Fed Injects $41 Billion in Liquidity

[GRG55]

Re: Fed Injects $41 Billion in Liquidity

There are a lot of hacks out there. I like Hussman. He's definitely one of the good guys and knows his stuff.

Still not convinced of the relevance of "new" versus "recycled" bank credit. The Fed does little more than try to maintain order in the non-bank credit system and otherwise contributes little in the way of what is used for "money" these days. They grease the credit machine but are no longer the machine.

As for the Wall Street platitudes, it's actually a lot worse than Hussman thinks. After spending more hours than I care to count talking to investment bankers, VCs, private equity fund managers, and money managers of all stripes, I can tell you with conviction that the old adage is true: At any one time only ever three current ideas on Wall Street. At the moment they are:

- Structured finance is dead
- The dollar is doomed
- Dollar priced commodities to the moon

To the extent that the majority on Wall Street believe The Three Ideas, they become self-fulfilling.

I'll add that most of the guys I talk to express more serious pessimism about the future of the financial industry than I have heard since 2001. Partly this is due to structural changes in the industry since the early 2000s. Hedge funds have been replacing investment banks. In response, investment banks have been turning into hedge funds, while trying to maintain the old, fixed cost heavy infrastructure. Long term, this is a loser. Small, light and nimble is the future.

Massive layoffs also aren't helping, but there's also an element if "Boy, we really overdid it this time."

Is there validity to the observation that there simply aren't 7000 (or whatever the number is) hedge fund managers with the talent to actually run one of these funds? Given the performance lately one would be inclined to think this might be true. And given the leakage of such talent out of the large banks and brokers in recent years how can they possibly "turn into hedge funds" successfully? Citi bought a fund and got the manager with the deal, but it would appear they may now have difficulty keeping Pandit. UBS bought Dillon Read and ended up shutting it down.

Doesn't look that promising a strategy...

[EJ]

Re: Fed Injects $41 Billion in Liquidity

Is there validity to the observation that there simply aren't 7000 (or whatever the number is) hedge fund managers with the talent to actually run one of these funds? Given the performance lately one would be inclined to think this might be true. And given the leakage of such talent out of the large banks and brokers in recent years how can they possibly "turn into hedge funds" successfully? Citi bought a fund and got the manager with the deal, but it would appear they may now have difficulty keeping Pandit. UBS bought Dillon Read and ended up shutting it down.

Doesn't look that promising a strategy...

Made a similar point March last year in Hedge Funds are Still in the Dark and in the update Most Hedge Fund Suck in December.

Around that time we also pointed out in an AntiSpin:

Reading this you'd think that these investment banks had a great year generating revenues from investment banking, but you'd be wrong. For the latest reported fiscal year, Morgan Stanley, for example, generated only 16.4% of revenues from investment banking, 21.2% from asset management, 14.3% from commissions and 12.5% from "other." Where do the bulk of their revenues–35.6% to be exact–come from? "Principle Transactions" as in long-short and other hedge fund strategies.

How about the biggest winner of the bunch, Goldman Sachs, whose full-year profit soared 70 percent to $9.4 billion, which is, by the way, greater than the GDP of Honduras. Investment banking generated 14.8% of revenues, asset management 19.2%, commissions 12%. Hedge fund type investments? A whopping 54% of revenues. What does that make Goldman but a giant hedge fund?

A giant, expensive hedge fund.

The whole investment banking business model broke with the stock bubble and the industry has been devolving every since. I don't think anyone knows where the process ends.

[jk]

Re: Fed Injects $41 Billion in Liquidity

At any one time only ever three current ideas on Wall Street. At the moment they are:

- Structured finance is dead
- The dollar is doomed
- Dollar priced commodities to the moon

To the extent that the majority on Wall Street believe The Three Ideas, they become self-fulfilling.

sounds like they've been reading itulip. those ideas, albeit unsubtle, aren't so different from what we say around here. the thing that's missing is the full implication of the end of structured finance on the mortgage and m&a markets.

[EJ]

Re: Fed Injects $41 Billion in Liquidity

sounds like they've been reading itulip. those ideas, albeit unsubtle, aren't so different from what we say around here. the thing that's missing is the full implication of the end of structured finance on the mortgage and m&a markets.

Let's think that through. If securitization and non-bank credit made credit creation sans inflation possible since the early1990s, what does the "freezing up" for a while of securitization and non-bank credit imply?

[c1ue]

Re: Fed Injects $41 Billion in Liquidity

I think its time for my hedge fund joke:

A new graduate from Wharton gets hired into a big hedge fund.

