Fed ups the ante but market calls

Its like watching a disaster movie in slow motion. To see the Fed so far on the back foot is disconcerting to say the least. The recent $40bln credit injection has just left the market needing more and stocks floundering.

For the first time I am asking myself whether we have a Japan style bank crisis developing. My immediate response is to say no because we haven’t had the screaming bubble of the equivalence they experienced in Japan but one could look back to the bubble of 2000/2001 and feel it was merely reinflated by the post 9/11 easing. This easing further invigorated the property bubble and took it to new heights along with financial practices that were dubious at best.

We have a situation where the banking system, in the wider sense, is stuck with a serious number of non-performing loans and this number could easily escalate if the recent liquidity measures don’t work. In Japan the policy response was to duck it and hope it would go away. The US has addressed it head on so far but will they allow banks to go under and house prices to tumble further. The maintenance of confidence is crucial in any fractional reserve fiat based money system and so far it seems like the US authorities are no taking any chances.

What if this doesn’t work? Then we will have a serious problem and global stock markets will take a 20-30% hit. I’m not making any predictions but cash still works for me.

Fed to freeze mortgage rates……another fiddle

So the Fed joins the Bank of England in changing the rules. The word is that certain sub prime mortgages will have their rates frozen for 5 years. This will ease the pain of borrowers who in some cases face rises of up to 30% on their mortgage bill.

Did i mention that mortgage means “deathgrip”?

Anyway this just shows that for all the hi’ fallutin’ nonsense about free markets we actually live in a system that is far from free. Bush doesn’t really want to hand the next election to the Democrats though he’s done his best to do so in recent years.

But what we are seeing now, as we saw post 1930, is that the financial system can be changed if required and that the fundamental right to create money resides with the people via their representatives. If i owned shares in a bank i would be worried.

Come to think of it if i had money in a bank i’d be worred but humping around gold coins is so 13th century.

I can’t quite work out if this is the beginning of the end or the end of the beginning. I fear its the latter.

The End of the $?

Following on from my post on the Amero I came across this article which explores the fallout for the $ from the current financial crisis. The hard question the Chinese, Russians, Arabs and other holders of $ must be asking themselves is what to do with them.

Well I think we’ve been seeing the answer in action for some time now. Buy overseas assets not paper. In other words buy into industries, land, property but not continue to finance the US deficit by buying US treasury stock.

We’re starting to see the Arabs and Chinese buying up assets in many sectors, especially finance and resources. Makes sense doesn’t it?

Nothing confirms this more than the Abu Dhabi Investment Authority buying 5% of Citbank for $7.5bln…….structured as a convertible loan paying 11%….now that is a junk rate.

What a deal for the Arabs. And the irony of having to bail out a huge US financial behemoth.

No doubt there has been plenty of sucking wind going on in Washington and Wall Street.

It’s a simple game from here on in. It’s called “Show me the Money”.

Dark clouds gather over corpse of Northern Rock

Believe it or not Northern Rock is still up for sale. It’s hard to imagine it has any value in it though like Barings there is a chance of life after death. The real concern though is the financial responsibility assumed by the taxpayer. As previously reported the taxpayer has underwritten Northern Rock and by inference the entire banking system.

This week concerns have arisen that the taxpayer could actually be seriously under water from this guarantee. Cracks are appearing in the government establishment with the Bank of England under fire from the Treasury and the knives are being sharpened as the blame game starts.

The UK financial system is clearly still in trouble.

Fed readies for another cut as markets hit and hope

As the Fed prepares for another rate cut, probably 25bps, possibly 50, markets are resilient in the face of what is still a horrendous credit meltdown. With Merrill Lynch reporting a monumental loss last week, it is clear that banks are still clearing away the debris of the last few months and the real impact may not be felt for some time.

Never mind the jokes (you can’t bail out anything with a siv)around the Super SIVs: the great $100bln bailout plan hatched by some genius to support the market. Similar to the rescue plan post LTCM crash, it basically involved the market coming in to buy its own distressed assets. Liquidity is the mantra but holding up the market is the reality.

Everything is under water so its a game of smoke and mirrors. As I’ve said before its a rational response to a difficult situation. The social impact of a complete financial crash is not something anyone wants to see but the longer we put off the necessary surgery the worse it will be.

The credit bubble of the last 15 years is over. The balloon has too many holes in it and its a waste of time pumping more air into it.  Satayjit Das, author of Traders, Guns and Money lays it all out in this paper. Its worth a read.

Fed Cuts, Markets Soar, Panic over. Not.

So the Fed arrived late at the party with a scything 50bp cut all round. But they left a cloud of uncertainty to block out the ray of sunshine.

Bernanke is not known for his pandering to the markets and inflation is still mentioned as a concern. So this move is part of the restoration of confidence in the US economy and global monetary system. The G7 central bankers and finance ministers will have been wired into each other this past month and since the Northern Rock meltdown probably on 24 hour call.

They all depend on each other now.

How the Asian central banks must be laughing given the dressing down they received during the 1998 crisis and how the G7 bankers and IMF threw the financial risk playbook at them.

So where does all this leave us. Well pretty much in the same place except we know that G7 will underwrite the financial system. This is good for big guys and bad for small ones (or foreigners!). Small guys can fail and be picked up for a song by the big fellas……nice bit of wealth transfer (anyone remember Long Term Capital or Barings?).

But fundamentally there is still pain to come. The fact that asset prices have been inflated way beyond realistic levels means at some point they must retreat and money must be destroyed as the money supply contracts.

No amount of paper shuffling can change that. Pumping out more money will help in the short term to keep institutions from falling over and the system functioning but it cannot prevent the inevitable.

The best we can hope for is a gentle downturn in asset prices. And of course lessons will be learnt….just like in 1794 and every 18 years since