commercial paper spreads higher than 9/11

[jk]

The commercial paper spreads (the panic measure) finally took over the September 11 of 2001 levels:

This level of panic is unprecedented and thus the consequences have to be unprecedented.
The outstanding asset-based commercial paper fell by another $10 billion.



http://theroxylandr.wordpress.com/

[santafe2]

Re: commercial paper spreads higher than 9/11

This level of panic is unprecedented and thus the consequences have to be unprecedented.

jk, The market actions we're seeing today are directly related to a financial crisis of confidence. The crisis the author is comparing this one to was a socio-political crisis that had the capacity to cause a financial crisis.

I'd like to see this chart back to 1997 so we can observe the 1998 Russian-Asian-LTCM peak. Maybe it peaks at 200BP? I'm not sure the 9/11 peak is as meaningful as that one would be. Also, since we did not have a financial melt down after 9/11, we don't know if 100BP or 200BP or more is the true point of panic and market dysfunction.

Others here who work in the financial community may be able to illuminate this issue more clearly and from different sides of the issue.

[Finster]

Re: commercial paper spreads higher than 9/11

jk, The market actions we're seeing today are directly related to a financial crisis of confidence.

You could look at it that way, but what so often gets glossed over is whether the confidence was warranted in the first place. This is not a matter of the market behaving irrationally, but of returning to rationality after a flight of manic irresponsibility. As I pointed out here one day before the Dow's summer closing high, "High liquidity is today's theme, but we need to anticipate tomorrow's. Liquidity will recede."

It has become fashionable to dismiss collapsing asset values as being driven by foul investor psychology. It’s fear of the unknown, panic, emotionally-driven selling, whatever the term used, but the idea is always the same. It’s irrational. Whatever the problem, a reasonable, thinking person wouldn’t be acting that way. Our calm, cool, rational investor would be dispassionately buying, or at least not selling. Sounds like a marketing pitch to me, you know, the kind where somebody really wants to unload something that the market is fast realizing is toxic waste and needs some buyers to help bail him out. The popular financial media make wonderful platforms for such sales pitches, and the propaganda is subtle. All the dumb money is selling, and smart investors are buying...

It’s Just Psychology

We may be looking at "panic" all right, but it's well-justified. We wouldn't tell someone one the fast track from the fortieth floor window to the pavement that he just needs more confidence. The imagined values weren't there in the first place, and the market is in the process of discovering that.

[jk]

Re: commercial paper spreads higher than 9/11

i've heard there are 2 rules in banking:
1. don't panic
2. if you're going to panic, be the first to panic.

you're not supposed to shout "fire" in a crowded theater. so what should you do when you smell smoke and see flames off in the corner? whisper "fire"? get up and leave and let everyone else find out for themselves?

i came across the snippet that founded this thread and thought it interesting. i agree with your interpretation, finster. this is the panic of awakening. we have had our minsky moment, and now we are in the minsky unwinding. all that volatility that went missing for the last several years has, it turns out, been accumulating off-stage, and has now made its entrance.

[santafe2]

Re: commercial paper spreads higher than 9/11

Finster - This is a great sermon but after reading twice to be sure I wasn't missing a much deeper point, I realized we're just coming at this from such different points of view, we may not find common ground. I've paraphrased your responses to be concise.

[was] the confidence...warranted in the first place.

A rhetorical question I'm sure, but as a general query, this is too broad to be answered with a yes/no response. If you were an investor, of course the confidence was warranted. It was like standing on a beach and watching a wave build. One percent Fed rates and a Fed theatrical production with deflation as the villain? If that doesn't give an investor / speculator confidence, nothing will. If one was managing a HF and the underlying debt obligations were performing beyond your wildest dreams you had every reason to be confident. On the flip side, if one took on more debt than than one could afford, then of course not.

Should there have been more regulation and oversight? Sure, but in 2002 we had an Executive and Legislative Branch that didn't want regulation, that despised oversight. They were busy creating "pure capitalism" at every turn. When inflation is under measured and short term rates are at give-away terms there's going to be asset inflation in at least one part of the economy. It's musical chairs, if you own the asset when the music stops, you're confidence was not warranted but all good investors saw this coming a mile away. In fact, most ran for the exits too early.

This is...a matter of the market...returning to rationality after a flight of manic irresponsibility.

All markets return to mean growth. I think we can agree on that. But by your statement you consider the financial markets to have been irrational while I consider them to have been reacting to a completely rational stimulus. If you want to discuss issues of regulation and oversight and of societal responsibility we might have that discussion on another thread but your original question and this follow-on question revolve around issues of human sanity with a dash of Victorian morality. I find humans generally sane and it appears you find our species incapable of rational thought, easily duped and prone to bouts of hysteria. The market is not returning to rationality, the market is always rational, investors need to drill down to understand what is driving the behavior.

"High liquidity is today's theme...

Liquidity was not a theme. It was, for many years a driving economic force. With only a temporary slowdown to kill the last bubble, the Fed gave money away from 1998 through 2005 and when the Fed could no longer give money away, the Japanese continued to give away a slowly devaluing Yen through the Yen carry trade. To call it a theme is to call water boarding a beverage.

