Chart Of The Day "Junk Yields"

Despite the rollercoaster ride in stocks the action in the bond & debtmarket is even more fascinating....... The main driver of equities for the next few years will be the quality of the balance sheet ( especially after goodwill....) and the timetable for the refinancing of the maturing debt/bonds..... Earnings will be a second-tier issue..... Bondholders will be in the driver seat........ No more attempts to "return value to shareholders" like shown from Daimler ( see How Daimler Wasted € 7 Billion On Buybacks In Just 15 Months...... )..... Needless to say they are also now begging for some kind of bailout.......

Trotz des tagtäglichen Wahnsinns an den Aktienmärkten spielt sich noch sagenhafteres an den Kredit & Anleihemärkten ab. Denke das in den nächten Jahren wie bereits mehrfach erwähnt vorrangig die Bilanzqualität ( vor allem nach den kommenden Goodwillabschreibungen, da versteckt sich noch so manche Bombe....siehe Die nächste Bilanzbombe tickt FTD, besonders interessant wenn mal wieder auf die niedrige Buchwertbewertung der DAXtitel hingewiesen wird .... Got Gold......) sowie die Zeitachse der kommenden Refinanzierungen der ausstehen Anleihen/Kredite die erste Geige für die Aktienkursentwicklung spielen wird. Die Gewinne ( oder besser ausgedrückt Verluste ) rücken da eindeutig in den Hintergrund. Die Bondholder werden zukünftig das sagen haben..... Immerhin bleibt uns dann der Wahnsinn der schuldenfinanzierten Aktienrückkäufe erspart ( das passiert wenn der Vorstand sich mit Haut und Haaren dem kurzfristigen "shareholder value" & seinen Aktienoptionen verschrieben hat.....Betonung liegt hier auf kurzfristig ... Fragt mal bei Daimler nach... siehe How Daimler Wasted € 7 Billion On Buybacks In Just 15 Months...... )


WSJ

Unrelenting declines in corporate "junk" bonds have pushed yields on these riskier securities to over 20% on average, a record

Bespoke

Based on data from Merrill Lynch, high yield bonds are yielding nearly 1,800 basis points more than comparable Treasuries. In the last month alone, spreads have risen by more than 200 basis points, and since bottoming in the Summer of 2007 at 241 basis points, they are up 645%. To put this in perspective, with the 10-Year US Treasury now yielding 3.4%, a high-yield borrower would need to pay roughly 21.4% per year to take out a ten-year loan. With terms like these, who needs loan sharks?

Much more insight via Naked Cpitalism Junk Bond Yields Up Sharply. On top of this visit FT Alphaville for an even more "impressive" chart on CDS ( see iTraxx Europe at all time high ). Combine all this with this chart and is not difficult to imagine that the worst is still to come.....

Mehr Details mal wieder von Naked Capitalism Junk Bond Yields Up Sharply . Einen noch beeindruckenderen Chart der CDS bietet FT Alphaville ( siehe iTraxx Europe at all time high ). Wenn man nun das Drama mit diesem Chart kombiniert ist unschwer zu erkennen das uns "ruppige" Zeiten ins Haus stehen......

Showing Stress.....& The Impotent Fed.

I think it is safe to say that the spreads in the auto & credit card segment will spike much higher in the coming quarters.... And this trend will spread around the globe.....

Ich bin mir ziemlich sicher das die Risikoaufschläge besonders im PKW und Kreditkartenbereich in den nächsten Quartalen noch erheblich steigen werden. Und das betrifft dann nicht nur die USA betreffen...... Passend hierzu aus der FAZ Unternehmensanleihen : Dunkle Wolken über spekulativen Werten

Worry About Stretched Firms,Consumers Hits Debt Markets WSJ
A range of corporate bonds and securities backed by consumer loans and mortgages have sagged in recent weeks to levels last seen in March, when worries about a financial crisis hit a high.

This time there is much less panic, but concern is building about the health of businesses and consumers.

The weakness is most visible in the debt of auto makers, retailers and companies in sectors reliant on consumer spending. Bonds issued by some financial institutions are also strained.

While a large-scale credit meltdown looks unlikely now, rising bond yields will make it harder and more expensive for corporations and individuals to finance their businesses, homes, education and day-to-day expenses.

Investors are demanding higher interest rates on most corporate and asset-backed debt. The average junk bond now yields around 8.1 percentage points more than Treasury securities, or 11.5%. That compares with a yield of 11.1% and spread of 8.6 percentage points on March 17, according to data from Merrill Lynch & Co.

