You´ve Got The Fed

Brilliant. Especially after the $85 Billion AIG Bailout from the Fed..... If this news is true Allianz, Flowers Said to Have Bid for AIG Before Fed Takeover this would create the biggest moral hazard so far..... Looks like post from Monday was spot on A.I.G. Seeks $40 Billion in Fed Aid to Survive.... Only $ 45 billion short...... :-)

Genial! Nach dem $85 Billion AIG Bailout der Fed zudem passender denn je....Sollte diese Meldung zutreffen Allianz, Flowers Said to Have Bid for AIG Before Fed Takeover markiert das einen neuen Höhepunkt in Sachen "Moral Hazard". Sieht fast so aus als wenn mein Posting vom Anfang der Woche den Nagel auf den Kopf getroffen hatA.I.G. Seeks $40 Billion in Fed Aid to Survive Nur die Summe hat sich merkwürdigerweise mal eben mehr als verdoppelt.....



Hat tip to Naked Capitalism

Alan Bernanke.......

It took the Fed only one quarter to reverse almost 50 percent of the past 2 years of rate increases. But this is what happens when all your models are so out of touch with reality & you are ignoring your duty for oversight. I think if there will be any rate increases in the distant future they will start with well telegraphed measured 0,125 % steps...... I assume that it is more likely that Elvis is still alive than that the Fed will ever orchestrate an emergency rate hike..... Unfortunately i havn´t found a broker that is willing to accept that bet :-) The next question will be if the Greenbag is on its way to become the new currency for the next wave of carry trades.....

Die Fed hat binnen eines Quartals bis Ende Januar vermutlich die Hälfte ihrer Zinserhöhungen zurückgenommen für die sie in ihrem mühseligen Normalisierungsprozess ( 0,25% Schritte ) zwei Jahre gebraucht hat. Eine echt reife Leistung. Das ist aber wohl der Preis dafür das man vollkommen an der Realität vorbeilebt und sich nach Modellen richtet die aus der Steinzeit stammen. Zudem hätte ein Großteil des Wahnsinns vermieden werden können wenn die Fed Ihrer Aufsichtspflicht nachgekommen wäre und die meisten der durchgeknallten Darlehensfinanzierungen nicht durchgewunken hätte. Ich befürchte schon jetzt das sich die Fed im nächsten Zinserhöhungszyklus (irgendwann in 10 Jahren) zu gewaltigen Zinsschritten von 0,125% entschließen wird.... Zudem ist wohl wahrscheinlicher das Elvis lebt als das die Fed jemals eine ausserplanmäige Zinserhöhung initiieren wird.. Leider haben ich noch kein Wettbüro gefunden das diese Wette entgegennimmt..... :-) Die nächste Etappe wird wohl sein das der Greenback die neue Carry Trade Währung werden könnte....

From panic to penicillin - Bernanke, blogged Ft Alphaville

Less Than Respectful Commentary on the Fed Put and Fiscal Rescue Efforts Naked Capitalism

Five Things You Need to Know: Emergency Rate Cut, What It Means and What to Do Minyanville

Greenspan Put Is Dead. Long Live Greenspan Put: Caroline Baum Bloomberg

The Fed Blinked: Now, What? Herb Greenberg

Bernanke Blinks Mish

Desperate measures Economist

Es riecht nach Verzweiflung FT Deutschland

Time to remember this great chart from Minyanville showing how stupid the case "Don´t fight the Fed" is...

Höchste Zeit sich den wunderbaren Chart von Minyanville anzusehen der einmal mehr eine angebliche Börsenweisheit "Don´t fight the Fed" entzaubert.....

Lots of the mess can be blamed on Greenspan but as shown in this excellent piece The Education of Ben Bernanke from the NYT ( Hat tip to Hellasious from Sudden Debt ) i doubt that Bernanke would have done much differently.... Especially after the latest actions......