We may be looking at "panic" all right, but it's well-justified.

Bulls make money, bears make money and pigs get slaughtered. The market mostly punishes those late to the game and tax payers.

[santafe2]

Re: commercial paper spreads higher than 9/11

i've heard there are 2 rules in banking:
1. don't panic
2. if you're going to panic, be the first to panic.

Excellent. My day-to-day business life revolves around financing energy projects. I work on the sales / energy analysis side of the equation so I'd not heard this before. I'll ask our banker how he sees this when I talk to him in the morning. These 2 rules seem to describe banking as accurately as the 3 rules of real estate.

You're not supposed to shout "fire" in a crowded theater. so what should you do when you smell smoke and see flames...

You take profits and let your friends know you think it's getting risky. With luck, you've cultivated friends smarter than you, and they let you know. Very few of us can do more than that.

...all that volatility that went missing for the last several years has, it turns out, been accumulating off-stage

Markets are not the only events that return to mean. Volatility famously returns to mean. Laughter and anger return to mean. Affluence and poverty return to mean. This is one of the greatest personal and investment lessons one can learn.

[Finster]

Re: commercial paper spreads higher than 9/11

Finster - This is a great sermon…

Sermon? This ad hominem opener reveals an emotional bias that serves as a red flag for anyone looking for objectivity in what follows.

… issues of human sanity with a dash of Victorian morality…

Objection to human sanity and morality duly noted.

A rhetorical question I'm sure, but as a general query, this is too broad to be answered with a yes/no response. If you were an investor, of course the confidence was warranted…

This is about all the further we need to explore, because it is demonstrably, factually, false from the get-go. It is notoriously well documented that all this credit that is occupying the headlines was extended to borrowers who could not repay it. Huge numbers of mortgages have gone into default within the first few month’s payments - even before resets kicked in. These were hastily repackaged into the likes of CDOs, SIVs. Given your view that investor "confidence was warranted", we presume you loaded up on such things and are satisfied with the results.

[Guest]

Re: commercial paper spreads higher than 9/11

Santafe2 -

You wrote:

<< you consider the financial markets to have been irrational while I consider them to have been reacting to a completely rational stimulus>>

Perhaps you intended :

" You consider the financial markets to have been irrational while I consider them to have been reacting rationally to a (an irrational) stimulus"?

Can't make heads or tails otherwise, of your observation that the "stimulus" was rational in and of itself.

[jk]

Re: commercial paper spreads higher than 9/11

i interpret santafe2's remarks to mean that it was rational for the credit processors, mortgage banks, and investments banks to make hay while the sun shone-- to issue mortgages, even of dubious quality, as long as they could sell them, and to buy mortgages as long as they could process them into highly salable AAA cdo tranches with the helpful magic of the ratings agencies. a lot of people got rich this way, after all, so why not be confidant in the process?

[c1ue]

Re: commercial paper spreads higher than 9/11

I second JK's notion - it is the classic capitalist credo: if it can be done and made profit from, then it is my duty to do so.

Whether there are long term consequences are irrelevant.

Somehow Adam Smith's invisible hand has been extended to cover all forms of behavior - not just pricing.

[Guest]

Re: commercial paper spreads higher than 9/11

I was just wondering if Santafe2 was referring to any central bank as a one of the rational actors.

[santafe2]

Re: commercial paper spreads higher than 9/11

Perhaps you intended :

" You consider the financial markets to have been irrational while I consider them to have been reacting rationally to a (an irrational) stimulus"?

Lukester - Thanks for taking the time to review. Your statement is much more clear than mine. I would think of the actions or reactions as rational but I'd also think of the stimulus as rational since the stimulus itself is an economic wave created by a prior set of circumstances and another set of players with their own motivations. I tend to look at events I don't initially understand as a puzzle with a rational intent.

At the end of a long cycle, especially these extended bubble cycles, there is no doubt the last group of "investors" are not acting in a way most of us would consider rational. They're caught up in the excitement. They're gamblers. Should there be more stringent regulations to protect gamblers from themselves? In the personal real estate arena, most probably yes, but that issue is peripheral to this discussion.

i interpret santafe2's remarks to mean that it was rational for the credit processors, mortgage banks, and investments banks to make hay while the sun shone

jk - To the extent these actions are legal and within ethical boundaries, I agree. In the world of business, it is expected that all players are focused on maximizing profits within a legal and regulatory structure.

In the last decade or so, have the trustees of the regulatory structure in the US met the lowest rung of their mission? Clearly they haven't, but it doesn't follow that they're not acting rationally. As a side note, we're at a low point in regulatory will, but I suspect we'll see a wave of regulatory activity over the next several years. Good investors are considering which markets will benefit from more stringent regulation. Renewable energy might be an example.

I was just wondering if Santafe2 was referring to any central bank as a one of the rational actors.

I was considering the investor side of the equation but the various Central Banks, are rational to an extreme. As I've said previously, they're dealt a hand they have to play. If I were to think of the economy as a game of poker, the CB's would be a player dealt discards and expected to play as if they'd been dealt a hand from the deck.