This Thursday was the historic day. The Feds made an announcement that was so stunning that I was puzzled how to write about that. But now I think you just read it yourself first:
March 20, 2008 The Open Market Trading Desk of the Federal Reserve Bank of New York (“Desk”) has engaged in extensive consultation with bagholders, potholders, potsmokers, gangbangers and their loser clients on the overall design and technical features of the Term Shit Sorting Facility (“TSLF”) since it was announced on March 11, 2008. As a result of this consultative process, the Desk is announcing a few modifications to the previously released program terms and conditions, as well as providing more details on the parameters of the first auction, scheduled for Thursday, March 27, 2008 at 2:00 p.m. Eastern time.
The Desk will conduct the first TSLF shit sorting on March 27. The dumping size will be $75 billion for a term of 28 days or whatever.
The first TSLF sorting will be a loan of Trashury against Schedule 2 shit rather than against the Schedule 1 trash previously proposed. To facilitate the operational processes of the facility, the Federal Reserve has also expanded the list of eligible collateral for Schedule 2 to include dogshit (CMOs) and AAA/Aaa-rated commercial catshit (CMBS), in addition to the previously announced AAA/Aaa-rated private-label horseshit (RMBS) and OMO-eligible collateral.
In short, this never happened before, even during the Great Depression. Who knows, maybe that’s why GD happened, aside other things. But never ever before the Federal Reserve was consciously exposing itself to major losses.
Lets think, what is exactly the Federal reserve? It’s a bank that holds treasury bonds, which are just uncollected taxes. You can read about Fed holdings here. It prints money that are representing those holdings. What are money? Its Federal Reserve paper that can be used to pay taxes. So essentially money are derivatives of paid or unpaid taxes managed by Fed as an underwriter, the same way as CDOs are derivatives that represent unpaid mortgages with some bank (for example Bear Stern) as underwriter (ups). So, essentially, when Feds are swapping treasuries for CDOs dollar is swapped for CDOs and Feds are becoming Bear Stern. Capite?
The Theroxylandr in Flame 
March 22, 2008 at 11:54 pm
Good one. The last paragraph as well.
The market likes this new TSLF thing. What to make of that? Has ‘dumbing down’ reached the investment community? Or are they, i.e. the ‘smart money’, just corrupt, trying to sucker in retail investors by giving the ‘all clear’ so they can dump into another rally?
March 23, 2008 at 2:03 am
Theroxylandr:
1. Helicopter Ben is being true to his philosophy of preventing deflation at any cost.
2. Should your theory about the Fed reducing the rates and drying up liquidity at the same time (thereby running over the markets) be now thrown out of the window?
More importantly – the Fed is out of bullets now.
BTW, the Fed can expand its balance sheet indefinitely and infinitely. It can swap CDOs for treasuries and simply purchase more treasuries from US Treasury (by creating money out of thin air). It is betting that the foreign governments will keep dollar propped up due to their treasury holdings. This has similarities to what happened during the Weimar Republic where they kept their printing presses on while the lenders kept betting that Germany won’t default on its debts.
The biggest fallacy with this type of reasoning is that foreigners may decide to stop purchasing treasuries beyond a certain point – just as Sovereign Wealth Funds have adopted wait-and-see attitude and declined to invest in US.
I still think the Fed may run over markets because the only way to get SWFs into investing mode is if the equity prices become more attractive. Suddenly, President Bush is advocating on behalf on SWFs. Secretary Paulson met with SWFs about transparency in investing etc. That could be a precursor to the run over of equity markets.
But of course, I could be reading too much into it.
One thing though, always bet on the man following his preconceived mindset. Helicopter Ben is going to be Helicopter Ben to the end. At least to the point there will be huge cry about inflation. My worry is that he may be forced to raise rates in the middle of severe recession. So much for dropping money out of helicopters.
Shankar
March 23, 2008 at 1:11 pm
An entertaining thread on announcement (“Schedule 2 collateral”).
Note this comment:
Here is how it could work: the fed takes all the garbage and the banks pay them interest. The Fed then prints up loads of cash to buy treasuries and uses the interest from them and the garbage to pay off the debt over a period of years. The Fed becomes the off-balance sheet for all the financial houses. As long as public banks don’t have to take the losses they won’t be insolvent, the downside risk will be fully priced in, and their shares will trend up. Given how far financials have fallen, if they rally for an extended period the market will hit new highs and take everything else up with it. No more 401k worries, sentiment restored, etc. Sure, we’ll still have a recession, but a collapse of the financial system will be avoided. Everyone now expects recession and the market will bottom before we see its effects — in other words, it already has bottomed if the above theory holds true.
