At today auction the Feds gave $6.25 bln at 2.42%, which is 108 bps below current target rate and 183 bps below last week target. 1.83% rate cut in 3 days – ouch! Without this particular add it would be a drain, so Feds had to cut rates by 1.83% and the sloshing is still below January 17.
Another interesting exercise is to count bullets. Bernanke, as a good cowboy in old western had 19 bullets. So far he fired 9, 10 more remain in his gun. He is expected to fire 4 more bullets at the next 3 meetings and only 6 will be left for the remaining of the downturn. Double ouch!
January 24, 2008 at 3:15 pm
First of all, thank you indeed for analyzing the prior drain when all said that sloshing abounded. Being short these last few weeks has been a great source of Schadenfreude (and cash).
I had been phasing my short positions through neutral toward long. I guess it is time to get 100% long for the counter trend rally.
January 24, 2008 at 4:17 pm
must be an odd feeling for BB to face reality after all those years in the Ivory Tower
January 24, 2008 at 5:00 pm
ron, I rather think you should blame not the ivory tower but simply the huge distance between Dec 10 meeting and Jan 22. The banks were quite happy to borrow at 4.25% back then. The things are deteriorating every week.
January 24, 2008 at 5:51 pm
“I guess it is time to get 100% long for the counter trend rally.”
Don’t take too long, this “rally” might be over before you know it. The credit conditions are worsening and it getting harder and harder for the Bull to gain traction when the fictitious capital is erased. I give it until the FOMC meeting and then “whoosh” down we go.
We shall see.
January 24, 2008 at 6:58 pm
The credit conditions are worsening…
And it is best not to underestimate the severity and staying power of the housing crisis. All indications are that it will worsen in 2008 — wealth destruction will accelerate: falling house prices, foreclosures, debt downgrades. This will have manifold consequences — see California’s budget deficit, for example. In many senses it is just getting started, although sometimes I get the impression it has already been discounted.
But you are right:
We shall see.
January 25, 2008 at 2:01 am
I am not sure why you think he can use all 10 bullets. Realistically, he can use only 4-6 more. He won’t be able to push below 1% because the inflation (yes inflation) will flare up. In spite of the downturn, Oil is still high, so is Gold and the commodity prices. They have come down, but comparatively, they are still high.
Pushing down below 1%, will result in a sharp decrease in the value of FRN (Federal Reserve Note aka US$). Result, foreigners dump their US Treasury holdings, that is, the rates go up! At minimum, they would stop buying.
Also, the inflation in the rest of world is high and foreign central banks will need to get it under control. Exchange rate adjustment meaning that the foreign countries will simply transmit that inflation back to US via increased export prices (import prices for US).
I think the we may see something worse – Helicopter Ben may be forced to raise the rates to get the inflation (and faith in dollar) under control. In the process, he may achieve exactly what he has been trying to prevent – a sever US recession bringing about an equally severe global recession.
Just thinking aloud.
January 25, 2008 at 10:54 am
Shankar Khadye – sure, I was counting bullets to 1%, he can’t cut below that. Of course I can always make an arithmetic error
January 25, 2008 at 11:46 am
So can I.
January 25, 2008 at 11:50 am
I was merely trying to convey the thought that even going to 1% is not going to be that easy. As they keep using bullets, they’ll see inflation remain stubbornly high, and hence, realistically they will adopt wait-and-watch mode as rates start going below 2.5%.
Of course, Helicopter Ben may decide to take the rates down to ZERO.
However, as I was telling a friend of mine – Helicopter Ben has only 3.5% to go down whereas the stock market about 12,500 points (theoretically speaking). I don’t think he is going to win this.
January 25, 2008 at 1:07 pm
Here’s my opinion on those rates and inflation.
I think inflation depends on the amount of money, not their cost. If Feds are lowering rates but at the same time M1 and M2 are decreasing it will not create any inflationary pressure based on fundamentals, but it will create some inflationary expectations because people think that low rates == inflation.
Japan had 0% rates for many years and no inflation whatsoever. We are going the same way
January 25, 2008 at 2:51 pm
Over the long-term, I am a deflationist. However, before the economy gets into deflationary recession, I think it is going to experience an inflationary recession.
Just my thought.
January 25, 2008 at 8:47 pm
theroxylandr wrote:
” If Feds are lowering rates but at the same time M1 and M2 are decreasing it will not create any inflationary pressure based on fundamentals, but it will create some inflationary expectations because people think that low rates == inflation.”
Well there is a big difference between the US and Japan. Japan has had a huge export market that has kept its currency strong. The US has…(drum roll please) a huge amount of debt and has a strong import market.
What is sustaining the US dollar is Bretton Woods II, mostly supported from Asia and the Middle East. Since both of these regions are facing high inflation, They may be forced to revalue their own currencies if they need to start fighting inflation. When this occurs, the US would need to change tracks or the dollar will become the next Mexican peso. Another worlds, our trading partners inflation problem is a dollar problem.
“Saudi Arabia Won’t Forsake the Buck unless it Falls 30%”
crooksblog.sovereignsociety.com/2008/01/the-greenback-g.html
[KSA didn't say if it meant 30% from yesterday or 30% from five or ten years ago. The reporter assumes 30% from yesterday's value]
Shankar Khadye wrote
“Over the long-term, I am a deflationist. However, before the economy gets into deflationary recession, I think it is going to experience an inflationary recession.”
