Fed: We didn’t know about SocGen trades

As we suspected earlier today:

The Federal Reserve was not aware that Societe Generale was unwinding trades in Europe on Monday that had been amassed by a rogue trader at the firm, a Fed source said Thursday.

The unwinding presumably didn’t help turmoil in overseas markets on Monday. The sharp market declines in Europe and Asia was cited by Fed watchers as the critical reason that the Fed engineered an emergency rate cut only one week before their formal meeting.
Federal Reserve board chairman Ben Bernanke was watching the markets closely on Monday, a government and trading holiday in the U.S., before convening a video conference call with the Federal Open Market Committee later that evening. The FOMC decided to cut rates by three-quarters of a percentage point to 3.5%. The decision was announced on Tuesday morning.

Economists said the Fed has good reason to worry about falling stock prices. If the weakness in overseas stocks spilled over into the U.S. market, the wealth outlook for U.S. households would have darkened because of already dropping home prices, economists said. This could curb demand at just the time that the economy sputters on the edge of a possible recession.

Analysts initially attributed the plunge in global stock markets on Monday to fears that the U.S. may be in a recession. But now it appears that something else might have been afoot…

’nuff said . . .

>

Source:

Fed didn’t know about SocGen trades on Monday
Greg Robb            
            
       
   

   
       
            
            
            

MarketWatch, 2:33 p.m. EST Jan. 24, 2008
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What's been said:

Discussions found on the web:
  1. Mr. Flibble commented on Jan 24

    So I’m sure Helicopter Ben will take back that 3/4ths of a point, now that we know that there wasn’t a coming catastrophe. Right?

    Um…right?

  2. Layman commented on Jan 24

    I’m not a finance pro, but it seems like the fed wasn’t the only one spooked by this trading activity. Was a real panic actually underway? If so, does it really matter what touched off the panic? Once the herd gets running, does it matter whether the noise they heard was really a gun shot or just one of the bulls stepping on a stick? They were running, and there is enough uncertainty about the solvency of the global financial system to keep them running a long way. Perhaps this news will introduce deeper emotional confidence than the rate cut did, but clearly we’re in an environment where fear, some of it well justified, is rampant.

  3. Clayton commented on Jan 24

    Doesn’t this reduce the likelihood of another cut next week? Or am I missing something?

  4. Johnny Vee commented on Jan 24

    Rate cuts, stimulus package, bond insurer bailout, mortgage/homeowner bailout, etc.
    It’s all getting to be a bit much–its reminding me of the gov’t response to Katrina about a week after the storm and the place is still empty.

  5. Don commented on Jan 24

    Right, Mr. Flibble, and for those that weren’t aware, our real estate troubles are now over, as well…Indymac just announced it will be profitable in 2008. Its stock price shot up 25%, and it had its biggest rate-lock day in forever. It’s on Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=a79NyKmPE7H0&refer=home

    I’m in the business, and this f’ing feels real familiar. So, Uncle Ben will reflate the housing asset bubble, but in the end, no one gets any richer. Understand that? More little slips of paper does not greater riches make.

  6. Stuart commented on Jan 24

    So what does that say then about the likelihood for further rate cuts next week. I would think they will be extremely reluctant to cut more next week given they now understand that much of the stock market turmoil was “artificial”.

  7. Bruce F commented on Jan 24

    I’m a little confused. Why should the anonymous Fed spokesman be believed? What are the implications of the Fed acting while knowing of the SocGen trades?

    Do anonymous Fed spokesmen have the same track record as other anonymous leakers coming from inside the Government?

    Also, how does a 31 year old, low level “non-star” trader secretly amass tens of billions of dollars of positions?

    http://www.moonofalabama.org/2008/01/what-is-behind.html#more

    For the record I don’t think I’m paranoid.

  8. Will T commented on Jan 24

    The 3/4-point rate cut by Bernanke reminds me of the drunk driver that flips his turn signal on after swerving into the other lane to make it look like he meant to change lanes.

    What a scumbag.

  9. techy commented on Jan 24

    Well then its decided, no more rate cut till next meeting in march.

    but hey the bright side is it was due to a rogue trader not due to risk aversion. so i think we will get some bull days, unless economic data does not look good.
    how hard is it to make the data look good, now that the government does not want people to get spooked?
    can ADP be coerced to present a rosy picture?

    not that i am complaining, i will take anything required for a slow unwinding of this mess and warding off long recession/depression.

