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     holycow
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Username: holycow
Post Number: 3111
Registered: 08-2004
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| | Monday, September 03, 2007 - 10:02 am: | 
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http://tinyurl.com/yt3832
Big Ben`s big dilemma
The question is: What will the Fed do in its next monetary policy meeting? The easiest option is for it to do what the markets expect — cut the signal Fed Funds rate. This will calm the markets down at least until the next set of expectations about monetary action builds up. The Fed can then choose to play ball or allow another phase of turbulence.
However, that could be precisely why the Fed chairman might not want to cut the rate. If the Fed gives the impression that it is entirely led by what the markets want, it ultimately loses its credibility as an effective policymaker. One of the associated problems is potential “moral hazard”. If markets believe that they can always rely on the Fed to bail them out, they will continue to take more risk than they should. One could argue that former Fed Chairman Greenspan had encouraged this to a degree and that had inflated the asset bubbles (like the sub-prime bubble) that are now bursting.
Thus, to mark a decisive shift in regime, the new Fed chairman might want to hold the rate steady. Fed bosses are known to go against market expectations to signal a change in the rules of monetary policy-making. In 1979-80, then Fed Chairman Paul Volcker went against the received wisdom of the time and hiked interest rates sharply to fight an inflationary spiral that rose from rising oil prices. Volcker’s actions sent interest soaring dramatically across the world, but by refusing to dismiss the oil price increases as transient shocks that could be accommodated through an easy money policy, he successfully established the US central bank’s credentials as a ruthless inflation fighter. The result: long-term inflationary expectations in the US came down sharply.
Besides, US domestic fundamentals are not that dire that an immediate rate cut is warranted. The mortgage mess may have slowed consumer spending a bit but the prospect of anything close to a recession seems dim. Manufacturing growth is robust and labour markets fairly tight. July 2007 unemployment was 4.6 per cent. To put that in perspective, the unemployment rate had soared to 6.3 per cent when the economy had slowed in 2003. GDP growth for the second quarter of the year printed at a healthy 4 per cent. US companies are underleveraged and banks’ net worth to assets ratio is significantly higher than the average of the 1990s. Strangely enough, despite the problems in the mortgage market, home sales have held up. New home sales in July grew 2.8 per cent, significantly higher than most economists expected.
That said, Bernanke would be taking a major risk if he chose to maintain the status quo on rates. If financial markets spin out of control and credit dries up, the repercussions for the long-term health of the US economy ultimately impact adversely on the global economic system. A rate cut at this stage seems sensible. The challenge for him is not to come across as a soft-hearted nanny that the markets and investors can turn to be at the first sign of trouble. However, the financial markets are in no mood to listen to any kind of tough talking. A rate cut may bring about temporary relief but it might just be a matter of weeks before they start fretting about the central bank’s next move. That, I am afraid, will keep things volatile for a while to come.
The author is chief economist, HDFC Bank. The views here are personal
*** more or less as I had imagined, but, my imagination doesn't count, his opinion does! He's a chief economist of a bank while I'm just a cow!
HC
...addicted to chart
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holycow
Member
Username: holycow
Post Number: 3112
Registered: 08-2004
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| | Monday, September 03, 2007 - 10:05 am: |
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http://au.biz.yahoo.com/050627/30/52eq.html
US at risk of recession: top economist
Financial futures indicate a 100 per cent likelihood that the Fed will lower its overnight funds rate by a quarter percentage point to 5.0 per cent when policy-makers next meet, on September 18...
*** dramatic claim and 100% one sided bet - if BB does nothing or raises rate - hell will break loose!
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HC
...addicted to chart
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holycow
Member
Username: holycow
Post Number: 3113
Registered: 08-2004
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| | Monday, September 03, 2007 - 10:15 am: |
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http://au.biz.yahoo.com/070902/30/p/1dphz.html
Subprime crisis to 'hit world economy'
..."Growth, especially of private consumption in the United States, will suffer because of the housing crisis and that can naturally not go without negatively affecting the world economy overall," "This is, to say it clearly, above all negligence on the part of the managements of these houses,"
...
Ackermann said many banks and investors affected by the credit market turmoil that arose in the wake of the subprime crisis had apparently taken risks that exceeded their size and risk-bearing capacity.
...
The distribution of credit risks in the international financial system had not been transparent to supervisory authorities and market participants, he said.
Deutsche Bank has shut down its proprietary credit trading desk in London and is laying off some of the 14-strong team, a source familiar with the matter said on Friday.
Earlier last month, a source close to Deutsche Bank told Reuters the bank was set to ditch its credit relative-value trading strategy used by the London proprietary trading desk after losses of about $US135 million ($A165.8 million).
*** My intention is not to repeat the news here... but to raise this question: can someone tell me how could BB and GWB solve this global problem by lowering rate by 0.25% or handing out temporary reprieve for the "poor house owners" this mid Sep?
HC
...addicted to chart
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hilarius
Member
Username: hilarius
Post Number: 2893
Registered: 04-2004
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| | Monday, September 03, 2007 - 10:51 am: |
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HC
The poor house owners are in trouble anyway. It would be the poor lenders who would be temporarily helped, with perhaps worse consequences as you rightly say.