I think I can might a case for just the opposite. I think the credit crunch falling real estate is likely to cause disinflation and for a short period deflation in the US. This of course depends on what Washington does in the short term. Most of the major industrial powers are coupled to US consumption, so I think for a period they will probably face some economic contraction. Over a longer period, internal demand will increase creating a recovery, and Asia and the Middle East will loose economic dependancy with the US.
The US will be mired in debt for a very long period and I would bet that Congress will print money to finance gov’t spending and pass major bailouts, increasing the money supply and of course creating a boat load of inflation. Considering that Boomers are starting to retire and will be spending less, but drawing considerably more entitlements from the gov’t, also lends weight to the gov’t increasing the money supply.
There is a chance for asymetrically inflation-deflation. Higher banking regulation and investor reluctance to extend credit to both consumer and commerical markets would put a crimp on US economic growth. Jobs and business that depend on abundant and cheap credit are likely to suffer the worse. On the flip side, if demand for resources remains strong overseas, prices for good and services made overseas will rise. We could falling real estate, auto sales, and non-discretion spend, while prices for things like energy rise as the dollar declines.
I think that even if the entire globe falls into recession, demand for energy (oil, natural gas, and coal) will remain strong. I don’t see chinese or india, abandoning their newly constructed petro-fueled infrastructure. They may consume less in the future than they are today, but I think they will always continue to consume more than they did before the built up thier industrial base.
Crude Oil production peaked in May of 2005 and has been falling. Sooner or later (probably in the next 2 or 3 years) we will face much slower oil production as the major oil fields become watered out. The new oil projects are all on much smaller fields which cannot possible offset declines from the super-giants and giant oil fields.
January 26, 2008 at 11:13 am
>>> However, before the economy gets into deflationary recession, I think it is going to experience an inflationary recession
Could be, whatever opinion I have on the near term is certainly beyond my qualifications
Those money streams are crazy, mindblowing and impossible to predict unless you have a full-time team of eggheads working on that 
January 26, 2008 at 11:17 am
TechGuy, this what the Kondratieff wave is all about. In 15 years we will have huge inflation. Huge. But in 15 years
January 26, 2008 at 11:21 am
>>> Sooner or later (probably in the next 2 or 3 years) we will face much slower oil production as the major oil fields become watered out
Is that happing THAT fast?
Few weeks ago I was listening a bloomberg radio with an expert who said they ran a program of detailed monitoring of Saudi Arabia famous oil field from satellites. It was never done before on that magnitude. The program was completed just few months ago.
And he said the condition of this field is much better than the consensus thinks. There is a suspicion that Saudis are pretending that they have less oil than they really have. Even though the consensus is that they pretend they have more than they have. You know, those Eastern minds are very sharp traders…
January 27, 2008 at 5:45 am
As far as I know, the Saudis are inreasing the number of drill holes just to keep current production levels – what does that tell us about their reserves?
January 28, 2008 at 12:52 pm
>>> the Saudis are inreasing the number of drill holes just to keep current production levels
If they need to give the impression that the reserves are depleted and drilling few holes will make the observers worry – why not to do that?
January 28, 2008 at 1:24 pm
>>> If they need to give the impression that the reserves are depleted and drilling few holes will make the observers worry – why not to do that?
Maybe, but drilling holes is an expensive game to play just to make a wrong impression…
January 28, 2008 at 1:36 pm
I will explain with a chart (Sorry, I did not find a chart in english):
http://de.wikipedia.org/wiki/Bild:%C3%96lproduktion-ausr%C3%BCstung-saudi-arabien.png
It ist the second chart. The thin line with the dots is the number of drill holes (scale on the right side); the thick black line is the OPEC quota assigned to Saudi Arabia and the grey shaded area is the amount of oil produced from 2001 to 2007. On the left you can see the scale in megabarrels/day.
As you can see, the number of drill holes has TRIPLED from 2004-2007, but oil production has DECREASED from 9.5 mbd in 2004 to 8.5 mbd in 2007. Why should they dramatically increase their production cost just to make an impression and heavily cut into their margins?
January 28, 2008 at 4:45 pm
MAZ, maybe it’s vice versa, maybe the guy on Bloomberg was pretending that things are better than they are? He might have his own interests…
January 28, 2008 at 6:06 pm
Well, we will not know for sure long after the fact (peak oil)…
January 28, 2008 at 7:46 pm
theroxylandr wrote:
“Is that happing THAT fast?”
Yes, From fields that have publically accessable data, (PEMEX, North Atlantic), The declines are double digits. Once a field begins to water out, production begins to slip rapidity. The Offshore fields are more difficult to drill so the production declines are much steeper.
MAZ Wrote
“As you can see, the number of drill holes has TRIPLED from 2004-2007, but oil production has DECREASED from 9.5 mbd in 2004 to 8.5 mbd in 2007.”
The Saudis are going after pockets of oil that become trapped because the water column is too high to recover this oil without drilling for it. The drilling rate will need to increase even faster to remain in the game. Right now they target the largest pockets. Soon or later they will run out of the larger pockets, and they will start drilling for the smaller ones. The smaller the pockets the more pockets you have to drill to sustain production rates.
I would estimate that the Saudis only have a two to four years before Ghawar goes into steep decline. The are also planning to wake up several smaller fields that they abandoned decades ago in a valiant, but hopeless attempt to offset losses from the Ghawar field.
Here is another issue:
Declining exports because of rising domestic demand in the top exporting countries.
graphoilogy.blogspot.com/2008/01/quantitative-assessment-of-future-net.html
January 29, 2008 at 7:00 am
Now that’s interesting, thanks!