Average spreads on bonds backed by auto loans and credit cards are three percentage points and 2.1 percentage points, respectively, close to their highs this spring. .....

Moody's Investors Service recently surveyed 31 companies that distribute gas to households. Of the group, 18 companies said an increasing number of customers were falling behind on their gas bills this year compared to last year

> No surprise to see that banks are once more procyclical in their lending habbits ( Same is happening in Europe WSJ: Euro Banks Tighten Lending Standards via Calculated Risk) ....... Too bad that there is so far no bill/law that allow Bernanke & Paulson to order banks to lend...... But with all the attempts we have seen you can´t even rule this out for the future ........ :-)

> Schon bemerkenswert wie es Banken immer wieder schaffen Ihre Kreditvergabekriterien immer prozyklisch dem Markt anzupassen anstelle in Zeiten des offensichtlichen Exzesses gegenzusteuern ( gleiches passiert auch in Europa Banken geizen mit Krediten FTD ).... Zu dumm das es bisher noch keine gesetzliche Handhabe für Bernanke und Paulson gibt die Banken zu verpflichten mehr zu vereleihen.... Nach allem was bisher aus den USA gekommen ist kann man aber selbst das zukünftig nicht mehr ganz auschließen..... :-)

Lewis Black "America On Sale"

The "strong $ policy", the fiscal discipline, the hawkish Fed & and the high savings rate is (finally )working...... More video related links from today American ‘Deal Deficit’ Gets Wider & Tokio Marine Will Acquire Philadelphia Consolidated for $ 4.7 billion. Much more to come......

Sieht so aus als wenn die jahrelange "Strong $ Policy", die strikte Haushaltsdisziplin, die gestrenge Fed & und die hohe Sparrate sich endlich auszahlen...... :-) Hier noch mehr Meldungen aus den letzten 24 Stunden die perfekt zum Video passen American ‘Deal Deficit’ Gets Wider & Tokio Marine Will Acquire Philadelphia Consolidated for 4.7 billion . Dieser Trend dürfte noch lange anhalten......

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.

An investment banking lexicon: The post-credit squeeze edition

After the as always way overrated Fed decision this guy has had probably a rough night........ I also thought that the hilarious piece about the credit crunch from FT Alphaville deserves a separate post. Barry Ritholtz rivals this post with Top 10 Things You May Not Have Known About the FOMC :-)

Nach der wie immer vollkommen überbewerteten Fed-Entscheidung dürfte dieser Typ heute Nacht etwas unruhiger geschlafen haben...... Ich habe mir gedacht das dieses mehr als amüsantes Werk von FT Alphaville über den Credit Crunch ein eigenen Post verdient. Barry Ritholtz fährt in Top 10 Things You May Not Have Known About the FOMC ähnlich lustige Geschütze auf :-)

Big hat tip to Connor and thanks to The New Yorker

An investment banking lexicon: The post-credit squeeze edition
Investment-speak is a universal language. From maximising shareholder value to full and fair offers, bankers are well versed in the art of keeping their clients happy.

But four months into the credit crisis and their words have taken on a new meaning. Here is an explanation.

SUBPRIME

Pre-squeeze: Poor cut of beef

Post-squeeze: On the national education curriculum

COVENANT-LITE

Pre-squeeze: Please pay back the money (no rush)