  10. Ryan commented on Jan 24

    If one trader in France caused that entire selloff, then there are Weapons of Mass Destruction in Iraq

  11. Ryan commented on Jan 24

    If one trader in France caused that entire selloff, then there are Weapons of Mass Destruction in Iraq

  12. Winston Munn commented on Jan 24

    Let’s see if I can recap this. A French version of Barney Fife used his one bullet to fire the “shot ducked round the world”?

    Is that about it?

  13. bob commented on Jan 24

    Off topic, but does anyone think the $150K cap on these rebates are a little low? This is what they are considering upper middle class??? I might make about the $150K, but could still use an extra $1,600. More welfare if you ask me…

  14. ken h commented on Jan 24

    Well, Ben’s showing his cards now. I’ve said this before, Many in my profession were good at the books in school but couldn’t handle the human condition in the real world. They would eventually fold like a lawn chair.

    Ben’s not giving much confidence. Ron Paul was grilling him in a hearing and Ron asked him what he was going to do about inflation and retired Americans losing their wealth. He said it wouldn’t matter if they bought goods in dollars?

  15. kk commented on Jan 24

    Monday: futures collapsing, panic selling overseas, bearish sentiment at major levels.

    Thursday: 75bps cut, non conforming loan increase, stimulus package, monoline interest, no earnings blowups, guidance OK, coupled with many stocks off 20-50% from highs.

    interpret it for yourself and spare the conspiracy theories.

  16. JJL commented on Jan 24

    Couple Tuesday’s move with the panic cut of 50bps after a weak unemplyment number (that was revised away) in September and it paints a FED that is either using any and every excuse to cut rates fast, or is totally oblivious to financial data and market movements. Either way, the result is the same.

  17. fyego commented on Jan 24

    off topic:

    Has anyone noticed how bogus the jobless claims number was today??? The government said that seasonally adjusted the claims dropped from 302,000 last week and 328,000 last year to 301,000 this week. There is only one problem the non-seasonally adjusted jobless claims for last year was 367,583 and this year its 408,333. So the real claims went up by over 40,000 without seasonal adjustment but went down by 27,000 with seasonal adjustment- a 67,000 fudge factor!…. I keep track of all the numbers in a spreadsheet and this adjustment was bogus. Currently claims are running at an average rate 0f 28,000 claims more per week than last year and 50,000 more than 2006. But they are claiming that the 4 week average is running only 2,250 more than last year and not the 28,000 when you look at the real numbers…..

    The seasonally adjusted rate should’ve come in at 328,000 + 40,000 more over last year which would be 368,000. Another manipulation?? I really think if they had announced the 368,000 the market would have nose dived today.

    Just look at the continuing claims. They are rising rapidly as is the nonadjusted insured unemployment rate as compared to last year.

  18. kk commented on Jan 24

    KenH you took Ron Paul / Bernacke exchange out of context.

    Ron Paul questioned Bernacke on the weaker dollar and the hardship that it would bring to retired Americans. Bernacke responded correctly that the weaker dollar does not impact people in the US paying in dollars.

    As for Ben not giving much confidence, I would throw out that 95% of Americans never heard of him, and the balance feel pretty confident of him. The evidence was Tuesday.

    Before ’00-02 it was unwise to fight the Fed. ’00-02 was an unwind of an extremely over valued equity market. Current equity valuations are much cheaper than ’00-02, so I look at the Fed easings in the late ’80’s and ’90’s for perspective.

  19. Bob A commented on Jan 24

    I’m a little confused as to how 7 billion in losses to one Fr bank is a bigger deal that 100 billion of write’s so far by various other banks, probably at least that much more to come, and half a trillion of liquidity pumped into the European system in recent weeks. 7 billion? huh?

  20. MTHood commented on Jan 24

    “Current equity valuations are much cheaper than ’00-02”

    Data please.

    Betcha’ can’t show any.