Sicher kann ein Großteil des aktuellen Unheils Greenspan angelastet werden aber dieser großartige Bericht The Education of Ben Bernanke der NYT ( Dank an Hellasious von Sudden Debt zeigt eindeutig das Bernanke wohl ganz ähnlich gehandelt hätte ( siehe Aktion gestern ) .......

Bernanke is also firmly opposed to the notion that central banks should raise rates to prick bubbles in the stock market or elsewhere. In a paper written at the height of the dot-com mania, in late 1999, Bernanke and his friend Gertler argued that it is virtually impossible to identify a bubble before it pops.....

Bernanke made a small contribution to a problem that would blossom in a big way on his watch. In the aftermath of the 2001 recession, inflation was at its lowest level in decades. Though consumer prices were rising, Bernanke feared a possible bout of deflation — the potentially devastating phenomenon in which prices drop, leading to lessened business activity and then still lower prices and so forth. This occurred during the Depression and also in Japan in the 1990s. Bernanke’s argument provided a major element of support to Greenspan for keeping interest rates low

But as a goldbug/bull you gotta love these guys......

Aber als Goldbulle muß man solche Typen einfach lieben.....

A Little Acid Test for Fed "Liquidity" / Hussman

Another attempt from Hussman to put things into perspective. While i agree in general what he has to say this time i´m a little more critical. I have the feeling that the latest Fed plan could be the beginning of a larger operation with "subprime" transparency and questionable collateral. But i´m with him that no matter what the Fed will do they have zero chance to stop the trainwreck that is hitting the US economy.

Ein weiter Versuch von Hussman die letzten Ereignisse ins Verhälrnis zu rücken. Auch wenn ich im allgemeinen mit Ihm übereinstimme bin ich diesesmal doch etwas kritischer. Ich habe so das leichte "Bauchgefühl" das die letzte Fedinnovation durchaus das Zeug dazu hat bei "Erfolg" wesentlich größerer Volumina zu beinhalten. Hinzu kommt das die Transparenz praktisch verschwunden ist und nachweisbar extrem fragwürdige Sicherheiten akzeptiert werden. Das ändert nichts an der Fesstelleung das egal was die Fed noch auf die Beine stellt der Verfall der US Wirtschaft nicht zu stoppen ist.



A Little Acid Test for Fed "Liquidity"

As usual, that's not to say that Fed actions provide more than psychological effects and a sort of “square dance call” for short-term rates anyway (which market rates often ignore, or precede). Still, inflation and dollar risk does complicate things a bit for the Fed, which is now forced to finance its predictable repos with great fanfare, as if they actually matter.

Case in point is the ridiculously over-hyped “term auction facility” announced last week. According to that announcement, the Fed plans to auction about $40 billion of “liquidity” this week: $20 billion on Monday December 17th, which will be a 28-day repo, and another $20 billion on December 20th.

If you've been following my weekly comments about Fed repos at all in recent weeks, you can figure out that there are currently $53 billion of repos outstanding (as of Friday), fully $39 billion that mature next week. And wouldn't you know it, the Fed is going to be “injecting” $40 billion next week too.

Acid Test
So here's a little acid-test of whether the Fed will actually be providing new “liquidity,” or whether it's just trying to brew up a tempest with what's already in that little teapot. Watch the NY Fed's listings of open market operations:

If the Fed is actually adding liquidity, you'll see not only the two $20 billion repos on the 17th and 20th, but additional repos to replace the $39 billion that are coming due this week ($5 billion mature on Tuesday the 18th, and fully $34 billion are set to mature on Thursday the 20th). If the Fed does nothing but those two $20 billion longer-dated repos, all it will have done is to change the maturity of its outstanding repos, without changing the amount.

