Archive through March 19, 2008

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easymoney

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Post Number: 144
Registered: 03-2005

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Tuesday, March 18, 2008 - 03:33 pm:

True eblode. I hear the Roman Empire was pretty big at one time too. Even the British had a good thing going once.

Having said that I hope you are right about the USA still being in control of its own destiny!

Two of them say they're Jesus.
One of them must be wrong.

Industrial Disease
Dire Straits

rdumas

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Post Number: 1254
Registered: 11-2006

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Tuesday, March 18, 2008 - 03:33 pm:

How safe are the Aussie banks ??

There has been some discussion about the safety of the Australian banks over the last few weeks. In order to put get some idea of the likely risk I have put some simple figures together that may give us some idea of whether any of them might go down the tubes due to the recent spectacular company failures.

Firstly the known exposures to the various failed companies are shown in the list below:

The reported Nett Profits of each bank of interest as reported in their last annual reports are as follows:

CBA - $4.415 billion
NAB - $4.295 billion
ANZ - $4.143 billion
WBC - $3.415 billion
SGB - $1.163 billion

So their potential risk exposure as a percentage of their last reported nett annual profits are as follows:

CBA - 61.6%
NAB - 41.1%
ANZ - 35.7%
WBC - 17.6%
SGB - 50.0%

So we can see which banks are the most exposed and possibly explains why the CBA share price from memory has dropped the most.

Using the above figures we have a worse case scenario of a possible drop in dividends but it's difficult to see any bank going down the gurgler.

I am aware that banks do make provisions for bad debts but I am unsure how those amounts are accounted for in their accounts. Whilst the above figures are an over simplification of the real risk to the banks I just wanted to get some idea of the size of the problem. I am sure that there are others on this forum who may be able to provide better risk figures but I would think that the above figures are a start in the right direction.

coyotte

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Post Number: 514
Registered: 12-2002

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Tuesday, March 18, 2008 - 04:07 pm:

Coyotte,
It's that "Parasite" is the reason you're not writing in fluent Japanese on this site.

Typical School Yard Bully Tatics --- Wait on sidelines until a opponents are weakened then go in and put the BOOT in, there are fellas look how good I am -- No I thank the Yanks for nothing ---have they ever had the GUTS to take on a equal foe ? -- NO

The "Sea of Uncertainty" is defeated by the nimble vessel "Probability", not the unwieldy vessel "Prediction".

eblode

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Post Number: 716
Registered: 11-2002

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Tuesday, March 18, 2008 - 04:34 pm:

lol

Eugenio

hilarius

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Post Number: 3616
Registered: 04-2004

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Tuesday, March 18, 2008 - 09:56 pm:

Eugenio

The express train called Depression is rounding the bend and the Fed Chairman is tied to the tracks unable to stop it

Who do you suggest could and should come to his rescue?

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

ody

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Post Number: 2242
Registered: 10-2006

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Tuesday, March 18, 2008 - 10:29 pm:

THAT CHILDISH WALL STREET

Another rate cut in prospect, and another rise in the futures on Wall Street. These people seem really unteachable. Every time this happens further disaster inevitably follows, and meanwhile we are laying a basis for the NEXT asset bubble - but in the US few people seem to understand such basic principles. They will probably still take the market up if Bernanke lowers interest rates to -2%.

coyotte

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Post Number: 518
Registered: 12-2002

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Tuesday, March 18, 2008 - 10:36 pm:

well i was under the impression that interest-rates are set by the LENDER , eventually any Reserve Bank must fall in line with Market Rates ( Reserve Banks follow not lead )

The "Sea of Uncertainty" is defeated by the nimble vessel "Probability", not the unwieldy vessel "Prediction".

rdumas

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Post Number: 1255
Registered: 11-2006

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Wednesday, March 19, 2008 - 07:35 am:

Hi Ody,

I echo your thoughts about the US market. It does seem like they will never learn. I wonder if Lehman Brothers, Goldman Sachs and JP Morgan have joined S&P on the US Market Plunge Protection Team and cooked their books?

After all it is in the national interest to get rid of negative sentiment so that the US citizens don't get too depressed.

In the mean time Bernanke only has another 2.25% to play with in his interest lowering (read: negative real rates) policy. Another article from the Business Spectator website below:

===============================================================
6:50 AM Mar 19, 2008

MATTHEW JOHNSON

SCOREBOARD Fed pessimism

The FOMC voted to cut the Fed funds rate by 75bps to 2.25 per cent, and the discount rate 75bps to 2.5 per cent. The vote was eight to two, with Plosser and Fisher both dissenting. In the lead up to the meeting, they had got on the public record wringing their hands about inflation expectations, so their dissents – to some extent – should not be too surprising. Fisher has said that if a recession is needed, that’s what the US should get, so I don’t see his vote supporting rate cuts – he’ll only vote for further cuts when inflation falls. And by then, growth will be in such a heap, we’ll have more to worry about.

