Friday September 7, 2007 - 11:08:14 GMT
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U.S. Jobs Report and Deja Vu ... Ever Been There?
FX Trading ‚Äď U.S. Jobs Report and D√©j√† Vu ‚Ä¶ Ever Been There?
It‚Äôs scary, a feeling where you find yourself in a new situation that you‚Äôve been in before ‚Ä¶ or at least you think you‚Äôve been in before. You can remember it like it was yesterday, only you have no idea when it could have been.
Some experts blame this familiar feeling (called d√©j√† vu) on miniature seizures that make you feel like you‚Äôre genuinely re-living an experience that you‚Äôve never actually experienced. Creepy!
Here‚Äôs something else creepy ‚Ä¶
Yesterday I was searching the web for some information on how the current credit crisis has impacted foreign banks. In my search I stumbled across an article titled ‚ÄúThe Credit Crunch‚ÄĚ by J. Orlin Grabbe.
It appeared to be a more scholarly type article, with deep explanation of the global credit system, rather that a quick, timely, event inspired piece like Bloomberg churns out with such ease.
So I stopped and read.
Here are some excerpts I thought I‚Äôd share with you ‚Ä¶
‚ÄúA credit crunch happens when financing for real estate transactions disappears or is hard to find. Since financing is a significant component of demand, the price of real estate drops quickly.
‚ÄúA credit crunch happens when commodity financing is withdrawn, so that inventories of, say, nickel, copper, crude oil, or silver can no longer be carried. The inventories have to be rapidly liquidated--sold in the market--with a consequence depression in the price.
‚ÄúA credit crunch happens when the collateral posted in a loan or trade transaction suddenly drops in value, so that more collateral must be posted. When this is not possible, the collateral must be sold at its new low price in order to help repay the loan. Done in sufficient volume, this further depresses the value of the collateral.‚ÄĚ
Does this stuff sound familiar? It should if you‚Äôve been following the markets. This is what all the gloom and doom types (which we are somewhat guilty of) are feeding off of as they warn you of the impending financial market collapse.
Here‚Äôs a bit more from the article ‚Ä¶
‚ÄúBorrowing in yen at extremely low interest rates was considered a free lunch. Then one day the free lunch disappeared.
‚ÄúCredit crunches used to be banking phenomena almost exclusively. No more. During the 1980s and 1990s formerly illiquid assets became more marketable or tradable. They no longer just sit on the asset side of some bank's balance sheet. ‚ÄėSecuritization‚Äô is the process by which a collection of receivables is put together in a package, and then bonds are issued against the package. The package may be a collection (or portfolio) of credit card receivables, or automobile lease payments, or commercial mortgages, or some similar type of asset which provides ‚Äėbacking‚Äô.
‚ÄúIn the first half of 1998, more credit was provided in the asset-backed securities market than provided by the entire US banking system.
‚ÄúIn traditional central banking theory, the lender of last resort--the Federal Reserve, in this case--is supposed to halt the run out of relatively illiquid financial assets, and real assets (commodities, goods) and into money. How? By making more money available. One deals with the drying up of liquidity by creating more. But how does one do that without exacerbating the current problem, or simply creating future inflation? Who should get money, and why? Doesn't postponing liquidation of assets postpone resolution of the crisis?‚ÄĚ
So if you‚Äôve read all this, you‚Äôre probably wondering what the big deal is. Yeah, you can probably get all this information in a half-hour of searching Bloomberg or Wall Street Journal headlines. After all, today‚Äôs credit crunch comes on the back of irresponsible mortgage loans, and it has led to waves of liquidation, to an extent where the Federal Reserve has needed to jump in and calm everyone down.
But the eerie part of the article, when I finally made way to the end, it was dated October 11, 1998.
Everyone wants a feel for the U.S. jobs market ‚Ä¶
It‚Äôs Non-Farm Friday in the U.S. today. You can pretty much guarantee this will seize the attention of most everyone involved in the markets.
Consensus estimates are calling for an addition of 100,000 jobs and an up tick in the unemployment rate to about 4.7%.
And considering the significant drop-off reported by ADP employment services earlier in the week (companies added 38,000 new workers compared to an expected 80,000) we may need to prepare for a similar disappointment later this morning.
But also keep in mind U.S. jobless claims decreased last week, and ended a five-week streak of increases. The big question is whether it‚Äôs too soon to see the impact that the housing and credit crunch is having on U.S. workers.
Seems to me like it‚Äôs not too soon, especially considering the shift in sentiment among analysts ‚Äď those noting surprising resilience among the U.S. labor market are now pointing to inevitable softness.
Today‚Äôs report has the potential to be big, real big. We‚Äôll see what traders think about it very soon.
John Ross Crooks III
Black Swan Capital
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