I have spoken elsewhere about the harm that would be done by throwing petrol on the flames of financial irresponsibility by generating still more unregulated liquidity
Also I spoke in favour of the recent Australian interest rate increase and the good response given to it by the ASX trading community in the days that followed. I thought that indicated maturity and responsibility by the RBA and the local market.
In a rising interest rate environment the best (most productive) projects survive and the weakest go to the wall.
All that said at what point do you think governments and authorities should step in to prevent a financial conflagration worsening, and what actions would you recommend?
Or do you simply look forward to "all hell breaking loose" and the consequences?
With Best Wishes
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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holycow
Member
Username: holycow
Post Number: 3114
Registered: 08-2004
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| | Monday, September 03, 2007 - 11:10 am: |
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Hilarius,
I have just read a very good report from here: http://tinyurl.com/2jb8dp, thanks to Shane. You should go get yourself a copy and have a good read. You may find the answer you want in this report.
Cheers.
HC
...addicted to chart
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resillent1
Member
Username: resillent1
Post Number: 198
Registered: 10-2006Rating: N/A
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| | Monday, September 03, 2007 - 11:17 am: |
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Below is another extract from the BB speech. Commentators will try and attach many differing opinions (often conflicting) to whatever action he takes.
I think from his own words it would be safe to assume that if the federal funds rate is cut, than there has been damage to the underlying Economy and contraction has began.
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy. In a statement issued simultaneously with the discount window announcement, the FOMC indicated that the deterioration in financial market conditions and the tightening of credit since its August 7 meeting had appreciably increased the downside risks to growth. In particular, the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally.
The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets
(Message edited by resillent1 on September 03, 2007)
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holycow
Member
Username: holycow
Post Number: 3116
Registered: 08-2004
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| | Monday, September 03, 2007 - 01:06 pm: |
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http://tinyurl.com/2oyrh7
*** words from higher authority...
...Turning to the world’s second major problem, the global credit crunch and its underlying cause - sub-prime US mortgages in all shapes, forms and derivatives - the analysts quote a fund manager who confessed to another service:
“Anyone who is bullish here either doesn’t understand what’s going on or is talking their book…This is a 25-year up-cycle in credit being popped. Once the air has started coming out, for the life of me, I don’t see how they can put it back in again…There are a lot of players out there who are insolvent, they just don’t know it yet”.
BCA confesses to have heard similar comments from clients who cannot remember when the overall credit market environment was as bad as it is now.
Sounds scary? It is. But BCA argues the authorities will use everything in their might to prevent this debt problem from crunching the real economy – even if it means creating more excesses further down the road.
Taking a positive view on matters, the analysts believe (hope?) the worst of the current financial crisis will be over by year end, and the world will be able to move on in a more normal fashion again at the start of the new calendar year.
Here comes the bad part: BCA believes the current episode has all the same characteristics of the recession fears in 1998, which prompted Fed easing. That was good news, at first, for investors in the share market, because a powerful rally followed. But it also led to increased volatility in the market.
The bad news is that this share market rally ended with a genuine crash two years later...
HC
...addicted to chart
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hilarius
Member
Username: hilarius
Post Number: 2901
Registered: 04-2004
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| | Monday, September 03, 2007 - 02:55 pm: |
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I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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ohkoolnutz
Member
Username: ohkoolnutz
Post Number: 658
Registered: 10-2005
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| | Monday, September 03, 2007 - 03:25 pm: |
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What is your picture saying? We retraced into the breakdown area and we are up for 5% crash tomorrow taking us straight back to 5950?
---
ohk
Lies, Damn Lies and Technical Analysis
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holycow
Member
Username: holycow
Post Number: 3117
Registered: 08-2004
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| | Monday, September 03, 2007 - 03:27 pm: |
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http://tinyurl.com/3dl8q7
Last week a transaction was posted in the US SPY options market of an astonishing US$900 million in value. The SPY (or "spyder" as it is called) is an exchange-traded fund which replicates the S&P 500 index. 12 million call options ranging in exercise price from 600 to 950 have been bought/sold (and thus created) by parties unknown. The S&P closed at 1474 on Friday. The options expire on September 21. This represents a three-week bet on the market being 35% to 60% lower in that time...
***can some option expert here verify this news and provide some sensible explanation please? How much money is involved to place this bet?
HC
...addicted to chart
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kate
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Username: kate
Post Number: 741
Registered: 04-2005Rating: N/A
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| | Monday, September 03, 2007 - 04:44 pm: |
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HC
The above is also mentioned on FN Arena. Nobody knows what's going on. http://www.fnarena.com/index1.cfm?CFID=770101&CFTOKEN=8167dbe3a4e60f4a-5A54942A- 17A4-1130-F523B847A4C66595
Kate
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kate
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Username: kate
Post Number: 742
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| | Monday, September 03, 2007 - 04:55 pm: |
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Sorry HC, didn't check your source, thought it was Market Watch.
Kate
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holycow
Member
Username: holycow
Post Number: 3118
Registered: 08-2004
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