The FOMC’s communiqué leaves out the forward looking balance of risks paragraph, just as the September 2007 communiqué did – which suggests that the crisis in the financial system is at similarly dire / uncertain levels. The Fed downgraded the growth outlook, saying that it had weakened further, and observed that consumer spending has slowed and labour markets have softened: these comments likely reflect February payrolls and retail data. At the January meeting, the FOMC didn’t see such a degree of weakness in the labour market, and didn’t mention a slowdown in consumer spending. Both retail and employment almost certainly have further to fall, so this pressure on the FOMC should be maintained.

The FOMC appears to sense a growing credit crunch. At the January meeting they said that credit has tightened for some households and businesses; now there’s a general tightening of credit conditions. Further, they expect that the housing contraction will deepen – probably a reasonable expectation given the massive lump ($US300 billion or so) of mortgage resets that are yet to arrive, and the fact that jobs are only just beginning to be shed. There is no talk of the level of rates promoting moderate growth over time, nor of the move mitigating the risks to economic activity. It seems that the Fed has run out of optimism.

The inflation talk probably reflects the debate between doves like Bernanke and Mishkin, and hawks like Plosser and Fisher. There is no doubt that recent inflation observations have been elevated, and the measures of inflation expectations have been very elevated. Break even inflation rates on 10yr TIPS were 2.25 per cent to 2.40 per cent prior to the sub-prime meltdown, however they reached 2.55 per cent in late January. To convince the market that they are not just assuming the problem away, the Fed has added some detail on the mechanism which they expect will bring inflation down: energy prices should level out, and commodity prices should fall.

This might seem optimistic, but if the Fed knows that the US is headed for a hard recession, it can have a lot of confidence in this price reducing dynamic.

Though the equity market didn’t like it (at least not initially) there are some virtues to the smaller move. It projects a degree of calm, and it saves some ammo to break negative psychology should there be more structural problems in the banking sector. The Fed has cut the discount rate 100bps this week, and that has delivered a 100bps cut in the financing cost of carrying MBS – so in a sense, they have delivered all the direct rate cut help that the banking system was asking for.

I don’t see it working, however. The US banking system is too leveraged into too much debt – and the value of that debt is sure to fall as employment and house prices fall, and default rates consequently rise. Equities have bounced, and the FX market bid USDs on the ‘calm’ rate cut – but the structural problems remain. I’m still comfortable selling equities on tops, bull steepening USTs, and dropping the USD. The rally merely provides better levels to sell it.

Matthew Johnson is senior economist at ICAP Australia

==============================================================

rdumas

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Post Number: 1256
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Wednesday, March 19, 2008 - 07:51 am:

Yet another article that suggests that the only way that the current problem in the US can be solved is for the IS tax payer to pay for the debt.

As rude as the solution seems I really can't see how else the problem will be solved. Maybe I'm being naive but I would have thought that eventually the debts have to be paid for by someone before the system can once again start rebuilding itself. What do you reckon Resillent1, can you see another way?

==============================================================

7:23 AM Mar 19, 2008
ALAN KOHLER

Money's too tight to mention

The Federal Reserve is doing the best it can, but for monetary policy to work it would help if there were some lending going on. Cutting the price of something that is not being traded (in this case credit) is pretty irrelevant.

This is the worst financial crisis since the Great Depression and the key factor in determining whether it turns into an even Greater Depression is the supply of money, not the price of it.

Which is why the Fed’s focus has been on maintaining liquidity and preventing a collapse in money supply.

The problem in Australia and China, by the way, is the opposite. M3 growth in Australia was 19 per cent over the past year, which is why the Reserve Bank remains focused on inflation, according to yesterday’s minutes (although interest rates here have now peaked, in my view, and will start coming down before the end of the year).

And last night the Bank of China provided a nice contrast to the US Fed’s 0.75 per cent rate cut by increasing the deposit reserve requirement of commercial banks to a record high of 15.5 per cent, to try to control liquidity.

In the US, liquidity has collapsed and the Fed has had to dramatically expand its role beyond the regulated banking system.

That’s because during the period of low interest rates and excess liquidity between 2001 and 2007 the most significant expansion of activity took place outside the banking system: investment banks, hedge funds, mortgage brokers, SIVs, and other non-bank institutions.

They are geared like banks – 20 to 1 or more – but they’re not banks. Now the emergence of severe counter-party risk has produced a general run on these non-banks: at best they have stopped doing business, at worst, like Bear Stearns, they have gone out of business. There is a very nice website called The Hedge Fund Implode-O-Meter which counts 37 hedge fund implosions since mid 2007.

The response from the Fed has been what Professor Nouriel Roubini calls “the most radical change and expansions in the Fed’s powers since the Great Depression: essentially the Fed now can lend unlimited amounts to non-bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run, but the Fed has no idea of whether such institutions are insolvent”.