  21. larrybob commented on Jan 24

    should the fed have known about the unwinding of the position? did the ecb know? i can understand socgen not wanting to advertise their open position, but…
    so, in this case of imperfect knowledge, where you’ve seen two days of dramatic declines in the asian equity markets, do you step in to soften the landing? i know there are those who are moral absolutists who want to see people hurt, but…
    is it worse to have a sudden decline in equity prices, or a “orderly” retreat…what’s worse a15% decline in a day or week, or a 15% decline for a whole year?

  22. Whammer commented on Jan 24

    “responded correctly that the weaker dollar doesn’t hurt”???????

    WTF?

    Weaker dollar means imports are more expensive.

  23. ken h commented on Jan 24

    KK,

    Your the same guy that was claiming no problem in housing 1-2 years ago. They are not making anymore land!! Guess that doesn’t matter now does it. Looks like there is plenty to choose from, no?

    I run a business and I hope your optimism is right. Problem is I see no change in the fundementals of most companies, why they would instantly become more attractive is beyond me. Mostly noise until this all unwinds.

    As long as energy is at a an all time high I really doubt most companies will do all that well. They are STILL trying to igure out how to stick it to the consumer. Food to transportation is about to SKYROCKET.

    The housing spicket has been turned off and these rate cuts and lending limits will not restart it.

    No savings….On and On and On.

    These are facts that are easily backed up, not conspiracy theories.

  24. Winston Munn commented on Jan 24

    I begin to wonder if this wasn’t a David Copperfield moment – misdirection raised to an art form.

    The Fed pretends to have been duped by a French bank trader, giving everyone either a good laugh or a reason to complain, when all the while it really was panic – the reason for the illusion would have been to restore confidence that the monoliner’s debacle isn’t as serious as it surely is.

    Terrence Patton wrote this about the monoliner’s failures in another part of BP comments:

    “The effect could easily have been – and may still be – a second lethal leg to the credit crisis, with vast losses. This could all too quickly lead to a run of bank failures.”

    I do not disagree with his assessment. The more likely cause of the Monday selloff was the threats to the monoliner’s and the bonds they insure.

    The phantom Frenchman may well have been nothing but a cover story to mask the real perceived need of the emergency rate cut – and like a good audience, we were amazed when the elephant in the room disappeared.

  25. kk commented on Jan 24

    JJl, using the current 5% unemployment rate as a dividing line, there were 475 data points of “high” unemployment with the rate at 5% or higher, and 220 data points of “low” unemployment with the rate 5% or lower. When the employment rate was “high” the market for large cap equities gained 15.9% over the next twelve months. When it was “low” in gained 7.2% one year out.

    Similar results if you look at the ISM under 50 and over 50.

  26. Cheryl H commented on Jan 24

    You guys are only thinking about your fat- lined portfolio loadings for your large customers, but the new retirees who have to protect their hard (35 year) earned pensions really appreciated the Fed move on Tuesday. It has already – finally – stimulated real estate buyers out here in Northern Virginia where I’m trying to start a 2nd career because I can’t trust this market to make me feel secure, whether it’s real estate, metals, fuels, futures, emerging markets, bonds, stocks, foreign and/or national fraud cases or terrorism events. Not to mention the election concerns. Not much has changed since the beginning of time – just different stressors. I felt that Bernanke was trying to do the right thing. I also think we were in a full freefall on Tuesday morning, no matter what the source. You have a lot of economic wisdom, but this time, I believe you were wrong about the Fed. I think they averted a panic. I’m glad we don’t have to deal with a recovery from something like that. You’ll never know, will you? Can you do any better? And, why didn’t Bush pick you for the Fed job?

  27. smoofy commented on Jan 24

    whoops. already linke to in a previous post

  28. getting older commented on Jan 24

    One wonders how you run a globally integrated economy if Soc Gen informed the Governor of the Bank of France on Sunday (French time) and the Fed didn’t hear about it by Tuesday. And they got to unwind their trades before telling anyone? I hope they get sued to Kingdom Come by the counterparties to those trades.

    My gut told me that there was something very funny going on Monday and Tuesday. Recession fears? Nah. First there was zero new economic data. Second, pharma stocks were massively down and their earnings have never been affected by recessions. Yes, there was the Zetia issue, but that came out last week and only affects SGP and to a lesser extent MRK.