March 23, 2008 at 2:47 pm
eh,
That is how it may work till the foreigners stop purchasing US Treasuries. If the Fed does what you indicated (and I said in the comment above yours), it means that the monetary base is going to be permanently expanded. Welcome to the inflation (rather hyperinflation).
The only stopping point to the Fed is foreigners. As long as they keep purchasing, the Fed will continue. Unfortunately at some point in time, they will stop (just as SWFs have turned away from US investments).
As my Macroeconomics Professor used to say, in Economics you can’t fool all the people all the time.
And that will bring the ultimate run – run on the US$.
Next few weeks market action will tell us if the Fed is going to lean towards hyperinflation or orderly liquidation.
If inflation, then cover the shorts and wait for the crash in Aug ’08 – April ’09 timeframe.
(Full Disclosure: I used the textbook written by my Macroeconomics Professor and our esteemed Chairman.)
Shankar
March 23, 2008 at 6:02 pm
Shankar, what’s funny, the classic problem during deflational squeeze is that banks refuse to borrow. Fed decided that if they lend for crappy collateral they will sure borrow 🙂
March 23, 2008 at 8:01 pm
As I understood it, a big problem is that the banks do not trust each other, and so they are very reluctant to lend to each other — this is the source of the ‘liquidity crisis’. Offhand I do not see how using their crappy collateral to borrow from the Fed is going to fix that.
March 23, 2008 at 10:45 pm
Did I see this right:
“conduct the first TSLF shit sorting”
Some typo. Naughty naughty.
This is a conversion to hyperinflation. I had a run ins with managers of other boards that keep pounding the table “deflation deflation, now go away”.
What is happening is that the Fed is printing money. If the Fed simply prints money and hands it out to the banks, that is simply monetary inflation. By handing money over for crap collateral, that is pure and simple printing of money. It puts crap on the same level of federal debt. Don’t tell anyone though, because Federal debt is so high with really big obligations coming, federal debt is not worth anything.
There will be a run from the dollar, which interestingly enough will put deflationary pressure in the very short term. We are seeing that now as the banks need to dig deep to find the cash to cash out those with dollar claims. Look for more margin calls and then hyperinflation. The conveyor belt has started running and it is only a matter of time before the dollars start coming off the end.
March 23, 2008 at 10:46 pm
Oops, meant to sign my missive.
That was me as anonymous. You would have guessed it anyway.
March 23, 2008 at 10:48 pm
Oops, meant to sign my missive.
That was me as anonymous. You would have guessed it anyway.
March 23, 2008 at 10:48 pm
Way to much focus on the FED and not on the consumer. 11 trillion dollar mortgage debt plus CC, auto etc. Recession in progress more layoffs, slow wage growth, generation change with boomers slowing down consumption, local, state and Federal taxes to be increasing, large shortfalls at all levels of gov’t. The City of San Francisco has a 356 million short, massive cutbacks coming, this is just the tip of the iceberg, so Ben and the FED along with most of Wall Street will become a smaller and smaller story.
March 24, 2008 at 1:02 am
Ron
There are only two organizations that can institute monetary inflation: Treasury and the Fed. The rest are along for the ride.
What will happen to kill everything is that the liberals at the local level will demand federal relief for their bond issues. The only way to pay all the debt is to either bankrupt all local governments or print dollars. My money is on printing dollars. Fiscal austerity has never won any election. The power of the public employee unions has never been challenged. Look again at the SF cutbacks. They are adding taxes right and left including mandates for health insurance for restaurant employees. The big number in the wages are the retirements and they are not being attacked. Cutbacks will only aggravate the retirement problem since all that will be left are those hanging on for retirement. The new, lower priced employees will get laid off.
Recession has never stopped inflation, be it price or monetary. Recession whether it be the depression, or the 60s or 70s have led to inflations in price and dollar devaluations, and large increases in public debt. The Fed and treasury have announced that they will inflate, and they have to. The banks are broke, they need printed dollars, the public debt is broke and needs printed dollars. Look for the Fed to go out and buy public debt wherever it comes from. I see the fed buying municipal and state debt just to push more cash onto the market. They may buy more long federal debt and put that on its balance sheet to keep the housing debt cheap.
