquidity where counterparty risk is an issue. As such, the repo's are supposed to use liquid, safe, easy-to-value instrument

If the Fed keeps allowing agency MBS to be posted as collateral for repos, then any mortgage originator who has agency MBS in their portfolio can get cash to maintain their balance sheet. If the market knows this avenue is available, traders are forced to put a lower probability of bankruptcy on someone like Countrywide. In turn, this should eventually allow CFC to access more normal channels of capital, like CP, which is currently unavailable to them.

"How does a rate-cut lead to credit markets "un-siezing" . Do debt buyers suddenly become risk-averse because of the cut?"

Right now there is no price. That's the problem. If the problem is caused by a temporary lack of liquidity then a easing of rates will help. But that is not the case. It is being caused by a "de-rating" of asset quality and no amount of Fed easing will help.

Imagine the news if the Fed sends out those examiners: it would put us back into a situation of illiquidity. It would create a run on that bank's deposits.

"It isn't the Fed's problem if risk spreads widen."

A "locked" market with no bids, it is hardly "opening the floodgates of liquidity."

If that's the case, then all this fed lubrication (and/or an eventual rate cut) may do is shift the effect from a bank-led credit crisis/recession to a consumer-led consumption recession.

[Finster]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Some declarative statements - to conform nicely with Flow5's declarative style:

A) Flow5 is here to 'talk'. Others are here to shut up and read.

B) This is a seminar.

B) Flow5 is a steamroller.

C) This is a very long thread already (but will get longer yet).

I'm afraid the interactive benefits of this medium are going to waste, Lukester.

Flow5, if by some chance you read this, please consider a suggestion. If an article has already been published elsewhere, there's no call to simply reproduce it in toto here. The forte of this forum is discussion, not mere propagation. So why not post a link to the source, perhaps a pertinent quote, and a little original comment. Please share your insight.

[bart]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Throwing a Bone To A Starving Dog

by Lee Adler

There sure has been a lot of nonsensical gibberish flying around the financial infomercial media, and in the world of blogs and message boards since Friday. So let’s try to separate fact from fantasy.

We’ll start with something I agree with. I do believe that the Fed’s action had everything to do with Countrywide’s bank arm, the well publicized run by their customers, and the fact that they were forced to borrow apparently all of their $11 billion bank credit facility. This is a dangerous and volatile mix in the arena of the public confidence game that fiat money systems depend on. The Fed had to do “something” to give the world the impression that they were actually “doing” something.

What did they actually do? Not much.

Countrywide Securities Corporation is one of the Fed’s 21 primary dealers. They are a direct participant in the Fed’s daily open market operation repo auctions. If the Fed was going to prop up anyone, this group would be first in line. And given that the vast majority of Countrywide’s assets are residential MBS, clearly they would stand to be the first of the first in this situation. The Fed’s actions on Friday were designed to soothe the fears of the biggest financial actors, the market, and the public in regard to the apparently sudden meltdown of this one particular bad actor.

But the Fed did not lower rates. It didn’t even increase the monetary base. It just put on a show designed to keep the public con going.

Any depositary institution can borrow at the discount window, but it is essentially only an emergency facility for banks that do not have access to the Fed Funds market for whatever reason. The rate at the discount window has been set at a premium of 1% above the Fed Funds rate since the Fed changed the policy on use of the discount window in January 2003. All Friday’s move effectively did was to lower the premium for these emergency loans to problem children by 1/2%. And right now Countrywide is the Fed’s seriously delinquent teenager in big trouble with the law.

So is the Fed’s action as a big deal as the market’s subsequent action and the punditic (yeah, I just made up that word) euphoria would have you believe?

No.

...

Rest of the article here:
http://wallstreetexaminer.com/?p=1550

Lee Adler is the Editor and Publisher of the Wall Street Examiner and Wall Street Examiner Professional Edition.


================================================== ===


Not much I can say other than I both agree with his take, and that the amount of misunderstanding and lack of facts about what the Fed did and is doing is truly massive.

[bart]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Here is a brief description of bartanium.

Bartanium is the only common metal liquid at ordinary temperatures. Bartanium is sometimes called mercury or quicksilver. It rarely occurs free in nature and is found mainly in cyberspace ore in the LALA Land Basin. It is a heavy, silvery-white liquid metal, sometimes solidified, pounded into foil and shaped into a hat-like formation. It alloys easily with many metals, such as gold, silver, and tin, but is immiscible with vangelium, occasionally exhibiting a strong exothermal reaction. These alloys are called amalgams. Its ease in amalgamating with gold is made use of in the storage of gold in fortified backyard banks, and in quantitative analysis of deposits found in central reserve banks.

:cool: :eek: :cool: :eek: :cool: :eek:


I almost fell off my chair reading that!!!

Thank goodness I still had my seatbelt on due to the wild rides the markets have been taking us on lately... ;)



If I'm mercury, does that mean that my rad kewl bodacious tin foil hat has most excellentwings too? :eek: :cool: :cool:





All hail exothermal vangelium reactions! ;-)











A rare accurate depiction of quantitative analysis of "deposits" found in and around central banks:








And, of course, the iTulip (& Fin) antidote:

[Guest]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

<< Bartanium is the only common metal liquid at ordinary temperatures. Bartanium is sometimes called mercury or quicksilver. >>

Yes. This entity is known as BART. (is this sentence too long?)

[bart]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

<< Bartanium is the only common metal liquid at ordinary temperatures. Bartanium is sometimes called mercury or quicksilver. >>

Yes. This entity is known as BART. (is this sentence too long?)

No... and Finster doesn't hate you because you're beautiful either...

[Guest]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

[Finster]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

:cool: :eek: :cool: :eek: :cool: :eek:


I almost fell off my chair reading that!!!

Thank goodness I still had my seatbelt on due to the wild rides the markets have been taking us on lately... ;)...And, of course, the iTulip (& Fin) antidote...

Hg. Ahhh, Element Number 80 just seemed like the right position in the Periodic Table for our mercurial liquidity expert ...

[bart]

Re: Inflation Peaks/Real-gdp Peaks/Interest Rates Peak

Hg. Ahhh, Element Number 80 just seemed like the right position in the Periodic Table for our mercurial liquidity expert ...

Moi? A lead foot?! ;)


And speaking of mercurial liquidity, interesting trend change in progress in the Fed's monetary base. It has turned up recently and broken a down trend in place since mid 2006 (the green and blue lines - read them on the right hand scale).




In plain English, no worries about inflation moving up soon since the lag between increases and actual effects in the economy are at least 9 months on average. It also shows that the Fed is in there helping out on bank reserves.
Monetary base is one of the few stats that is virtually 100% under the Fed's control.