    Finally, look at earnings in the non-financial sector, especially in tech and industrials. Where is the evidence for a recession? I’m not saying there won’t be one, but right now most companies aren’t seeing it. Oh, you say retail? Yeah, they sucked, but I’m not sure how much that is the fault of the economy vs a complete lack of innovative products (outside electronics, which did very well) and any sense of customer service.

  29. CDizzle commented on Jan 24

    I always get confused about these threads on the Fed. I’m going to throw this out there, again. For some strange reason, I thought the primary objectives of the Fed were:

    1) Maintain stability in price levels

    and

    2) Maximize employment.

    When the Fed makes (seemingly) important decisions in the fashion that the most recent cut was made, folks start sniffing the air…as they should.

    Bernanke is a fraud. Greenspan was too. Most everyone at the top is corrupt, how’dja think they got there in the first place, silly wabbit.

  30. kk commented on Jan 24

    A you serious when you need the data to make a valuation call on 2000 vs. 2008?

    NAZZ 2000 Vs. 2008 valuation..are you kidding me?

    The P/E of the S&P 500 reached 45x trailing during the bubble of 2000. I recall it got down to about 22x at the bottom in 10/02 before the earnings increase kicked in ’03.

    Current P/E of the S&P 500 is 15x.

    P/E is in the eye of the beholder because a high P/E before earnings momentum can be bought as the E closes the gap with the P. A low P/E with earnings decreasing at times can be sold because or decelerating E.
    I learned this lesson the hard way on low P/E expensive cyclicals in the early 1990’s. Ouch.

    Going forward I think earnings will surprise due the the changing liquidity sitiuation, and the prices need to catch up, especially with the 10yr. @ 3.5 or so.

  31. D.H. commented on Jan 24

    Panic or Rogue Trader, the Fed cut may have alleviated a massive crash on Tuesday. They cut and everyone says how could they waste the ammo on some 31 year old trader unwinding a bad trade, they don’t cut and everyone is citing Long Term Capital and asking why the Fed didn’t step in and stop the crash caused by the Black Swan Rogue Trader.

    Hilarious. It’s like a Rorschach Inkblot Test. Our interpretation says more about our beliefs and almost nothing about the bare facts …

  32. bsneath commented on Jan 24

    On Tuesday Bernanke was criticized for not cutting rates sooner. Today he is criticized for responding to the whims of the stock market.

    Cynics.

    Layman has it right (see second post above)

  33. mhm commented on Jan 24

    Why would SocGen unwind trades in a hurry to point of near crashing the market? That is hard to believe… that is on top of the single Frenchman conspiracy.

    I’m sure if the writers strike were over we’d get a much better story.

  34. Don commented on Jan 24

    Winston…it’s not David Copperfield, it’s the Wizard of Oz. Oz equals ounce, as in ounce of gold, which in fact, is what the movie Oz name was referring to, as the farmers and small business men were being “crucified on a cross of gold” according to Bryan’s famous speech. The farmers wanted silver currency, the money folks back east (the wicked witch)wanted gold. Gold won, until paper replaced it. But you guys probably all know the history.

    I just don’t see whence comes this misguided faith in the quantity theory of money. When you print more money, if no real output changes, then the money just becomes less valuable. Duh. Keynes and Friedman agreed that more money would partly go to output increases, and partly to increased prices, but Keynes said that the output would only increase if there was unemployment, if not the extra money would just serve to cheapen itself.

    What the fed is really doing though, and here’s the cynical plot worthy of a new Wizard of Oz type movie–is it is decreasing wages, i.e., the price paid for labor, through inflation rather than through a contraction/recession/depression, whatever you’d like to call it. Wages in the US had/have to go down to reach some sort of parity w/ the rest of the world. Watch as the money becomes less and less valuable, i.e., prices continue to increase, yet wages stay flat or even fall. In the last 40 years real wages in the US have barely budged. This is how the exchange rate, i.e., weaker dollar hurts everyone. That and all those imported goods become more expensive. It is a direct result of the US’ propensity to consume more wealth than it creates for the last 30-40 years.

    Milton Friedman observed that inflation is better than deflation if for no other reason than it feels good–it feels like your house is more valuable,even if it’s not. And if you can at least not lose your job, then you cuss the higher prices, but don’t really consider what they really are–a decrease in the wage rate you are receiving. Deflation, on the other hand, is depressing. And who wants to go around depressed all the time. The illusion of gain is almost better than Prozac.