Money money everwhere. Look for more TSA like organizations to soak up the unemployable and generate more public debt and more dollars.
March 24, 2008 at 1:08 am
PF , like it or not TSLF is rolling out this week. One way of thinking through an aspect of the fed’s present set of concerns is what do to with the insolvency issue confronting the prime brokers without a depository base. By implementing 28 day loans with a lower threshold for collateral , the Fed believes it helps provide both liquidity and assists firms that may be insolvent. Consistent with TAF , I believe these 28 day loans will rollover at the end of the 28 day period , perhaps indefinitely.Presently , with an emphasis on the word presently , these loans have not been inflationary due to the fact these loans have been sterilized. Objectively , on a short term basis the Fed has addressed liquidity for the prime brokers and probably has assisted firms from confronting run on the bank type insolvency problems that overwhelmed BSC. This does not address whether prime brokers will lend out this borrowed money to hedge funds , reenter the Term auction markets , lend out to their peers or other banks , reenter the leveraged loan markets or lend to consumers…. the better bet is lending will remain constricted due to lack of confidence , distrust of counterparty and the basic need to preserve capital and shore shaky balance sheets. A question in my mind is at what level of TAF , TSLF or PDLF activities will some semblance of stability come to pass. Is 400 billion , 600 billion or 800 billion the number ? what if we have the Fed extend their balance sheet of roughly 800 billion and the present conditions still exist , what does the Fed do at that point , participate in unsterilized or inflationary loans ? What happens one or two years down the line when FNM and / or FRE implode and we still have highly elevated TAF ,TSLF and PDLF lending , what then ? Does Treasury implement its own version of the Fed’s programs ? Short term and perhaps even in the medium term we will tread water… but the underlying problem have not been addressed ( as Ron and others noted above , disappearing jobs feed into the growing foreclosure / credit card / car loans problem , which feed into declining values of structured finance products , which lead into writedowns for the financial firms… until the structural problems are resolved ( assuming there is such a solution ) , we will see short term relief which fades until the next gimmick or band-aid is applied.
March 24, 2008 at 1:13 pm
$2 is the real price. $8 is the cost of trouble if the deal is voted down.
March 24, 2008 at 1:41 pm
T , this situation is a mess…. there are a host of stories from Dealbreaker today , as well as the NY Times ( Sorkin ) reviewing and breaking down JPM and their counsel’s purported errors in drafting docs related to the deal…. the takeaway is that this deal isn’t not only not locked down , but they may have increased litigation risk in Delaware’s Chancery Court. Moral hazard as well as the law of unintended consequences ( let’s throw in Murphy’s Law while we’re at it ) are really kicking in on this situation.
March 25, 2008 at 12:46 pm
The “buyer of last resort”
The economic effect of the arrangement is that the Fed is buying up MBS and other assets at the “value of the portfolio as marked to market by Bear Stearns on March 14, 2008.”…Rosenberg writes that the transfer of these assets has removed the liquidity and mark to market triggers which would put pressure on a private balance sheet.
Those ‘private balance sheets’ would be, among many, those of other investment banks. Including JPM.
March 25, 2008 at 5:23 pm
Eh , the 29 or 30 billion just cleans up one gutter , the gutter at BSC. Where does the money come from to clean up the gutters at the rest of the IBs , Bulge Banks / Regional Banks / hedge funds , Pension funds — after all , we can’t allow any institutions to fail since they’re all too big , right ? And if you bailout the creditors of BSC , since we know BSC itself wasn’t bailed out , moral hazard implies the Fed could swoop in to save Hedge funds ( think of their role in the CDS market and say the counterparty risk there with hedge funds isn’t greater than BSC’s counterparty risk. ) There isn’t enough money at the Fed to sweep clean all of stables piled with toxic structure finance waste , so what happens if JPM gets in trouble ? Or Goldman , heaven forbid ? Or Bank of America chokes to death while attempting to digest that swollen corpse known as CFC ( I wonder if Bank of America has cried to the Fed for JPM type assistance — they really didn’t get squat , just headaches from the CFC deal and you know that had to have been pushed on them…. I really want to believe their CEO and Board weren’t so stupid to do that deal on their own accord. )so , bullets have been dodged but it’s just for now….
March 26, 2008 at 12:22 am
Fred
You have a point with the Fed trying to clean the Augean stables of waste. The pattern that the Fed has set is to involve novel products, different agencies, different companies.