Now, that's not to say I believe that even if the Fed does temporarily buy $40 billion of government securities for 28 days, before selling them back out, it will do much for the solvency of the $12.7 trillion U.S. banking system, much less exotic CDOs and mortgage-backed securities. As I've emphasized in recent weeks, if you track all those daily and weekly rollovers and figure out the total quantity of Fed repos outstanding at any given time, you'll find that the Fed has only injected $18 billion in “liquidity” since March

If investors think the Fed buying up a few billion of Treasury and agency debt means a hill of beans, they might do well to remember that the U.S. government is running up annual deficits in the hundreds of billions. In fact, the U.S. Treasury will float tens of billions of new debt in December alone (most of which will be sopped up by foreigners, who have increased their holdings of Treasuries by well over $200 billion in the past year). This will be mixed in with refinancings.

Last week, for example, the Treasury auctioned $21 billion in 3-month bills and $20 billion in 6-month bills. In doing so, the Treasury offset every bit of the Federal Reserve's actions this week, even if it turns out that the $40 billion “term auction facility” represents new liquidity and not just rollovers. Why aren't investors just as interested in that? When the Fed does open market operations, all it's doing is buying up (temporarily or permanently) a tiny fraction of U.S. Treasury debt and replacing it with currency and bank reserves. But every time the Federal government issues more debt to finance its deficits, the new issuance cancels out any beneficial increase in liquidity the Fed could possibly provide.

So it's difficult to understand why investors would get all excited about the Fed temporarily buying up a few billion in government securities, when we've got a Federal government that's simultaneously and permanently issuing and then constantly rolling over many, many times that amount. It‘s an escape into dreamland to believe that Fed actions have any chance at all of providing more “liquidity” when the Federal government's deficits suck up in a matter of weeks every bit of liquidity that the Fed has provided in a year. These Fed actions are nothing but marginal tinkering around the edges of the global financial system, and investors are starting to catch on.

Still, it's fun to watch when you understand what's going on. In fact, there will be all kinds of interesting things we'll get to watch next week. For instance, the Fed does its first $20 billion auction on Monday, but only about $5 billion of expiring repos come due that day – the other $34 billion come due on Thursday. So between Monday and Thursday, we'll observe at least a temporary jump of $15 billion in Fed repos outstanding. There's a good chance that during that 3-day overlap, the actual Fed Funds rate will creep below the current target of 4.25%. If that happens, you can bet that some analysts will incorrectly conclude that the Fed is doing some sort of “stealth easing.” But it will be nothing more than a 3-day timing overlap between maturing and new repos.

More interesting is to watch what happens on Thursday. That's when we get $34 billion of repos coming due. If the Fed does little more than $20 billion through its “term auction facility,” that will put the total for the week at $40 billion, versus $39 billion expiring, and it will be clear that this whole maneuver is simply a way for the Fed to temporarily refinance its expiring repos using a slightly longer 28-day maturity, rather than any effort to actually increase the amount of reserves.

In any event, banking conditions aren't likely to change even if $40 billion in additional 28-day repos actually materialize. Indeed, a Bloomberg report noted “A Fed official told reporters that the U.S. central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash.” Should be interesting.

Finally, it's worth repeating that the total amount of outstanding repos has increased by only $18 billion since March, nearly all of which has been drawn out as currency in circulation. Most likely, the Fed will enter a “permanent” open market operation on the order of $10-20 billion at some point in the coming weeks to formalize that increase in outstanding currency. That move will probably be met by ridiculously over-hyped reporting as well. But it's entirely predictable.

In short, Wall Street analysts aren't paying attention to the data if they believe that the Fed is "pumping" hundreds of billions into the economy to provide some kind of “safety net” for the banking system or the mortgage market. Is it really too much to ask that they make some attempt to understand the subject about which they opine incessantly?