  35. Winston Munn commented on Jan 24

    There is a bit of free thinking in this comment so please bear with me.

    I may have underestimated Bernanke.

    Bernanke has stated in the past that it is important to mitigate “inflation expectations”. Clearly, this is a sentiment/psychological approach.

    And if you can control the sentiment/psychology, you can alter outcomes.

    If what I mused above is true, that by pretending to have been duped, instead Bernanke coordinated a misdirection ploy to alter market sentiment/psychology, it would have to go down as the greatest central bank intervention in history.

    The weird thing is that it is consistent with his views of the importance of pyschology and sentiment, as evidenced by his “inflation expectations” comment.

    But would he really allow himself to look foolish to accomplish this aim?

  36. kk commented on Jan 24

    Ken H, the first time I posted here was this Monday, so you have me confused with somebody else.

    I am optimistic on equities beacuse I believe the bad news and fear have been already priced in with plenty to spare.

    The ’00-02 bear playbook will not work here IMO. I am looking back to 87, 90, 94 & 98 for reference on this one.

    I am an investor and not a trader, so I don’t try to analyze every tick. That’s Barry’s job.

    Good luck with your business.

    BTW I like land for an investment at the right price.

  37. Tin Foil commented on Jan 24

    It’s a cover story. The French firm has no real rogue trader. They coordinated with the U.S. Fed to unwind during an American holiday so that global selling could absorb it just before the hurried-up interest rate cut to stabilize Wall Street’s Tuesday.

    Too obvious.

  38. jombi commented on Jan 24

    Don : However, for the generation that has yet to think about a home and for the generation of people (20-23) looking for a home.. Where do they lie when they dont have a previously priced asset in the bag before the inflation runs rampant. I think they lie in a perpetual hell. I think, given the sentiment of the younger generations, that you are going to have some social unrest on your hands. Let them keep playing games :D LOL

  39. Justin commented on Jan 24

    Stimulating back in 2001 worked ok, because it had some push from the over-all economy coming out of a recession. This time around we are just going into a recession, in which the consumer is doubly strapped and as the dollar sinks and oil, materials spike. Oh yes Larry Kudlow, Goldielocks is dead…

  40. Don commented on Jan 24

    Jombi,

    Agreed. But it is a reckoning that’s anyways coming. Not surprising the fed/gov would put the focus of the pain on the least-vested and least powerful politically, i.e., the young.

    Not to worry. Once the fed has decreased through inflation the US wage level to that of a Chinese peasant, we’ll be ready for some real growth.

    It’s interesting that the farmers and small businessmen wanted a silver standard back at the turn of the century–it would surely have been inflationary, as silver was officially trading at 16 oz to 1 oz of gold, but the market price was more like 15-1. Of course, back then, the money guys weren’t et up in debt–they were debt holders–and the little guys were the ones having to pay back debts in ever more dear currency, as the gold standard caused several very severe deflations.

    Nowadays, Wall Street is leveraged to the hilt, so devaluing the currency helps them, while it also helps alleviate the trade imbalance through the exchange rate mechanism, and by bringing about purchasing power parity, most importantly in the price it costs for labor.

    Gotta go…my mandarin lesson starts in ten minutes.

  41. sk commented on Jan 24

    As I posted as a comment in an earlier post, we have the Fed setting monetary policy which has strategic, medium and long term horizons in response to incoming data that suggested black swans without even knowing what the actual event was. Such attachment to momentary day by day data without understanding the underlying reality is stupid – now they’ve miscommunicated, seen to be fools, lost all credibility, and no doubt will compound the mistake by adding another .5% next Wed, to demonstrate they were right all along.

    If the US economy really has just passed the Minsky moment then we may still not get general monetary inflation – they can offer to lend cheaply to their chosen banks, a disgusting money for old rope scheme if ever there was one, for lending onwards but those banks won’t want to lend and people still won’t borrow – but it will affect the US dollar downwards, it will affect price inflation is stuff that matters like oil and food.

    Idiots.