I look for the Fed to engineer massive monetary inflation through their own agency of issuing their own debt for the first time, bank over bank (re BSC&JPMC, CWide and BA), OFHEO, FHLB, FHA, Treasury, FDIC, PBGC, SIPC, BIS, trading bank equity options on the open market (selling OTM puts, buying OTM calls), futures, G10 central banks, and whoever has enough float more cash.
This will be helicopter money with an air force of helicopters. The Fed has established its agenda: Save the banks, save the stock market, and save home equity levels. Enough moral hazard to go around for all the casinos in Las Vegas.
March 26, 2008 at 2:11 am
…moral hazard implies the Fed could swoop in to save Hedge funds…
I’ve read that the new TSLF is designed partly to be a conduit: PDs can borrow there, but then who knows where the money goes…? Perhaps to hedge funds.
March 26, 2008 at 8:09 am
PF , Eh , the short term sugar high from the Fed’s actions gets shorter and shorter. After last week’s commodity sell off , once again commodity prices are on the rise as the dollar resumes its slump downward. Another hedge fund ( Pentagon Capital- a billion dollar fund ) has announced it’s shutting their doors , the confusion surrounding the BSC fiasco continues ( 2 pension funds announce they will seek a temporary restraining order to block the BSC deal ) , banks continue to hoard funds , the BOE Governor King states he will not bailout banks ( or follow the Fed in recklessly cutting rates )and the ECB still has its eye on inflation. The dollar ( USD Index sporting a 71 and change handle this morning ) faces the real risk of becoming a funding currency for carry trades as investors borrow at low rates here and invest elsewhere in the world. TAF , TSLF , PDLF allow the temporary propping up of apparently insolvent institutions but at a huge cost . As the world wonders which Banks and / or IBs may be the next BSC , confidence ebbs away as does investment funds ( unless the insolvent institution is TMA desperate and will pay a 18 percent coupon for hail mary financing .) Consumer confidence numbers plumb the abyss and consumer spending will follow into the abyss as well. However , as interesting as the Fed’s frantic bailing of water out the sinking ship known as the US financial sphere has been to date , I fear it will get more interesting in the medium term. The BSC / JPM machinations will pale in comparison to the upcoming and inevitable bailout / nationalization of the GSEs… Both FNM and FRE will take on more risk and dubious assets at a time when their financial position is already quite weak and declining as we speak. after BSC , the issue of the federal government standing behind their obligations has been resolved but the cost of such actions is truly unknown ( 1-2 trillion perhaps when one factors in derivative exposures for both FNM / FRE. ) What will be the name of this facility ? Maybe the WTF facility would be appropriate but the Fed will need heavy lifting from Treasury to pull off GSE bailouts. Which means Treasury funding needs ( already surprisingly above projections )have to jump to the sky at some point.All the while , Treasury will be continuing to fund two wars where costs only go up and the endgame fades further into the mist… as we now rely on foreign central bank financing to fund our borrowing needs , how long this funding be provided ?
March 26, 2008 at 1:32 pm
On the carry trade angle.
Don’t think that the buck can hold up the carry trade. It worked for Japan, and could work for China for one simple reason: Japan needed to sterilize all the money that was coming in from all its exports. They could loan away all the high powered yen generated by their export economy.
For the US, the carry trade could last until the currency finds its value. I have set it at somewhere between .30 to .40 DXY. At that point though, interest rates should be up appreciably. No carry trade. The problem is that no one wants to lend to anyone which will keep the carry trade away. The banks are short of capital and demand high interest rates. The only rates that are low are those between banks and the government. Private investors need not apply.
Forget the carry trade in the US dollar. Who will loan the money for it?
March 26, 2008 at 2:16 pm
At .30 to .40 DXY , the dollar will be a funding currency and treasuries will have sky high yields. The treasury market bubble at some point has to pop. I find it hard that foreign investors will continue to fund our budget abd current account deficits at current yields indefintely. Moreover , the fed cuts have the perverse effect of making US being a massive inflation exporting machine ; at some point, the current account surplus nations either drop dollar pegs , cutback on purchases of dollar denominated debt or demand significantly higher yield to buy same. Tomorrow’s auction of 18 billion in 5 year notes should provides clues as to what the plans of the indirect bidders are.
