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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 nothing…now that is the kind of low bar children use to justify unacceptable behavior and outcomes…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 – the BOJ (won’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. 


Disinflation, present everywhere, is impacting more than commodity prices – look at US Black Friday retail sales – 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 mutineers. 


Bernanke said today in so many words that it is bad now but is likely to get worse ahead…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 Oppenheimer’s Meredith Whitney made on CNBC – 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 – 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 deadbeat tenants. 


US auto firms will be in Washington Tuesday to resell bailout requests.  But short of a government bridge loan GM’s days are numbered and Chrysler and Ford’s months are numbered…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 1930’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 redemptions…in this world investors are selling good hedge fund investments because the bad ones are locked down with gates…Tudor decision will force more redemptions at strong funds….some are advocating the whole industry gate but this seems unlikely – 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 funds…and unless asset prices recover they will be in the same boat in due course.


It is enough to go back into the bunker and get fetal.  Can we make through another horrific jobs report Friday?  I am hopeful…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 – 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 dead. 


David Gilmore


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