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;
- 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.
- 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.