As for the Fed itself, it's a great gift to offer people hope, but a great disservice to offer people false hope, and I think that's what the Fed is doing. What's going on in the mortgage market is not a crisis of confidence that we can talk ourselves out of – it's a problem of structural insolvency, where many borrowers literally don't have the means to service their debt over the long-term, because many of them were counting on rising home prices over the short-term. By acting as if a few billion in repos will substantially change this equation, the Fed is raising hopes, and setting the markets and the economy up for disappointment that will be far worse as a result. Bernanke would be better off admitting that the Fed has no chance of providing meaningful “liquidity” when the Federal government is issuing Treasuries at ten times the rate the Fed can absorb them. At that point, Americans would see better that the resources we need to invest, compete and become a financially sound nation are being hoarded by the Federal government and sent up in flames.

Overbought in an Unfavorable Market Climate / Hussman

On his mission to inform and try to provide his much needed "anti spin" Hussman must feel very lonely. It´s amazing what nonsense you hear and read hour by hour on a daily basis from wall street finest. Thanks from Germany

Hussman muß sich auf seiner Mission ungefilterte Wahrheiten unters Volk zu bringen ziemlich einsam vorkommen. Es gibt meiner Meinung nach kaum einen der so beharrlich & gebetsmühlenartig seinen "Anti Spin" mit Fakten untermauert. Das ganze wird immer dann besonders gruselig wenn man sich die Kommentare der sog. anderen Experten vor Augen führt und diese Hussman´s Ausführungen gegenüber stellt. Besten Dank dafür aus Deutschland



Overbought in an Unfavorable Market Climate
Also, as I've frequently emphasized, monetary policy is not, and cannot be independent of fiscal policy. All the Fed does is to determine whether government liabilities take the form of Treasury bonds sold to the public, or currency and reserves held by the public directly or indirectly through the banking system. Monetary policy determines the mix (and even then only at the margin). Fiscal policy determines the total quantity of those government liabilities, most which are absorbed these days not by the Fed but by foreigners (in an amount many, many times what the Fed absorbs). If you want to worry about some entity that could have enormous impact on U.S. economic activity, ignore the Fed and focus on the real “maestros:” foreign purchasers of U.S. Treasuries, particularly China and Japan. ....

Again, the Federal Open Market Committee (FOMC) has “injected” only about $16 billion of “liquidity” into the U.S. banking system since March – all via short-term repos that are continually rolled over. Meanwhile, foreign investors (particularly China's central bank) have provided about $2 billion in fresh “liquidity” per day, mostly by purchasing U.S. securities (primarily Treasuries).

Liquidity and real investment
What has happened to this dough? This is the money that the U.S. uses to finance its own gross domestic investment (“real” investment such as factories, equipment, housing, etc). Indeed, all of the growth in U.S. gross domestic investment over the past decade has been financed by foreign capital inflows, since our government appears incapable of existing without spending away the domestic savings that would otherwise allow America to self-finance its growth*.

In the coming year or so, we'll probably see a narrowing of the massive trade and current account deficits that have accumulated in recent years. As I've noted before, every dollar of “improvement” we observe in the U.S. current account deficit is typically matched by a dollar of deterioration in gross domestic investment. That regularly happens during recessions, and it's likely to happen in this one (nothing in recent reports or market action materially changes the prospects of an oncoming U.S. economic downturn).

Recessions are generally due to a growing mismatch between what the economy produces and what is demanded. During those recessions, overinvestment stops, losses are taken, adjustments are made, and resources are reallocated, all of which help to eventually turn the economy around. It is these adjustments that require a long and variable lag. They are not primarily the result of “Fed liquidity.”

In any event, the overinvestment and excess inventory during this economic cycle has clearly been in the areas of housing, finance, and debt origination, so those are the areas that will bear the primary burden of adjustment. ....


Fast, furious, and prone to failure
As I noted last week, “The market has now cleared the oversold condition that it established a week ago. Stocks aren't overbought here, but overbought conditions in unfavorable Market Climates tend to be rare. The steepest bear market losses tend to follow immediately on the heels of such overbought conditions.”

