Sunday, March 16, 2008

Something Broke Last Week

I had a truly remarkable bone-in "Cowboy" ribeye steak at Ruth's Chris Saturday night, and I have to say that eating anything else seems almost criminal. That steak was so good I almost wanted to cry when I was finished. Truly remarkable. There is something purely evil about the human dietary evolutionary mechanism. I mean we SHOULD be strongly attracted to broccoli and carrots for the best long term viability, but instead I could down a big fatty steak every day and be very happy instead. Just mean if you ask me.

Something Broke Last Week
I wanted to expand a bit on Friday's post. The Bear Stearns collapse and the silly FED "liquidity" gymnastics has presented us with a real test of confidence and belief in the system. I was pleased to see this kind of thinking was permeating the better blogs and financial sites (like Minyanville, Calculated Risk, Market Ticker, etc). This week promises to be every bit as exciting as last week.

My main point for this post is that I believe something broke last week. You can strain belief up to a point. You can batter confidence a bit more than you think. It is possible to stretch and squeeze hope for a while. Eventually something has to give. I feel we are at that point in time. Consider the following macro dynamics at work as things go forward:

The Average Person on the Street FINALLY Grasps that the Actions of the FED are Eating His Financial Future: While Easy Alan Greenspan cut rates to 1% nobody noticed the damage to the dollar as their home prices went parabolic. Now, with every cut in the FED funds rate, the dollar erodes to levels never seen before. The difference is that now even people that have no interest in the workings of the money system are AWARE that a dropping dollar is killing them in the price of oil and gasoline. No fewer than 4 people at my work have correctly paired the dollar crash to gasoline prices. How long until they figure out the food connection as well?

Add to this that mortgage rates are going nowhere but up, and the man on the street cannot understand why the FED cuts are killing him, not helping him. The banks in the current credit crunch are simply pocketing the yield differences, and not passing the lower rates on to the consumer.

The massive "liquidity injections" the FED keeps pushing out (now at around 400 BILLION and counting) are correctly viewed as pushing debt further down the line onto our children. This money is not coming from assets, but through debt issuance. This is another point that has recently been elucidated.

Finally, the FED is actively encouraging wild behavior by banks in the future. Now they are ABSOLUTELY SURE that faced with a systemic breakdown caused by ridiculous behavior, the good old "Too Big To Fail" rescue line is guaranteed to come in. At least in the past there was some degree of uncertainty on this point. No longer.

The Bold Faced Lying Now Extends to Every Aspect of Society: I am cynical by nature. So are most folks. They expect their politicians to be basically full of it. They are not shocked to get a bunch of BS from the car dealer. The list goes on. There is a big difference between being full of baloney and trying to be vague versus the outright misinformation and blatant lying going on right now at all levels of leadership. Bear Stearns screams for day that they are not facing any problems, then in 24 hours require a massive bailout? Treasury secretary Pauslon runs his mouth bemoaning any attempts to bail out "flippers" and "speculators" then orchestrates deal after deal to do that very thing. Ben Bernanke stands at the ready to cut rates to zero, but has the gall and the balls to say he sees inflation moderating in the future.

The level if distrust in the banking system stems form the fact that these mythical value mortgage paper is held by all the banks in large amounts. Every bank knows this, that is what is causing the credit crunch. Unfortunately the level if mistrust now extends to all corners of our society as the obvious lying has reached a level where you cannot give the benefit of the doubt to anyone. We are approaching a "Oh yeah, show me in no uncertain terms" kind of interaction phase.

FED is Betting the House on Bear Bailout: The hurried BSC bailout is even now being rushed through. JP Morgan will probably announce a buyout tomorrow. This is it. THIS HAS TO WORK. The FED is betting the house on two independent events and they had better be right;
  1. The BSC turnover will progress smoothly - With over a TRILLION dollars in complex derivatives and counterparty exposure, it is simply not possible to unwind the BSC positions. They must be seamlessly transferred. The FED is betting this can be done. We will see.
  2. No Other Major Bailout is Needed - I want you to consider a very real point; What if Morgan Stanley or Lehman Brothers had the same blowup this week or next? What if BOTH did? Can the FED really supply THAT MUCH LIQUIDITY? If two or more entities bought the farm we could be looking at dollar values in the Trillion range for assistance. What would that do to the dollar? What would that do to the US's credibility of EVER paying up on our debt? The FED is really gambling the house on this second point. As they say over at Minyanville, "Risk is extremely high".

All right, theres my 2 cents. I will work on a new poll question for tomorrow night. Leave any ideas in the comments section.

Have a good night.


Anonymous said...

Hey Team,

The shiza is hitting the oscillator tonight....

BS fetched $2/share.

Is this the end?


watchtower said...

This has been an interesting Sunday.

BB cuts discount 1/4% on a SUNDAY!
Anyone know if this has ever been done before on a Sunday? (I may be overreacting here)

Last I looked, Yen carry...96, seems not too long ago I was looking at 118.

Ag's over $21 last I looked.

Dollar drops into the 70's!!!

Could be an interesting week coming up.

Anonymous said...

I love broccoli and carrots, but I also love a good steak. I think it has something to do with balance which we don't seam to be having in the markets. Figured there would be a rally today and looks like that's what well get commodities are getting hammered as well. I hate manipulation but what the frig you gonna do, the people doing the manipulating are the same one's that run things.


watchtower said...

I was listening to the radio this morning, and they said it has been since the Great Depression since a rate cut on Sunday. (who knows if they are correct though, guess I could google it if I had time)

What I'm trying to say is...historic stuff happening.

Anonymous said...

(Reuters) - The Federal Reserve's cash life-line to financial markets has set a dangerous precedent with lasting costs, but it was probably necessary to prevent economic ills from spreading.

The Fed on Sunday announced it would extend $30 billion in credit against Bear Stearns' shaky assets to persuade JPMorgan Chase & Co to buy the troubled investment bank for $2 a share.

One former policy-maker said the Fed had "crossed a bright line" by putting "TAXPAYER MONEY: in danger and was flirting with moral hazard by shielding investors from loss.

This really pisses me off!