Post-squeeze: Please get approval for all expenses above £50

COMPETITIVE AUCTION

Pre-squeeze: 50 buy-out firms submit first-round bids

Post-squeeze: The Malaysians are looking

EMI

Pre-squeeze: Coveted transaction

Post-squeeze: Distressed debt play

STAN O’NEAL

Pre-squeeze: $50m for successfully delivering shareholder value

Post-squeeze: $50m for destroying shareholder value

DEBT AVAILABLE FOR BUY-OUT

Pre-squeeze: $10bn

Post-squeeze: Z$300,000bn

ATTRACTIVE INVESTMENT OPPORTUNITY

Pre-squeeze: Growing faster than the competition

Post-squeeze: Not falling quite as quickly as the competition

INFRASTRUCTURE

Pre-squeeze: Goldman launches billion-dollar fund

Post-squeeze: Heathrow queues get longer

MULTIPLES

Pre-squeeze: 8 x pro forma ebitda

Post-squeeze: 4 x historic earnings

DUE DILIGENCE

Pre-squeeze: There is a hole in the pension book

Post-squeeze: Due diligence to look diligent

BANK’S CHRISTMAS PARTY

Pre-squeeze: Bollinger, Château Lafite, Nobu catering

Post-squeeze: Glass of Chianti, dry roasted peanuts

PIPELINE IS FULL

Pre-squeeze: Real deals by stretched bankers

Post-squeeze: Stretched deals by virtualbankers

EMERGING MARKETS

Pre-squeeze: Risky, high-yield play

Post-squeeze: Safe haven

STRATEGIC REVIEW

Pre-squeeze: We will take the highest offer

Post-squeeze: Fire sale

For more funny stuff click here. Nice to see that the Pentagon isn´t effected by the ongoing credit crunch. They made Enron & Co look like amateurs.....

Für mehr Spaßiges bitte hier klicken. Schön zu sehen das zumindest das Pentagon von der anhaltenden Kreditkrise nicht weiter betroffen ist. Dagegen sind Enron & Co die reinsten Waisenknaben....

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.

Where is Debt Being Stuffed? Minyanville

Thanks Mr. Practical. On top of this i suggest to read the latest from Hussman An Irrelevant Fed: Thimbles of Water in a Forest Fire .

Besten Dank Mr. Practical. Ergänzend empfiehlt sich das letzte "Werk" von Hussman An Irrelevant Fed: Thimbles of Water in a Forest Fire

Thanks to Jim Borgman

Where is Debt Being Stuffed? Mr. Practical / Minyanville

As the markets seem to want to be relieved that global central banks have the “liquidity” problem under control, let us Minyans remind ourselves of the magnitude of the problem.

I have described just how central banks inject “liquidity” into the markets when they need it. Essentially central banks encourage debt creation, for people to borrow money, so that they buy things (consumption) to spur the economy. But due to too much debt, financial engineering has had to create new and better places to stuff more and more debt.

You may have seen this chart before. It shows the results of that financial engineering. Central banks can only affect the bottom two parts of the chart, high powered money and M3. M3 the Federal Reserve is growing as fast as it can in order to indirectly support the much larger problem of securitized debt and derivatives.

These two phenomenal pockets of debt are supported by asset prices: when asset prices (which act as collateral) decline, liquidity gets sucked out of the system. So the purpose of pumping new debt into the system is to keep nominal asset prices up to protect collateral values of the real problem of leverage in the system that the Fed cannot directly control. It takes more and more debt to do this because people are having huge problems servicing the debt they already have.

So we have two huge forces fighting each other right now: central banks desperately attempting to re-flate (create more debt) and the market grudgingly but purposefully attempting to deflate by paying back (which the bureaucrats are trying to help with) or more likely destroying (write-offs) that debt. We have extremely high volatility as these two forces fight it out.

Looking at the chart, which do you think will win?

>If you are still not convinced i urge you to read Straight Talk on the Mortgage Mess from an Insider via Herb Greenberg. One of the best i´ve seen in months. It looks like the "Hope Now Alliance" will become a running gag during the coming years.....

>Solltet Ihr immer noch Hoffnung haben das alles gut werden wird empfehle ich dringend Straight Talk on the Mortgage Mess from an Insider via Herb Greenberg zu lesen. Mit das Beste was ich in den letzten Monaten zu lesen bekommen habe. Es sieht so aus als wenn die "Hope Now Alliance" zum Running Gag in den nächsten Jahren werden dürfte......

An Irrelevant Fed: Thimbles of Water in a Forest Fire / Hussman

Always good to start the week with some rational thoughts from Hussman

Immer eine gute Idee die Woche mit erhellendem von Hussman zu starten

An Irrelevant Fed: Thimbles of Water in a Forest Fire
Pop Quiz
How much “liquidity” has the Federal Reserve “pumped” into the $12.7 trillion U.S. banking system since March 2007?

a) $1.2 trillion, which banks have used to firm up their balance sheets

b) $600 billion, which banks can now use to make new loans

c) $16 billion, all of which has been drawn out of the banking system as currency in circulation

If you answered c, move to the head of the class. Investors who answered a or b have not only been misled by analysts and media stories, but have no idea how irrelevant the Fed's actions are likely to be, except on short-term market psychology. More charts and data below. ....

The Fed can certainly penalize savers by pressuring deposit rates lower, but it isn't having a measurable effect on the market-determined interest rates that borrowers actually face. Nor can the Fed significantly affect the solvency of the mortgage market.

