Merrill Lynch: The Credit Monitor

Got this via the good guys over at Econocator:

Merrill Lynch – The Credit Monitor

“Easy money” is the root cause of current credit volatility. While mortgage finance, Hedge Funds, LBO’s, Yen-based financing, SIVs/Conduits and CDOs have all been cited as sources of structural leverage they are derivative of the 1% funds rate policy from the early part of this decade. As the Fed began the process of removing excess monetary liquidity, market participants simply manufactured it with financial leverage.

This process was seven years in the making. We doubt it will be unwound in two months time. We caution investors: beware of false recoveries.

The irony is not lost on us: last week’s apparent short-lived recovery in credit spreads was prompted by rising expectations of a 2007 Fed rate cut. Yet, it is the 1% “easy money” Fed Funds rate policy that is the origin of many of the current structural problems in the credit market. A rate cut seems like a curious solution to a problem that was incubated by liquidity. Moreover, the currency outcome could prove troubling. Should credit rally on such an action, it may serve as an opportunity to add new shorts/underweights.

Band wagon? Or people just waking up after a long period of delusions?

More questions on “safe haven” status of USD

[Note: Here I am joining the flocks of bloggers pointing to their prior words of wisdom. My apologies!]

On Saturday, I wrote

Flight to non-USD quality

Over the last few weeks, being on “garden leave” has given me a great opportunity to watch recent events unfolding from the sidelines. In that time, I’ve made a lot of comments. Some of them I hope make some sense. Some of them have probably been fairly ludicrous. I’m an admitted amateur and even the pros are struggling these days. One of the most ludicrous things I’ve said was on July 25 over on NP:

I also suspect that a “sovereign” flight to quality will not be a flight to US treasuries and in fact may be a flight away from US treasuries into EUR denominated government bonds. So as the credit market turns, the typical safe haven will not be available as even treasuries get whacked from sovereign sellers.

Even worse! I’m pointing to previous things I’ve said that reference even more previous things I’ve said. How long can this continue?! (Ad absurdum? )

Anyway, since I am knee deep already I might as well trudge along. Along this theme of non-safe USD, Econocator points out some research from Barclay’s that I found interesting:

Is the USD a safe-haven currency?

Could there be something to the idea? I think so, but what do I know?

Telegraph: China threatens ‘nuclear option’ of dollar sales

Holy crap. I first heard about this a couple hours ago while listening to BBG TV’s online stream. A quick google later turned up a bunch of hits, including this one from the Telegraph:

China threatens ‘nuclear option’ of dollar sales

This reminds me of a dialogue way back when (about a week ago) on NP.

Giants: Hyman Minsky?

As one works their way through the academic jungles from undergraduate to graduate studies in any given field, one of the cultural side effects is the knowledge of who the “giants” in your field of study are. In mathematical physics, some of the giants include Einstein, Dirac, Cartan, Bohr, Heisenberg, Schrodinger, de Broglie, Maxwell, Newton, etc. Since I’ve only been thinking about finance and economics seriously for the past two years or so, there are still many giants I don’t know. Some of the giants I do know and have come to admire include Graham, Keynes, and von Neumann (who also counts as a giant in mathematical physics!). Not to mention some people from my previous place who I consider to be giants.

One person I’ve only recently learned of that I am tempted to elevate to the title of “giant” in my book is Hyman Minsky. I’ve only learned of him in the past couple weeks through references in a few blogs, e.g. here. I hope to spend some time leaning about his work and may purchase a couple of his books. I don’t have anything more to say for now, but my “gut” tells me I will like what he had to say.