    -K

  42. Alfred commented on Jan 24

    I am stunned by arguments that the rate cut was to restore confidence in the bond insurers. I admit I really do not see the connection. Making the cost of money cheaper does by no means implicate it gets where it is most needed. The rate cut did nothing to stop the bleeding in the markets, only after the announcement of an alleged capital infusion did they rebound. The David Copperfield argument is an elegant alternative and would lift Bernanke into the realms of top CIA operatives. Bernanke is an academic, I don’t think he is capable of engineering such a “The Spy came in from the cold” ploy. Let’s face it: He simply panicked. So did I.

    http://manonthestreet64.blogspot.com/

  43. Winston Munn commented on Jan 24

    Don,

    Iteresting comment about the Wizard of Oz. Something of which I was not aware.

    That said, I think there are some misconceptions in what you wrote – that’s not exactly right – not in what you wrote but in what you surmise.

    What you surmised would be correct if money-stock inflation were occuring – but it isn’t. Of course there is inflation, but it is atypical inflation. Our system is dependent upon continuing expansion of debt – it is a requisite for growth. Therefore, under our system the Fed attempts to manage required inflation. However, this atypical inflation occured outside the Fed’s control, in the shadow banking system – and its cause is unbridled debt expansion. The Fed has not been able to manage this type inflation.

    The securitization industry effectively eliminated reserve requirements. Look at the Fed’s website for total reserves and then think about total outstanding debt – any worry about fractional reserve banking is mute. The banks didn’t loan out all that money. They couldn’t. The reserve requirements were simply bypassed by securitization.

    The labor reward is not the result of inflation but of global labor arbitrage – with an eventual theoretical balance where the cost of labor is universal.

    I agree that the system of necessary comsumption is flawed. But at what cost comes a fix at this point? Collapse?

    The above is why my position is that the conditions we are in are the result of an unregulated debt bubble, that insolvency threatens to collapse that bubble, and the end result if that happens will be deflationary – Japan to the fourth power.

    Fugly.

  44. Joe Klein’s conscience commented on Jan 24

    getting older:
    The kicker is that SG said the trader was up huge at the end of the year. Which means that what ever he was doing tanked in 3 weeks. Doh!!!

  45. VennData commented on Jan 24

    I want one person to admit they own any EWQ…

    …cuz, I’m selling my odd lot in the after hours, topping it up with $600 welfare check from our beloved President, and looking for an ETF for that’s overweight monoline insurers.

    Any thoughts?

  46. ken h commented on Jan 24

    Thanks KK,

    I am small business but I am going to button down the hatches for awhile and I am way too amature to play this market.

    Munn,

    Don’t you think Don has a point in that the deflation in the dollar does help with out debt. You want a conspiracy theory. Crash the dollar to parity with the peso…and canadian dollar.

  47. Auto Mechanic Guy commented on Jan 24

    And to Don’s most important point, I offer:

    In L. Frank Baum’s original novel The Wonderful Wizard of Oz, Dorothy wore silver slippers. The movie’s creators changed them to ruby to take advantage of the chromatic possibilities of the new Technicolor film process.

    Perhaps we’ll hear next week that Ben is cutting rates to take advantage of new deflationary possibilities.

  48. Steve Barry commented on Jan 24

    Winston is right about the debt bubble…it dwarfs 1929. I would post the chart again, but when I do nobody seems to care. The debt chart mirrors the housing chart as you would expect…the RE bubble was fueled with too much debt as is blatantly obvious now. Greenspan missed it as usual. It has to end badly, as housing has to drop 40% to get to previous all-time highs. The banks will eat the debt…not just sub-prime…but second mortgages and home equity lines. Credit card collapse coming too and the banks can’t re-possess Chinese food meals, gasoline and vacations that were charged. TOTAL LOSS on those.

  49. Rich Lather commented on Jan 24

    I wonder if this was the source of the “scary” box spread placed last August. I think the MSM called it the “bin laden bet”.

  50. David commented on Jan 24

    At the current rate of Fed cuts, within a year we’ll have crude oil at $150, and gold at $1500. Maybe that will get their attention.

  51. Trainwreck commented on Jan 24

    We are at least three months beyond a Minsky Moment.

  52. Trainwreck commented on Jan 24

    Things are unraveling faster then the Fed can stay ahead of them. Anything more then a 25 basis point cut would be confirmation that the fed really doesn’t have a grasp on what is occurring. Personally I don’t think they should cut, but this upcoming meeting will probably be the most angst ridden meeting that they have ever had.