As for stocks, I noted a couple of weeks ago (extending Jim Stack's analysis) that in each instance that the market declined materially after successive discount rate cuts, S&P 500 earnings were down sharply a year later. Given that a large portion of S&P 500 profits are from financials, that profit margins in other industries are well above historical norms, and that profit margins have always collapsed during recessions, my impression is that S&P 500 earnings could easily fall by 40% over the next 18 months (investors who view this as impossible haven't examined earnings history). This could become far worse than a 5% decline off the high, which is where the S&P 500 is now.

FT Equity investors: Denial is not a river in Egypt

Suppose three years ago, they said, you had been given the following scenario for November 2007: oil close to $100 a barrel, the dollar at $1.50 to the euro, corporate profit margins at a record high but starting to turn, house prices falling in the US and the UK and the global banking system in chaos. Would you have predicted that European equities would be only 6 per cent off their peak?

It's possible that investors could adopt a fresh willingness to speculate on the hopes and eventuality of a Fed rate cut (the economic news this week will determine the likelihood of 25 vs. 50). Regardless, given the economic backdrop, my impression is that any such speculation would be short-lived - as it has after other Fed cuts this year. For now, we don't have evidence to support any amount of bullish speculation. ..... In any event, historically, investors would have considered themselves lucky to clip off their excess risk so close to all-time highs, even after market action and economic news began to sour.

The Fed – thimbles of water in a forest fire
My greatest concern at present is that investors are being bombarded with empty hope that the Fed will save them by “injecting liquidity” into the banking system. Time spent examining these false perceptions is not time wasted.

Very simply, the impact of Fed actions is sorely exaggerated. The amount of liquidity that the Fed provides is minuscule in relation to the U.S. banking system, and also in relation to the volume of capital inflows (about $2 billion daily) that the U.S. relies on from foreigners, thanks to our massive fiscal deficits and low savings rate.

What strikes me as particularly absurd is that the analysts who wax rhapsodic about “Fed liquidity” speak in a way that makes it obvious that they have no understanding of how these Fed operations work. Then again, it's precisely because we do understand how they work that we're convinced that they're irrelevant (aside from boosting short-term market psychology and accommodating short-term spikes in the demand for currency).

Let's start with a basic fact. There is only one monetary aggregate that the Fed directly controls: the monetary base – consisting of currency in circulation plus bank reserves. Here's the data.

Monetary Base : = Currency in Circulation : + Total Reserves :

In the early 1990's, reserve requirements were abolished on everything but demand deposits (checking accounts). Since then, the quantity of bank reserves has gradually declined, and has no relationship with the volume of bank loans or total bank assets – again look at the data. In recent months, as has been the case since the early 1990's, virtually all of the increase in the U.S. monetary base has represented the gradual and predictable increase of currency in circulation, held outside of the banking system.

So how does the Fed increase the monetary base? There are three sources of “liquidity” managed by the FOMC: permanent open market operations, temporary open market operations, and loans through the discount window. Let's take a look at each. Again, here are the Fed's own statistics:

Permanent Open Market Operations:
Temporary Open Market Operations:
Discount Window Borrowings:

The Fed uses permanent open market operations primarily to finance the gradually increasing stock of U.S. currency in circulation. The Fed buys Treasury securities (which become an asset on the Fed's balance sheet) and pays for them by printing money (a liability of the Fed, as evidenced by the words “Federal Reserve Note” on top of the pieces of paper in your wallet). The Fed has not engaged in any permanent open market operations since May.

Next, the Fed can use temporary open market operations to vary the amount of day-to-day reserves in the banking system, in order achieve the targeted Federal Funds rate (which is the interest rate that banks charge to lend reserves overnight to other banks that are temporarily short). What's important is that these are temporary operations, in the form of “repurchase agreements”: the Fed provides reserves to the banks, usually for periods of 1-14 days. It purchases Treasuries or government-backed mortgage securities from the banks as collateral, and at the end of the period, the banks are obligated to buy them back from the Fed, at the purchase price plus interest.

What's important here is that every time a repo matures, the Fed generally enters a new one for a similar amount. The average maturity of these repos is only about 7 days, so there is a lot of activity. These transactions are constantly reported by the media as if they are “new injections” of liquidity – but they are just rollovers. If the Fed does a $20 billion 7-day repo one day, you can pretty much bet that the Fed will be doing another $20 billion in repos a week later when the outstanding one comes due. What matters is the total amount of repos outstanding. The chart below presents the 30-day average of Fed repos outstanding since March (see the above link for source data - thanks to Brooke Steinau for tying all of these figures out).