March 26, 2008 at 5:45 pm
Pf , check Denninger missive tonight at market ticker… he hits on the dollar as a funding currency for the carry trade as well a soffering commentary on other issues of the day. Also , Bloomberg on March 25th noted the dollar was being used by some traders as a funding currency… my point is to some degree it’s already happening. Just pointing out the facts , cretainly not suggesting this is good in any form or fashion for the US. However , let’s ponder these situations : the BOE doesn’t cut rates at an accelerated pace similar to the US ; the ECB declines to cut rates while noting its mission isn’t to bail out bankers who screwed up ; the Australian interest rates which have been raised actually stay at those levels for a period of time, if not hiked again ; Iceland has just raised their rates unexpectedly 125 basis points this week for crying out loud– to defend their currency ; Bank of Japan doesn’t cut their current pis*ant level interest rate. While Canada might cut rates , the lack of coordination from G-7 central bankers leaves the US and the dollar isolated and weak… Moreover , the ECB and even Japan have noticed their stronger currencies have taken some of the sting out of the inflationary rises in commodities. Next month the Fed cuts again… will it be 50 bps ? Who knows at this point. Who knows when another IB might blow , if a major Bank barfs a hairball or two ( C and Bank of america remain prime candidates for hairballs ) , whether we have a rash of hedge fund closures after the end of the quarter or investors notifed they have been locked into their funds — roach motel fashion. it’s been less than 10 days since the Fed cut rates and already , things are getting edgy again . The interest rate crack high lasts shorter periods these days ( BTW , remember the good old days when the Fed cut or raised in mere increments of 25 bps … what happened to that ? ) So , when do you see the USD Index cracking 50 , let alone 30 – 40. Let’s start with 50…..
March 26, 2008 at 8:37 pm
Hi Fred
Denninger is off when he thinks that we can fund the carry trade. We don’t have the cash to do it and the banks aren’t lending.
It is deceptive to look at simply some of the numbers. Denniger has always missed the fact that our trade balance is terrible and that in spite of all the signs pointing to deflation, inflation is our future. A negative trade balance has no other outcome. Feel free to correct me with an example of a country running a negative trade balance that goes into deflation.
Take a look at in another way. If we raise the value of the dollar, our trade balance goes negative because we kill more of our domestic industry. In the near term, dumping the buck, cause the trade balance to go up because the cost of essential goods goes up. In the long run dropping the dollar finally reaches equilibrium when the buck wallows long enough. Raising the buck never finds equilibrium and results only in bankruptcy and the country being carted off for pieces.
Wait for the DXY to walk down and quack.
March 26, 2008 at 8:45 pm
Fred one more thing
There is the possibility of the Eurodollars to be used as a funding currency. As for Eurodollars, no bank wants to be long them, so they will be dumping them on overseas investors at low rates. Those suckers will be freely available, but domestic dollars will be hard to borrow.
The proper scenario is for the Eurobuck to drive down the price of the dollar to my DXY target. I see this as a cataclysmic rush and the lifetime of the dollar as a carry vehicle will be nil. Eurobucks are hot money, very hot money.
March 26, 2008 at 9:13 pm
I read denninger… even if I don’t agree with certain theories of his , its always an interesting point of view ! LOL I think we agree the buck is going down against a variety of currencies and this doesn’t upset our government due to the positive impact on the current account deficit and exports. The trade offs of a weakening currency include importing inflation , the risk at some point that foreign buyers ( even those perceived to be price insensitive ) decide to call it a day and dump the dollar and the risk of the bond market tanking due to sharply rising yields. Not an all-inclusive list , but some things we can agree on I believe. At some point , the GCC nations will depeg or at a minimum revalue their currencies. Inflation is becoming a big issue in the middle east and periodic stories of laborers protesting in these countries ( at the risk of arrest and / or deportation back to their countries of origin ) have been noted in the media in the region. The loss of th dollar as the reserve currency will be detrimental but it appears the choice has been made to let the dollar go if that is what has to be done to save the Banks / IBs and the bulk of the financial sphere here. Since the ECB and BOE don’t appear to want to follow the Fed’s lead on rate cuts , we’re hanging pretty much by ourselves in that regard. After April’s cut to probably 1.75 on the fed fund rate , they have 75 bps to work with in my opinion… I want to see what happens at the point their hands are tied and they can’t justify further rate cuts. that will be the moment when the rubber meets the road for me……
March 26, 2008 at 11:00 pm
Hi
Fred will agree with you just about everything including Denninger. He is interesting, if over the top. Not necessarily accurate, but you pays your money and takes your choice.
