Forex Blog - Fed Chairman Delivered Last Rites on US Economy
Fed Chairman Delivered
Last Rites on US Economy
I had to pinch myself today
while Bernanke spoke to the Austin Chamber of Commerce today. I thought I
was at the death bed of the US economy and the Chairman was delivery the last
rites. After 425bps of rate cuts, more liquidity programs by the Fed than
Jerry Lucas could memorize (former New York Knickerbocker who
has a photographic memory and took to memorizing the Manhattan phone book to
impress his teammates), $750bln in taxpayer money to invest in banks ($290bln
spent), an explosion in the Fed balance sheet to over $2trln from around
$880bln in August, Fed buying GSE debt outright to the tune of several hundreds
of billions of dollars, around $800bln in bank write downs, downfall of Lehman,
Bear and Wachovia, $160bln fiscal stimulus package, untold efforts at
pressuring mortgage servicers to modify home loans facing foreclosure, FDIC
backing of bank debt, FDIC insurance for deposits up to $250,000 from $100,000,
private capital infusions into banks in the billions of dollars and virtual
nationalization of AIG, the banking system remains broken and the economy is
following suit. Bernanke said so today while delivering the last
rites. And he hinted at nonconventional monetary policy or quantitative
easing ahead as interest rate cuts ahead are rendered meaning less by the
liquidity trap (buying longer-dated US Treasury debt and GSE debt). About
the only positive point he made after untold Fed efforts to restore a
functioning banking system was that it would be even worse if the Fed had done
nothingâ€¦now that is the kind of low bar children use to justify unacceptable
behavior and outcomesâ€¦but that was the Chairman of the Fed.
Well the adverse feedback
loop is in full bloom. Central banks are climbing all over each other to
cut rates â€“ the BOJ (wonâ€™t be cutting but will be announcing measures to
address a Japanese banking system credit freeze) and the Riksbank (expected to
cut 100bps) announced today they would be holding emergency board meetings this
week ahead of scheduled ones later this month. The BOE and ECB are seen
cutting rates 50bps Thursday, but very few think this is realistic in light of
the rapidly deteriorating economic fundamentals. Indeed 100bps cut is the
new 50bps cut. I would not rule out the ECB cutting 100 and the BOE cutting
another 150bps as it did in November. RBA is expected to cut 100-125bp on
Tuesday while the RBNZ is expected to cut 150-175bps on Thursday. Both
banks will signal more is likely needed ahead.
everywhere, is impacting more than commodity prices â€“ look at US Black Friday
retail sales â€“ all driven by discounting and this means lower profit
margins. Deflation is two quarters away as weak demand and rising
inventories drive most prices down for manufactured goods. And emerging
markets, the safety net for world demand, as so many asserted through the last
year, is a no show economically. It turns out that emerging economies are
not only coupled to developed economies but they are joined at the hip. China is rapidly becoming a basket case and needs massive
domestic fiscal spending to keep a restless population from becoming
Bernanke said today in so
many words that it is bad now but is likely to get worse aheadâ€¦most official
forecasts have unemployment peaking in the second half of 2009 and I would say
that is optimistic.
And today I could not help
but worry about banks cutting unsecured credit lines to households and firms
ahead based on remarks Oppenheimerâ€™s Meredith Whitney made on CNBC â€“ she has
been ahead of the pack by a country mile on the severity of the banking
crisis. Whitney said banks only started to cut back on consumer credit
card lines in Q3 and this will soar to around $2trln in 2009. So for the
unfortunate who lose a job, will also be facing much reduced access to
credit. Seems like a dangerous cocktail.
Paulson also spoke today and
indicated Treasury could use TARP money to support commercial mortgage market
(CMBS) as this segment is looking more like residential mortgage market â€“ more
tenants in commercially rented spaces not paying rent and property owners down
stream not paying bank loans on commercial properties sitting vacant or with
US auto firms will be in Washington Tuesday to resell bailout requests. But short
of a government bridge loan GMâ€™s days are numbered and Chrysler and Fordâ€™s
months are numberedâ€¦I would be betting on government help but at a high price
(major concessions from unions, suppliers and management, executive
housecleaning and equity stakes). Auto firms also release car and truck
sales for November tomorrow.
US stocks posted their largest weekly advance since the 1930â€™s through
Friday and today posted one of the largest decreases on record (an 8% decline
in DJIA). US 30-year Treasury yield is the lowest since June 1955. Fixed
income is trading as if quantitative easing is upon us and the US yield curve is turning Japanese.
I also do not like the news
from the hedge fund space where Tudor Investment reportedly is gating investors
in hopes of splitting assets and funds into good bank (liquid) and bad bank
(illiquid) on its $10bln flagship BVI fund (investors have to approve it,
though the gate is the discretion of the fund itself). This fund was down
only 5% for the year yet faced high redemptionsâ€¦in this world investors are
selling good hedge fund investments because the bad ones are locked down with
gatesâ€¦Tudor decision will force more redemptions at strong fundsâ€¦.some are
advocating the whole industry gate but this seems unlikely â€“ a poison
pill. The good news in this sector is that funds have deleveraged for the
most part (where they can). Private equity has multi-year lock-ups and
this sector will face similar redemptions if investors could get their
fundsâ€¦and unless asset prices recover they will be in the same boat in due
It is enough to go back into
the bunker and get fetal. Can we make through another horrific jobs
report Friday? I am hopefulâ€¦hopeful the Obama administration and
economists will end the wasted efforts at pretending the market still works as
an allocator of capital and credit. After much rehab maybe the private
sector can be released to resume the function it so badly corrupted in this
crisis. But we are in for an extended period of Fed and Treasury doing
what the private capital market used to do â€“ allocating capital and credit to
credit and cash starved firms and households. The sooner we all come the
terms with the government as last resort the sooner we can get on with the
rehab and hopefully bring the banking system and economy back from the
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