Note that the total amount of liquidity added by the Fed since March is only about $16 billion (it turns out that all of this has been drawn out of the banks as currency in circulation, probably for good, so at some point in the coming months, the Fed will undoubtedly do about $10-$15 billion in “permanent” open market operations to recognize this withdrawal, and will simultaneously reduce the outstanding amount of these “temporary” repos).

The third way the Fed can “inject liquidity” is to make loans to banks through the “discount window,” for which it charges interest at the “discount rate.” While market participants behave as if changes in the discount rate are wildly important, the fact is that even at their peak last summer, total loans to banks through the discount window only rose to about $3 billion. Currently, the total amount of “liquidity” being lent by the Fed through the discount window is $55 million. Yes, million.

FT Fed considers steps for money market

The Federal Reserve is considering measures to make liquidity more readily available to financial institutions. Analysts close to the Fed believe it is considering a cut in the discount rate, at which it lends directly to banks, and steps to reduce the stigma associated with such borrowing. The Fed could announce plans to cut the discount rate by 25bp to 4.75%. That would halve the interest penalty on discount window borrowing compared to the main, Fed funds, rate of 4.5%. The reduction of the discount rate penalty could come before the next FOMC meeting on Dec 11 if credit market conditions remain stressed. Alternatively, the Fed may cut the discount rate by an extra 25bp over and above any reduction in the Fed funds rate at that meeting, the analysts said.

> Maybe this could bring the amount back over $ 100 mio...... Watch for the spin if this move happend outside the regular Fed meeting ....I´m pretty sure that almost nobody will mention that the entire discount window borrowing is almost nonexistend despite the latest cuts...

> Evtl. könnte dieser Schritt die Summe ja über 100 Mio hieven..... Sollte dieser Schritt ausserhalb des regulären Fed Meetings stattfinden dürfe das als Anlaß genommen werden die Spinmaschinerie heißlaufen zu lassen..... Ich vermute das die Tatsache das diese Art der Kreditversorgung trotz der bisherigen Senkungen keinerlei Rolle gespielt hat mal wieder "unterschlagen wird"......

Last week, investors made a great deal about an $8 billion 43-day repo that the Fed initiated. While this was reported as an extraordinary measure to stabilize the financial markets, the fact is that the Fed regularly enters a long-dated repo every year, just before the holidays, in order to accommodate a moderate increase in the demand for currency (in 1999, the amount was massive because of year-2000 fears, and was quickly reabsorbed after the new year). The $8 billion repo the Fed entered last week amounts to roughly $25 per American in extra cash to carry around the malls. To frame this as some sort of extraordinary effort to stabilize the banking system is absurd.

Again, the problem with the U.S. financial system here is not liquidity, but the solvency of mortgage loans and securitized debt. The Fed's actions are not likely to have material impact on this. To believe otherwise is mindless sheep-like superstition. Do investors really want to bet their financial security on the hope for “Fed liquidity” promised by uninformed analysts who don't understand monetary policy because they can't be bothered to look at the data?

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

The Federal Reserve loan officers’ survey

The impotent Fed........ Taken from Pimco´s U.S. Credit Perspectives. More on this topic from Calculated Risk , Mike Larson & Michael Panzner / Financial Armageddon

Die machtlose Fed..... Das ist ein Auszug aus dem aktuellen U.S. Credit Perspectives von Pimco. Mehr zu diesem Thema gibt es von Calculated Risk , Mike Larson & Michael Panzner / Financial Armageddon

Banks & Lenders: Rising Caution

The large debt overhang in recent years was sustainable so long as banks were willing to lend, structured credit markets provided liquidity and housing prices rose. Of course, those factors changed radically in August. While the Federal Reserve will likely lower the Fed Funds rate considerably in this environment, I don’t believe the risk appetite to extend credit to individuals and companies will resurface anytime soon amid falling home prices and slowing corporate profits. Financial sector write-downs will likely continue into next year given declining asset quality, and banks will likely be increasing loan loss provisions.

Not exactly the best environment for fostering lending and risk taking. The Federal Reserve loan officers’ survey confirms these trends

> With less and less appetite in the ABS market to unload the loans this should come as no surprise.

> Da den Investoren der Appetit auf die weitergereichten Kredite vergangen ist sollte dieser Trend keinen wirklich überraschen

Bond Buyers Are Losing Confidence / NYT