Personally I think that holding the dollar as reserve currency has hurt the US more than it has helped. We need to engage in responsible management of our monetary resources and using our tax bills as a monetary reserve is a sure way to run up a budgetary deficit, not to build up our industry.
March 26, 2008 at 11:31 pm
PF , the way things are developing , I don’t think we will have to worry about reserve currency issue with the dollar in the medium term. De facto rather than de jure , the dollar role has and will continue to diminish. Just a fact of life and we should just get over that. Me have lost our manufacturing base and evolved into a service model , with the financial sphere being the hub. I don’t believe anyone can truly grasp the reputational harm our financial giants have suffered in the court of public opinion. Frankly , who could have imagined Bank after Bank , IB after IB , reduced to going hat in hand seeking welfare from foreign investors. moreover , the world watches as the fed contorts itself in a patently obvious attempt to keep the financial sphere afloat… doesn’t really inspire confidence and what life lessons would we have imparted if China or Russia was in our financial condition / position today ? and the scary part is we’re still just in the top of the first inning of the ongoing credit fiasco…. depending on your point of view . The good , bad and ugly aspects are just beginning to be revealed. just when we think we understand where the pressure points are , another seam gives way revealing fresh sources of credit anxiety. and so it goes… what it boils down to is the Fed et al find themselves fighting a 12 alarm fire with five hoses… you pick the brightest fires and try to douse them with the resources you have , but you can’t hit all of the hot spots. That’s just the way it is.
March 26, 2008 at 11:42 pm
Pf , check naked capitalism piece entitled ” Paulson calls for a weaker dollar ” Just read that after responding to your earlier post… Yves covers a lot of the same things we bounced around tonight regarding the dollar and its subset of issues , perhaps more eloquently. A lot of folks are seeing the same things , at around the same time. Should be interesting to see how these things resolve themselves.
March 27, 2008 at 12:04 am
Thanks Fred. I like Yves’s blog. It is one of the tops. Sometimes the comments there don’t measure up to the blog content. Guess that’s why I like it here.
I guess that I have promoting the bleeding obvious for a long time in that the buck needs to settle to its true value, and the faster the better.
Unlike a lot of people I blame Volcker for this mess. His rescue in the form that it took promoted the strong dollar policy which led to a promotion of imports over exports. That in turn led to our current excessive dependence on external economies. We ought to either be dependent on natural resources/commodities or finished goods, but not both like we are now.
The strong dollar policy became ingrained because of Volcker’s perceived heroism, and because successive administrations found it convenient, like tinhorn dictators, to keep the public buried in cheap imported goods to avoid rebellion and restlessness.
We got away with our strong dollar policy because of the role of reserve currency. Foreign banks had to soak up our excessive supply of government debt and currency. By the way in the US financial model, there is zero difference between federal debt and currency, only the maturities are different — a theme recently echoed by our gracious host.
Our constitution based our currency on a commodity, not the federal debt, and money supply was not linked to debt issuance. Somewhere in our overheated populism we decided we needed more cash and pushed aside any currency anchors.
March 27, 2008 at 12:14 am
Just read Yves’ commentary. Cannot say that I agree with Yves.
Repeat: The dollar is junk. Paulson is right on. It will take years to restore the export economy, and it must be restored. Pain, pain, pain, pain, followed by misery.
The FIRE economy must burn out. We cannot have Wall Street making more than main street. As I said above, the near term pain must be sustained to let the dollar find its level. Price deflation must be in non-dollar terms (ie prices will decrease in proportion to the DXY to outsiders), inflation/stagflation will be the result in dollars.
March 27, 2008 at 1:15 pm
PF… follow up to #29. In light of that part of your note discussing foreign central banks ( I will assume you were referring to indirect bidders )taking on excessive US Government debt , the news that the South Korean Pension Fund ” NPS ” ( fifth largest pension fund in the world ) will shun treasuries due to falling yields and the weaker dollar , was eye opening , right ? Some coverage in the FT and the Guardian today on this story. Note NPS isn’t selling at this point , but definitely isn’t buy more treasuries at these levels. However , due to their aging population , SK looks like it will be actively diversifying over the next several years to take on higher yielding assets and equities… So , absent a significant ( in the eyes of NPS ) increase in yields , treasuries are off the table as they move into equities and higher yielding assets , perhaps such as asian regional bonds . Will be interesting to see if other asian countries adopt a similar approach and also chose to publicly announce same ( rather than make a stealth move. )
March 27, 2008 at 1:30 pm
My message is decoupling, and the SK move out of Ts makes a lot of sense. All the Asian exporters will be looking for more diversified consumers (like China and Europe), more diversified investments (like China and Europe).
