Archive for December 2007
Last Wednesday, I gave my call for monetary policy in the US and Eurozone
The Fed SHOULD hold rates, but I’ve lost all faith in the fed and they are just puppets for Wall Street.
ECB holds at 4%
Fed drops to 4%
So I was a bit shocked when the Fed only dropped rates 25 bps. I would have preferred 0 bps, but if you’re going to cut, cut enough to make some impact. A cut of 50 bps makes more sense the 25 bps even though if they had brains it would have been 0 bps, i.e. either do something or not. Don’t be a wet noodle.
So Bernanke doesn’t want to be Greenspan, eh? That much is clear. He is trying every tool in the chest other than lowering the Fed rate, but how on earth is this global bank bailout going to do anything other than bailout some new found buddies on Wall Street?
You should not really be surprised. After all, they are just as human as you and I. I’m probably better educated than most in the Fed anyway (as scary as that may sound).
Here is my advice to Helicopter Ben. The sooner you realize that some on Wall Street deserve to be insolvent, the better. Hold rates where they are (or even raise rates). Trashing the dollar isn’t really in anyone’s interest. Let the inevitable recession come over us. We’ll live. Trust me. We’ll even come out on the other side stronger. Leaner. Meaner. Greener.
The 0% APR on
Al Wojnilower’s American Express Card is about to expire and we’re likely not going to be able to roll over into a new one. But that’s alright. This country is still full of smart innovative people. Even if/when Citigroup defaults on its first interest payment, we’ll get through this. In every Econ 101 book I’ve ever glanced at (and tossed back on the shelf in fright), you see the words “business cycle”. It is natural. Recession are natural. Embrace it. Don’t let complacency take us beyond the point of no return. Make us work for a living. Don’t let us expect to be able to hold a job if we’re not giving 110% of our effort to be cost effective employees. We’re in a global competition with some super smart, super aggressive entrepreneurs and innovators in China and India, yet we’re feeding our lazy kids into diabetic obesity. This competition cannot be won through politics or military strength, it has got to be won through hard work, creativity, and dedication.
Ok. Why did I go off on that rant again? 🙂
Whenever I read about “subprime contagion”, I feel frustrated. When you get the flu, does the runny nose cause the muscle aches? No. Just because the runny nose came first doesn’t mean the flu can be described as “runny nose contagion”. The subprime mess was just the first symptom to appear in the bursting of a general credit bubble. The corporate high yield market saw very similar aggressive loan covenants. Commercial real estate. Emerging markets. You name it. We’ve been in the midst of a general fixed-income bubble since our friends at the Fed decided to keep rates far too low for far too long.
Think about this. Back in 2005, we were worried about the CDS market reaching $17 TRILLION notional. That is a HUGE number. But the notional amount is not indicative of overall exposure because of hedging, right?
If you want to see a perfect hedge, visit a Zen garden.
What is that number today? More like $45 TRILLION. That is insane. An entire new insurance industry has basically assumed that corporate defaults do not exist anymore. Not only that, a “hedge” can turn into naked exposure at the flip of a switch, i.e. what happens when the entity you bought insurance from no longer exists?
When I get a chance, I hope to start posting some more mathematical analysis of what’s going on (since that’s what I’m good at). For example, a primer on Leverage Mathematics 101 (which is partially complete) followed by Hedge Mathematics 101 would be a good start. In risk management, “hedging” basically means “let’s buy(sell) some similar securities so that we have more capital to buy other stuff.” In other words, hedging allows you to leverage yourself more.
Here is an article that may help spread the word, i.e. it’s not about subprime:
However, I would go even further. The truth is the current mess is not even about mortgages. Here is the word we should all be thinking about, “Fixed Income Bubble”.
[Update: My friend said they had over 300K views in the first 3 days since they posted it!! It has now been viewed over 590K times. Amazing.]
Here is the latest from the Richter Scales!! Woohoo!!
blog even if you’re wrong
won’t you blog about this song?
As usual, it is waaayy past my bedtime and I’m STILL groggy from this cold, so what do I do? Post another article of course!
On my way to bed, I just thought I’d point out a good article on MSN Money:
What is the ECB going to do? Raise rates? Not such an easy call. I’m learning that it is important distinguish what monetary policymakers SHOULD be doing and what they actually WILL do. I think the ECB SHOULD raise rates, just like I thought the Fed should have raised rates. Will they? I doubt it. The credit crunch is too severe and I think fears of a financial market meltdown trump inflation fears. Plus, factors that are weakening the USD are strengthening the EUR, so inflation is the lessor of evils in Eurozone in my opinion. I think ECB stays where they are at 4%. The Fed SHOULD hold rates, but I’ve lost all faith in the fed and they are just puppets for Wall Street.
ECB holds at 4%
Fed drops to 4%
Aside from this slight disagreement, I agree with his analysis of the fall out, i.e. USD falls, EUR gains, OIL rises, stocks rally (stocks always rally) temporarily only to fall hard, gold rises. Stocks that I think will do well (although I’m no investor) longer term will be those associated with “onshoring“.
Occasionally, I like to poke my nose in and see what my old comrades are up to over on NP. It seems the infamous thread is still alive and kicking.
However, it appears they are still talking about subprime. When are they going to realize that subprime was merely the first symptom of a massive global credit/asset bubble to surface? In economic terms, the dollar amount involved in any Treasury Dept bailout will be insignificant. However, when you multiply that amount by the insane leverage financial institutions have in, mostly off balance sheet, exposure, then things make more sense. Don’t be fooled. No policy maker cares about subprime borrowers. They are desperately trying to keep one, if not several major banks, afloat. Sorry Citigroup. The music has stopped.
Financial markets have a long way to go down still. The US economy will get whacked in a historical fashion, but we won’t be knocked out by any means. There are still strong sectors in our economy that will benefit from the coming “onshoring“. Pain is a good teacher and I, for one, will welcome the exorcism of complacency that is eminent.
Ha! What did I tell you? It is wayyy past my bedtime and I should be sleeping (especially since I’m sick and feel like I’ve been run over by a truck), but just stumbled on an interesting article from one of my favorite economic development blogs: Design Nine. He points to an article in the journalgazette.net.
Recall that in the midst of all the market doom and gloom, I recently said:
I’m actually ironically optimistic about the outlook for suburban and rural economic development. A weaker dollar will make outsourcing less attractive. That will bring manufacturing jobs back home. I can imagine a boon in suburban and rural development. Just imagine if communities developed decent broadband via fiber-to-the-home/business. Suddenly, there will be attractive jobs and living standards in affordable places.
I admit that the quote is a bit misleading because Andrew Cohill has influenced the way I think about things, but still timely I think. Here is an excerpt from the article:
Onshoring, in fact, is becoming trendy.
Some U.S. companies recently have pulled back from India to set up shop in rural areas where access to high-speed broadband connections isn’t the problem it was just a few years ago and where lower real-estate prices and wages are attractive.
Note that the key to onshoring is an investment in telecommunications infrastructure. In particular, fiber-to-the-home. It is quite sad to see so many municipalities rest their hopes on wireless broadband. That will only end in tears as the reality of wireless broadband becomes apparent. Any community that is not investing now in fiber will lose out on an important opportunity that is now beginning to present itself: onshoring. As Andrew will tell you more eloquently than I could, an intelligent investment in a communities future MUST involve a combination of both fiber and wireless and I would put wireless as a distant second. I can explain in gory detail why wireless will fail if you like (I did my PhD in the subject), but for now need to hit the sack.
Go onshoring! Go USA!