As well as supporting the JP Morgan takeover of Bear Stearns with a $US30 billion loan, the Fed created a new term facility for primary dealers that allows them to swap their worthless mortgage-backed securities for US Treasuries, and is now allowing non-bank dealers to access the Fed discount window to an unlimited extent on the same terms as banks.

Roubini, along with a growing chorus of supporters, believes that by providing unlimited liquidity to potentially insolvent institutions the Fed is taking a serious financial risk and exacerbating moral hazard distortions (that is, baling out the reckless financiers who should be left to reap what they sowed).

One commentator likened it to giving a heroin addict more heroin as a cure, rather than forcing withdrawal.

Which is all very well, except Bear Stearns has not been bailed out – its owners have been wiped out. And it is pointless now for the Fed to try to maintain liquidity in the system by focusing only on regulated banks. Like it or not the “shadow financial system” has become the tumour on an artery that can’t be removed.

Just one more metaphor: an important aspect of this operation, in my view, is that the men and women who steered the ship into the icebergs – that is, the investment bankers and securitisers – should not be allowed into the lifeboats. As the equity owners get wiped out, the executives should not get their usual handsome severance pay.

More generally, the Fed funds rate is heading back to 1 per cent and lower. After all, if Greenspan cut the Fed funds rate from 6.5 per cent to 1 per cent between May 2000 and June 2003 after a bunch of over-inflated internet stocks went bust and otherwise everything was more or less OK, what will it do when the banking system is under threat?

But it won’t work anyway. This is a job for the taxpayer: $US1 trillion in losses have to be socialised and the capital of the banking system rebuilt before the credit market can resume normal transmission.

This will require the White House and Congress to be united, which probably can’t happen until January, and even then the task may be beyond a country that has spent, according to Joseph Stiglitz and Linda Bilmes, $US3 trillion on the war in Iraq (The real cost of Iraq, February 29).

In which case it will be up to the taxpayers in the nouveau riche countries of the Far East and the Middle East, via their sovereign funds.

But the US dollar probably still has some way to fall before it’s cheap enough for them to buy.

===============================================================

rdumas

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Post Number: 1257
Registered: 11-2006

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Wednesday, March 19, 2008 - 08:04 am:

Hi Dean,

Today could represent a pretty good money making opportunity for the pros to fade the initial move by the amateurs on open. Any thoughts ?

Also another opportunity for the funds to get rid of some more of their unwanted stocks.

I really expect a big move up followed by a fade off in the market throughout the day. It will be interesting to see how it plays out today.

resillent1

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Post Number: 399
Registered: 10-2006

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Wednesday, March 19, 2008 - 08:55 am:

Enough with the Yank bashing from the armchair critics. How about justifying criticism with some viable alternatives.

A rate cut is good for stock markets in their base currency. It makes sense that the markets should rise. The currency on the other hand did the reverse of what would be expected.

Would you have the Fed ignore forced liquidations and let asset prices enter a self-enforcing downward spiral? The market got risk premiums on debt wrong, de- leveraging is needed to accommodate the new risk premiums, but surely it’s better for that to happen in a controlled manner.

Would you have the Fed keep monetary policy tight as a moral lesson to borrowers in the face of a possible deep recession?

It appears to me that the fed is dicing with inflation, but even so I think it is choosing the lesser of two evils by cutting. If their motivation is actually grave concerns for the physical economy rather than arresting a forced asset devaluation spiral, then inflation won’t even be a problem.

If the US does have a deep recession, don’t forget that we have some of the most unaffordable housing in the world. Which is underpinned at the moment by full employment, which in turn is underpinned by resources, which is underpinned by Asian demand, which is underpinned by US consumption.

If the Fed does cut too quickly, the risks lay in their currency hitting free fall and no longer being able to borrow. If the risk premium on US bonds re-rates watch out. This is the scenario for a world recession. The US could expect help in avoiding this outcome (Who supported the US currency last night?) and that only seems fair to me, as the debtor should not be the only one to suffer from bad lending practices. Who thinks the poor, house purchasers are solely to blame for the subprime losses that started all of this?

deanrosario

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Post Number: 1384
Registered: 11-2002

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Wednesday, March 19, 2008 - 09:07 am:

Hi Rudy

Prima facie it seems like a case of deja vu as the US - yet again (I've lost count of the number of attempts) - tries to use a band aid (short term cash incentives) to cure a terminally ill patient (the depressing US economy).

If history repeats itself, the canny investors will be selling into this rally - if not today then over the next few days.

To add further excitement to the next few days ...

Exchange traded Index derivatives (Aussie market) expire tomorrow!

"Never commit yourself to anything you can't walk away from in 30 seconds." Neil McCauley (played by Robert de Niro) in 'Heat'.

"Hope is a dangerous thing. Hope can drive a man insane." Ellis Boyd "Red" Redding, played by Morgan Freeman, in 'The Shawshank Redemption'.

ody

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Post Number: 2243
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Wednesday, March 19, 2008 - 09:23 am:	</