    Nothing will improve until the financial sector is reformed and re-regulated.

  53. D.H. commented on Jan 24

    I was talking to a trader and he summed it up nicely:

    1) If you hate the Fed, you are either:

    short stocks, holding tons of cash because you want the once in a lifetime Buffett bargains, holding too many bonds, you have a decent job (i.e., not worried about becoming unemployed in a recession), and you are probably renting or looking to buy a home at more reasonable prices.

    2) If you love the Fed, you are either:

    long stocks, don’t have much cash, are worried about losing your job in a recession, and are sick of watching the value of your house decline.

    I, for one, fall into category one. Thus, I would have benefited or will benefit greatly if equities and houses decline in value while my saved dollars gain more purchasing power as prices come down. But statistics indicate that the majority fall into category two. Thus, in an ironic way, you now have government for the people …

    Do your possessions and job color your opinion of the Fed move?

  54. Steve Barry commented on Jan 24

    Some of the ABX tranches are about to be literally pennies on the dollar.

  55. Winston Munn commented on Jan 24

    Ken H wrote, “Don’t you think Don has a point in that the deflation in the dollar does help with out debt. You want a conspiracy theory. Crash the dollar to parity with the peso…and canadian dollar.”

    Absolutely – like I said, I don’t argue with what Don wrote, but argue against his conclusions that this is classic inflation.

    Debasing money is obvisouly good for borrowers, as it allows debt to be repaid with cheaper dollars – but does that do any good under our current system, where the creation of dollars is dependent upon more debt?

    This is the misconception. We do not have a pure fiat currency. There is nothing wrong or evil about pure fiat – soupcans, shirt buttons, playing cards, or pieces of paper – anything can be used as money if the society agrees to accept it.

    The problem is we have a debt-fiat currency. It is true that the Fed can create money and buy – but what they buy is debt – they can’t simply create and distribute without the associated debt.

    Likewise, gold-backed currency is not an answer; although it controls government’s spending, it also stifles economic expansion as it caps monetary supply. It is basically deflationary in nature unless a nation is stagnant economically and has flat population growth.

    Bernanke has admitted in speeches that the 1-2% inflation target is a buffer against the possibility of deflation. Because of our reliance on credit expansion, a deflationary event must then be a credit contraction.

    We sometimes confuse the Fed mandate of stable prices to mean low inflation. This is not accurate. Rising price is not inflation, although it may be an expression of inflation.

    The mandate really means: control supply and demand. How else can you control price? When a central planner is tasked with the control of supply and demand, is it capitalism and free markets? Or does it have another name?

    By bother told me of being in East Germany before the wall came down, and trying to buy skis. He said there were all sorts of skis to buy – but no bindings to be found anywhere – so the skis were worthless.

    Central control of supply and demand.

    We have about 10 months of houses now for sale, convoluted derivitives that no one wants to buy, and excess debt piling up with no clear way to service the cost.

    It’s not skis and bindings, but there seems a lot of similarity in outcome.

  56. D.H. commented on Jan 24

    Any IOU that symbolizes goods exchanged or services rendered is debt. Thus, as learned in Econ 101, it matters not whether we use gold or dollars or toilet paper — if you are not directly bartering, then one party leaves the transaction with an instrument symbolizing the “debt” the marketplace owes to them. What good is your gold if no one takes it in exchange for goods and services?? Or, conversely, if we directly bartered in every exchange, what would be the point of gold?

    Something to ponder: if one hour of labor from every human being was equal to one hour of labor of all other human beings, what would the economy and society look like? Puts a bomb in the superior/inferior model we have created. Ah, the world is a mine field of “moral hazards” …

  57. Winston Munn commented on Jan 25

    D.H.

    I’ll take door #1 above.

  58. Windex commented on Jan 25

    I don’t read the financial news everyday but I’ve had the feeling a crash was coming for a few years. Having said that, the scenario with the “rogue trader” does smell suspicious. Coupled with the fed rate cut, the “stimulus package” and the news of this new $200 billion problem… Well, it just seems like the bets has been raised.

    These are rather scary times we live in.

  59. AGG commented on Jan 25

    Big pop coming today (friday). Take advantage of it to sell. Also technical analysis of EWJ (Japan all share) means big money can be made for at least a week.