He works his butt off - 100+ hours a week, and a year passes by.

After his 'anniversary', he gets invited by the hedge fund head honcho to the honcho's yacht to celebrate his first year and hard work.

The boat is beautiful, stocked with the latest gadgets, crewed by the best, and replete with beautiful and charming women and great food.

While partying, another yacht pulls up.

It is the hedge fund's banker.

The two boats tie up together and the party continues with even greater fervor.

In a brief interlude, the 1st year associate looks up and asks: "Where are the customer's boats?"

:rolleyes:

[jk]

Re: Fed Injects $41 Billion in Liquidity

Let's think that through. If securitization and non-bank credit made credit creation sans inflation possible since the early1990s, what does the "freezing up" for a while of securitization and non-bank credit imply?

the ka before the poom! [i was leaving that as an exercise for the reader.]

[Jim Nickerson]

Re: Fed Injects $41 Billion in Liquidity

the ka before the poom! [i was leaving that as an exercise for the reader.]

Should I take your statement as an afirmation that your opinion Ka is still ahead?

[Spartacus]

Re: Fed Injects $41 Billion in Liquidity

sounds like they've been reading itulip. those ideas, albeit unsubtle, aren't so different from what we say around here. the thing that's missing is the full implication of the end of structured finance on the mortgage and m&a markets.

that can't be the concensus - we as contrarians would be going the other way.

They're still in the "we can come out OK in the end" phase

[GRG55]

Re: Fed Injects $41 Billion in Liquidity

the ka before the poom! [i was leaving that as an exercise for the reader.]

What about the restoration of inflationary bank-created credit; only this time we have a globalized coordinated effort by all the central banks so the traditional role of the Fed (plus BoE, France and Germany) is much diminished compared to historical cycles?

Currently they are all talking hawkishly and refusing to cut interest rates, but as their economies start to roll over on the heels of a US recession would they not respond in this fashion?

[jk]

Re: Fed Injects $41 Billion in Liquidity

What about the restoration of inflationary bank-created credit; only this time we have a globalized coordinated effort by all the central banks so the traditional role of the Fed (plus BoE, France and Germany) is much diminished compared to historical cycles?

Currently they are all talking hawkishly and refusing to cut interest rates, but as their economies start to roll over on the heels of a US recession would they not respond in this fashion?

i think that at some point there will be a coordinated intervention in the currency markets and that will be a signal of a major shift in the markets. i just don't know when it will happen or what will trigger it. any thoughts?

[GRG55]

Re: Fed Injects $41 Billion in Liquidity

i think that at some point there will be a coordinated intervention in the currency markets and that will be a signal of a major shift in the markets. i just don't know when it will happen or what will trigger it. any thoughts?

Perhaps soon, given today's rather sharp edged movements in the various dollar crosses. The de-leveraging, and associated rebound in the US$ that Peter Warburton talked about better start happening damn soon, or the Central Banks may be forced to start intervening to prevent a dislocation gap down in the US$ exchange rate.

[jk]

Re: Fed Injects $41 Billion in Liquidity

Perhaps soon, given today's rather sharp edged movements in the various dollar crosses. The de-leveraging, and associated rebound in the US$ that Peter Warburton talked about better start happening damn soon, or the Central Banks may be forced to start intervening to prevent a dislocation gap down in the US$ exchange rate.

the dollar index is trading with a 75 handle at this moment. we should start a pool to predict the level that will trigger intervention. i'd take 72. [don't know why, in particular, but it's 10% lower than prior lows, so why not?]

[c1ue]

Re: Fed Injects $41 Billion in Liquidity

JK,

The intervention might not happen, or might not even matter if it does.

Europe seems to be more focussed on China's exchange rate much like the US Congress.

[jk]

Re: Fed Injects $41 Billion in Liquidity

i believe that there's an ecb meeting tomorrow. with eurozone inflation last reported at an official 2.6% but the dollar at record low v. the euro, they've got an interesting decision to make.

[GRG55]

Re: Fed Injects $41 Billion in Liquidity

i believe that there's an ecb meeting tomorrow. with eurozone inflation last reported at an official 2.6% but the dollar at record low v. the euro, they've got an interesting decision to make.

The Bank of England (MPC) and the ECB are both meeting this week. Likely hold fast on interest rates and talk hawkishly for now. Their strong currencies should help their relative inflation situation compared to the US, giving them the cover to start cutting official rates next year.