Moving consumption to the east will take more time than the movement of investment. Both are inevitable.
My sense is that there will be a spate of announcements on movement of investment. The politics in the exporting nations is becoming restive with the notion of subsidizing the US consumer while they add bugs to their rice bowls for nutrition.
Onward into years of misery for the US. Payback is a female dog.
March 27, 2008 at 2:55 pm
Pf… it would appear that our foreign investors are growing quite restless with the developments here. Some have reached the point where they’re mad as heck and aren’t going to take it anymore. We both agree that is not only a very bad omen , nut also an omen we will see repeated.
March 28, 2008 at 11:45 am
Hi Fred
Here is another one for you:
China is refusing bucks to settle export trade:
http://www.nakedcapitalism.com/2008/03/chinese-avoiding-dollar-as-invoicing.html
Those who talk about monetary deflation have no clue. We are on the brink of monetary deflation with massive price inflation. And price inflation is what everyone cares about. No one but an academic cares about monetary deflation.
When I think of the dollar, I think about the market for an item that no one wants. One the market just gets no bid. No inflation or deflation of the dollar, just no bid.
March 28, 2008 at 3:23 pm
PF , read the piece from NC. I would state the situation as deflation expressed by way of dollar deflation , pound and euro currency deflation on the way , residential real estate deflation ( Us / UK / Ireland / spain ) , CRE deflation on the way here , and structured financial product deflation here but infecting the world. Price inflation using these examples , but certainly not an inclusive list ( actual shortages of supply and high demand / flooding and other weather related issues impacting crops / the insane and uneconomic of policy of turning corn into fuel / political dynamics in certain regions of the world in particlar Asia , Africa and the Middle East / dollar decline in value ) , driving grains , softs , energy complex commodities and other hard commodities that people value and will buy. Yes , we have inflation and deflation impacting us at the same time … no matter what inflation stas come on the tv or appear in print to try to convince folks all is well on the inflation front , any one with a grain of sense understands prices for the things we buy have jumped over the past year. Particularly energy and food products. If you buy these items , you know the deal.
March 28, 2008 at 4:11 pm
PF , Russ Winter at Wall street examiner has several pieces which touch on some of these trends ( “Backstopping Fictitious Capital” and two pieces with Mad Max in the titles… ) Taken as a whole , they highlight how the unintended consequences ( or perhaps foreseen but considered acceptable collateral damage ) come to the forefront . Perverse policy actions here , which act against the best interest of the whole of our nation ( whether if we look at trade , the dollar , the hollowing out of manufacturing ) , recklessness in lending practices coupled with the actions and /or inactions of inept / corrupt or complicit regulators / rating agencies and alleged governmental oversight entities — have a cascading effect around the globe , and the ever growing lack of confidence by the world in the US ( whether as a guiding light and beacon of hope , a land where hard work is rewarded and opportunity abounds , a land where integrity and taking the moral high ground aren’t just buzz words or just a place where folks are competent in managing not only their country’s affairs , but those of the world. ) I don’t think we viewed that way in many parts of the world by the average citizens, which is a shame. we have manage to lose the world ( figuratively not literally — at least not yet ) and also lose our soul at the same time.
March 28, 2008 at 4:18 pm
Right on Fred
I am putting my money into DB’s currency hedge, DBV, and oil trusts. I don’t trust gold. I am looking for ag production investments at this time. I refuse to invest in ADM since they were prime movers in the effort to convert food into fuel. So much for sustainable fuels. Why not soylent green instead. Damn, soylent green seems so prescient, kind of reminds me of soy and lentils into fuel and energy. When I think of small carbon footprint I think of central Africans and American winos (all they consume is a little bit of food and modest amounts of motor fuel), neither of which need shelter.
Think I am going out to sell my gold and buy canned food with it.
March 28, 2008 at 4:26 pm
Hi Fred on your 36
The loss of American soul is why I keep coming back to Volcker in pinpointing where things really backward. Till Volcker, there was still emphasis on production, and manufacture, but the whole era that was fostered after than emphasized stability of the financial community above all else.
