maverick
24-03-2008, 07:33 AM
Something unique happened last week, Fed cut interest rates by 75 bps, Gold hit $ 1033 an ounce and then plunged 10 per cent in one session to $ 914 an ounce. Crude Oil too struggled to retain its head above the $ 100 per barrel mark even as Goldman Sachs Abbey Cohen proclaimed a fair value for Oil at $ 90 a barrel.
Later in the week, the Chinese Government raised Bank reserve requirement, perhaps the 12th time in the last one year. Worse has followed in India-a near 6 per cent headline rate of inflation, which alone will ensure even tighter liquidity going forward, stifling all capital intensive projects and profitability of Banks.
Voices from Hong Kong suggest that the People's Bank Of China has issued edicts to commercial banks-to cut lending. It makes sense. The Government in Beijing does not wish for financial disasters in the Olympic year. Just like the Fed, it will want to see Oil and the Gold complex to correct, making it easier for the Fed and other Central Banks to ease in the context of a US led global slowdown.
Beijing has no more wish to see the American economy slow sharply than does Washington. This is how the Bernanke Cycle is shaping up so far with all its dangerous portents.
1. Fed Cuts Interest Rates.
2.Equity Markets surge.
3.Dollar decline accelerates.
4.The price of Oil and Gold soar.
5.Treasury reiterates "strong dollar policy".
6.Housing market problems get worse.
7.Credit market problems get worse.
8.Dollar decline accelerates.
9.The price of Oil and Gold soar.
10. Fed talks tough on Inflation.
11.Treasury Reiterates strong dollar policy.
12. Equity markets plunge.
This cycle which has moved so beautifully over the last 12 months seemed to have been broken even as the Fed seems to be running out of any more Gun powder to throw at the economy.
The coming days will show, if Billy Boy has succeeded in breaking apart the weak dollar-high gold and oil cycle, or was it just some speculators taking hordes of money off the table.
Anyway let us talk of the financial sector, while we are still on the subject of "Hank the Hunk" and "Billy Boy Ben".
1. The much vaunted $ 75 bn super-conduit fund designed by Citigroup, Bank of America, and JP Morgan has reached agreement stage. The firms say they are about to start marketing to 60 financial institutions in the near future. Believe it or not they intend to charge fees for launching this vehicle.
Expect the response to be cool. Increasingly the feeling is that assets underlying SIV and conduit activities, enhanced yield CDO's and other asset backed securities are too difficult to value.
Why would financial institutions pile money into a fund that is looking to buy the assets of those that have launched the fund because those companies themselves cannot agree a value on the underlying instruments that they hold? If anything sounded like a Greater Fool Theory, this has to be it.
2.So far it is reported that ratings agencies have downgraded $ 70 bn in CDO's out of a $ 1 trillion market. The WSJ has recently warned of a coming wave of debt downgrades.
S&P has 709 CDO tranches on negative watch while Fitch has 734. So far S&P has downgraded only 381 tranches and Fitch around 338. The CDOs on the watch list already are likely to result in tens of billions of downgrades, if not 100s of billions of downgrades.
This will force redemption on hundreds of hedge funds that are leveraged into this paper as investors are forced to sell downgraded assets that breach their covenants (many institutions including the German Landesbank, are not allowed to hold paper that is rated below investment grade.
Mark to maket transactions are what leveraged, quant hedge funds fear most.
3. By spring of 2008 the heaviest load of resetting mortgages should be hitting, at a pace of $ 120 bn per month. Default rates on mortgages are already running at over 50 per cent above normal and foreclosures are soaring.
Hank Paulson told the Senate recently that Defaults are now roughly at 8 per cent, while the FGIC still claims that figure at 4 per cent, so something has to give shortly.
Increasing defaults will become an input to the models used to value CDOs and other mortgage backed securities. Ratings agency downgrades will be forced to ratchet up once again.
Later in the week, the Chinese Government raised Bank reserve requirement, perhaps the 12th time in the last one year. Worse has followed in India-a near 6 per cent headline rate of inflation, which alone will ensure even tighter liquidity going forward, stifling all capital intensive projects and profitability of Banks.
Voices from Hong Kong suggest that the People's Bank Of China has issued edicts to commercial banks-to cut lending. It makes sense. The Government in Beijing does not wish for financial disasters in the Olympic year. Just like the Fed, it will want to see Oil and the Gold complex to correct, making it easier for the Fed and other Central Banks to ease in the context of a US led global slowdown.
Beijing has no more wish to see the American economy slow sharply than does Washington. This is how the Bernanke Cycle is shaping up so far with all its dangerous portents.
1. Fed Cuts Interest Rates.
2.Equity Markets surge.
3.Dollar decline accelerates.
4.The price of Oil and Gold soar.
5.Treasury reiterates "strong dollar policy".
6.Housing market problems get worse.
7.Credit market problems get worse.
8.Dollar decline accelerates.
9.The price of Oil and Gold soar.
10. Fed talks tough on Inflation.
11.Treasury Reiterates strong dollar policy.
12. Equity markets plunge.
This cycle which has moved so beautifully over the last 12 months seemed to have been broken even as the Fed seems to be running out of any more Gun powder to throw at the economy.
The coming days will show, if Billy Boy has succeeded in breaking apart the weak dollar-high gold and oil cycle, or was it just some speculators taking hordes of money off the table.
Anyway let us talk of the financial sector, while we are still on the subject of "Hank the Hunk" and "Billy Boy Ben".
1. The much vaunted $ 75 bn super-conduit fund designed by Citigroup, Bank of America, and JP Morgan has reached agreement stage. The firms say they are about to start marketing to 60 financial institutions in the near future. Believe it or not they intend to charge fees for launching this vehicle.
Expect the response to be cool. Increasingly the feeling is that assets underlying SIV and conduit activities, enhanced yield CDO's and other asset backed securities are too difficult to value.
Why would financial institutions pile money into a fund that is looking to buy the assets of those that have launched the fund because those companies themselves cannot agree a value on the underlying instruments that they hold? If anything sounded like a Greater Fool Theory, this has to be it.
2.So far it is reported that ratings agencies have downgraded $ 70 bn in CDO's out of a $ 1 trillion market. The WSJ has recently warned of a coming wave of debt downgrades.
S&P has 709 CDO tranches on negative watch while Fitch has 734. So far S&P has downgraded only 381 tranches and Fitch around 338. The CDOs on the watch list already are likely to result in tens of billions of downgrades, if not 100s of billions of downgrades.
This will force redemption on hundreds of hedge funds that are leveraged into this paper as investors are forced to sell downgraded assets that breach their covenants (many institutions including the German Landesbank, are not allowed to hold paper that is rated below investment grade.
Mark to maket transactions are what leveraged, quant hedge funds fear most.
3. By spring of 2008 the heaviest load of resetting mortgages should be hitting, at a pace of $ 120 bn per month. Default rates on mortgages are already running at over 50 per cent above normal and foreclosures are soaring.
Hank Paulson told the Senate recently that Defaults are now roughly at 8 per cent, while the FGIC still claims that figure at 4 per cent, so something has to give shortly.
Increasing defaults will become an input to the models used to value CDOs and other mortgage backed securities. Ratings agency downgrades will be forced to ratchet up once again.