Presently, the market has established just that profile. This is one of the very few situations in which I ever have a pointed view about likely market direction. Although the likely Fed rate cut (no opinion on 25 vs. 50) on Tuesday adds some uncertainty, and the market would most likely celebrate a 50-basis point cut, there is currently not much evidence that suggests that even such a rally would be sustained for long. In my view, the probable risks are skewed to the downside. I don't believe there is such a thing as the Fed getting “ahead of the curve.” LIBOR continues to be “sticky” in the face of multiple cuts in the Federal Funds rate, credit spreads continue to push toward new highs, and there is no reason to believe that minuscule volumes of Fed repos will have any effect in ameliorating credit risks.

Meanwhile, the Treasury “plan” to bail out homeowners (without bailing them out) is likely to be both very little and very late. Think of it as the equivalent of the FEMA response after hurricane Katrina. Barring an almost immediate freeze on foreclosures and interest rate resets, we are likely to observe a rash of delinquencies and the need for soaring loan loss reserves even over the next few months. All of this talk of Federal help feels good, but it will be next to impossible to coordinate Federal assistance quickly and equitably. On the other hand, freezing lenders ability to collect on bad loans will simply allow balance sheets to deteriorate without any actual financial solution to the problem

The problem is simple: people bought houses during a boom, at bubble prices that they couldn't actually afford. The money that was lent has already been dissipated to the sellers – the owners of the houses don't have it, and neither do the lenders. The excess money that homeowners can't actually afford to pay back will have to be written off institution by institution, lender by lender. Major loan losses are inevitable. To believe they are something less than inevitable is to stay at the party even as flames engulf the building, in hopes that water is on the way. The U.S. financial system is going to have a bad time with this – there will be major losses and major adjustments. Eventually we will work through it, but it is delusional to look for a bottom when the real losses haven't even started to emerge.

Thanks to Jim Borgman

Again, with regard to the stock market, my having any view at all relating to short-term market direction is very unusual, but I am particularly concerned because we now have overbought conditions in a negative Market Climate. The Fed may very well give the market an extra psychological boost next week with a 50 basis point cut, but a disappointing move or statement could prompt an unusually steep decline. As for market action, despite the standard “fast, furious” rebound from oversold conditions, there is no indication from the quality of market action that investors have adopted a robust willingness to speculate.

On the subject of multiple Fed rate cuts being bullish for stocks, it may be helpful to note that in those events that multiple Fed cuts helped the market, stocks had generally already experienced a bear market decline of 20-40% prior to the second rate cut, and the average P/E on the S&P 500 was typically below 14 and (generally less than 11). Stocks were largely poised to perform well anyway, generally by virtue of being sold off to depressed valuations. Even in the 1998 instance (which occurred at much richer valuations than previously), the S&P 500 had plunged about 20% prior to recovering.

Investors let mottos like “don't fight the Fed” and “it's a new economy” do their thinking for them in 2000-2002, while the S&P 500 lost half its value and the Nasdaq lost three-quarters. There's good reason to expect “motto-based investing” to be disappointing again. Keynes may have been right in saying “the market can remain irrational longer than you can remain solvent,” but provided you don't do things that endanger your solvency (like taking large net short positions), there's nothing wrong with avoiding risk in periods of market irrationality - particularly once market internals deteriorate measurably as they have now. Provably incorrect ideas are eventually proven incorrect. The beliefs that the Fed is “injecting massive liquidity” and that profit margins hold up despite economic softness are provably incorrect ideas.

Fed & Moral Hazard

For the three people out there that still think the Fed and the majority of other central banks are still fighting inflation i recommend to read Moral Hazards And Fed Actions fom Mish. I coudn´t have said it better. AMEN!

Für die zwei bis drei Leute die immer noch denken das die Fed und fast alle anderen Zentralbanken sich die Inflationsbekämpfung auf die Fahnen geschrieben haben sollten zwingend Moral Hazards And Fed Actions von Mish lesen. Besser kann man es kaum beschreiben. Sehr treffend!

Thanks to John Trevor