The Fed was established initially in some part to provide stability for main street in particular ag price stability and parity. What has happened, is that the harvest of dollars has become more important than the welfare of the middle class. The Volcker era begat Milken and all the rest of the pirates. Volcker should have seen to the capital flows to production and not offshore.
Volcker sold the soul to save the dollar. Not a fair trade. Now the dollar is being priced at parity with our soul.
March 28, 2008 at 6:13 pm
Pf , our collective soul isn’t going for much these days. Regardless of whether McCain , Hil or Obama wins , an intial glance of their economic pronouncements doesn’t inspire confidence. Hil and O will spend , spend , spend away … McCain is admittedly clueless on economics. Let’s pray the winner hires top flight talents that haven’t presold themselves to the Street. I know , faint chance of that but one can hope , right ? Looked at the Fed’s H-3 yesterday evening… major drop between 3/12 and 3/26 ( from -19 billion and change to – 61 billion and change ( unadjusted for seasonal changes. ) Benny and the Feds keep playing for time … whether its TAF , PSLF , PDLF or taking toxic waste on its book to facilitate the BSC transaction , Benny is keeping insolvent banks and IBs in motion…. the Banks / IBs are just a bit stiff , it’s not rigor mortis ! In six months of TAF et al ( or a year / two ten years ) , prices will come back and all will be well. That’s the pipe dream and we know Benny and his squad are definitely on the pipe. It won’t be long before Treasury steps up to the plate , whether George W and Cheyney want to acknowledge how screwed up things are or not … I don’t even think we’ll have to have food riots here in the US , looting of Banks / Supermarkets or the like before the next alleged taxpayer assistance program will be offered… while the hope is to push that off until the next Administration , it will be a long hot summer and it is an election year. Stay tuned… we live in interesting times and each week we see a new wrinkle from the credit crunch.
March 29, 2008 at 10:04 pm
PF , feedback to your post 37. You need to grab this week’s Barron’s…interesting discussion on commodities , including the AG sector. My take is based on the negative take of the article and factoring in the Barron bounce ( pro and con ) , you may want to take a peek at this. Sounds like a set up for another take down in commodities similar to the take down that happened during the week of the Fed cut. Any who , take a look at the article and if you you like , give me your thoughts after review of same…. I have my jaded little thoughts but would be actually interested in chatting with you after you check the Barron’s article… Peace !
March 30, 2008 at 1:58 am
Thanks Fred
I will grab a Barrons in the morning. Wouldn’t it be great to be a Barron’s editor and know what was coming for the week? Never mind that would be illegal.
My view is that all non-essential commodities will get sold down to keep the sucker money moving and stripped of value. Gold will likely continue to get whacked, and oil futes might get bruised.
I am really getting this sense that we are headed to to new world with food and energy crowding out other forms of assets and savings, and will crowd out taxes. As for taxes I am thinking both locally where property tax revenue is key and at the federal level where income taxes dominate. This is looking more and more monetary whiplash with deflation of assets and inflation of living costs. I need to look at the models of impact of the first oil shock of the mid 70s, though that was a bit weirder with rationing and with a much more robust export economy. Somehow the answers to where we are headed are in there, except it will not be the same.
First I think rationing mitigated the impact by forcing the public to cut driving, so the shock took a while. Next, the amount of GDP spent on fuel was likely a lot less than it is today — these numbers should be around somewhere. Next, the slowdown from the end of Vietnam allowed money to contract and prevent the filtering of fuel into general inflation.
Finally, positive exports allowed the US to manage the effects. In fact the last time the US had a positive trade balance seems to be in 75. Two years later it zoomed to $30B/year, about triple any previous year. Likewise the negative trade balance between 97 and 2000 almost quadrupled, getting us close to the current rising plateau. The 70s cushion is gone now
The only way that we can pay out our current debt is to print faster. Our asset sales cannot keep up and deflating them will only make it worse.
March 30, 2008 at 6:46 am
Response to PF #41 — my takeaway from the Article is look out for another take down of commodities. This may include not lost gold /silver and platinum , but also oil and grains ( wheat / soy / corn in particular . ) T , has set a new thread discussing commodities. If you get the chance to follow up , post your response on that thread. Talk to you later.
March 30, 2008 at 6:48 am
From 42 , the word “lost” should actually have been “not only”….