  60. donna commented on Jan 25

    Wow, if one rogue trader could do this, imagine what someone who really wanted to take down the house could do.

    I think we had better lock up all the big bank’s traders, just to make sure they don’t screw anything else up. ;^)

    And they ought to give back those big bonuses and all the stuff they bought, too.

  61. John D commented on Jan 25

    Don,

    Thanks for bringing up the Wizard of Oz allegory. And remember, the Emerald City is the greenback and fiat money!

  62. Windex commented on Jan 25

    D.H.

    The biggest reason gold, metals and diamonds are good for bartering is because they are portable. You can barter with real estate or toilet paper but one of them can’t be moved and the other one, well, it’s just pieces of paper, much like the stuff you have in your wallet.

  63. day4night commented on Jan 25

    What a wonderful surprise that there’s apparently no anti-French sentiment in the comments here…

  64. Eclectic commented on Jan 25

    I’m afraid I’ll have to observe that the tendency to practice conspiracy theory is inversely proportional to the intellect of the practitioner.

    And I think many of you are not just GPs but have served long fellowships in order to become specialists in the field.

    Too funny.

    *Winston, I have selectively excluded you from this tome since I am too aware of your intelligence and proclivity for practicing the dark arts merely for sport.

    Whether Benber N. Anke and the Fed knew about the Pâté de foie gras or not…

    http://en.wikipedia.org/wiki/Foie_gras

    …is of no consequence.

    Here’s what they did know at the end of last week just prior to a long holiday weekend in the U.S. (I use these stocks merely as commonly discussed examples in this forum of ideas, and in no way do I offer any recommendation about these stocks or any stocks – I make no recommendations of any sort on this blog):

    http://finance.yahoo.com/q/bc?t=1y&s=MBI&l=on&z=m&q=l&c=abk

    Notice the closing prices for all of the days of last week. It could only be obvious to any rational person that had that trend not been halted, those prices were headed for terra firma and the potential to become a guided missile t-r-i-g-g-e-r into U.S. financial oblivion:

    http://finance.yahoo.com/q/hp?s=MBI

    http://finance.yahoo.com/q/hp?s=ABK

    While the Fed has stated that it has no intentions of bailing out the shareholder equity of securities traded in markets, they do view the prices exchanged in public markets as i-n-d-i-c-a-t-o-r-s of those very shareholders’ estimations of the potential for insolvency.

    It’s insolvency of financial institutions that worries the Fed, not shareholder equity insolvency, per se… but rather f-u-n-c-t-i-o-n-a-l insolvency of the core services of financial institutions.

    This thread is astounding. I’m not sure how many of you have yet conceptualized the literal risks to the U.S. and world economies of a freezing of commercial paper markets.

    BTW, I’m with Layman, bsneath and any others I’ve overlooked who may have demonstrated lightbulb mentality brighter than Cro-Magnon level. The Fed is now perceived to be acting, and just days ago it was not perceived this way.

    mhm,

    It’s one thing to carry temporarily illiquid ABCP on your books just hoping to not be forced to mark it to market. It’s an entirely different thing to be on the wrong side of bad futures positions that are marked to market in real time. With the former you might benefit from deferring eventual closing transactions (when marking to market immediately might mean marking yourself to instant insolvency), but with the latter a failure to close the positions will be immediately discovered with settlement demands in cash. You might in that case hasten your demise by failing to close bad positions immediately, even in thin markets. In other words, you’re either going to be insolvent or not because of some bad trade, but whatever it is… it is NOW.

    Captious,

    Just for the record, I responded to your comment directed to me, but as I once told you, Barringo is a topic spinnin’ savage and so you’ll have to work to find it if you haven’t already.

  65. Bill King commented on Jan 25

    So basically fraud in the Euro equity markets has set US interest rate policy and the expectation for another 50bp cut? And the fraud was in the Euro markets – and the
    Euros didn’t even respond by cutting and since then have almost reprimanded the US fed.”

  66. Steve Barry commented on Jan 25

    Bill:

    You say “So basically fraud in the Euro equity markets has set US interest rate policy and the expectation for another 50bp cut? And the fraud was in the Euro markets – and the
    Euros didn’t even respond by cutting and since then have almost reprimanded the US fed.”

    I love the way you framed this. It really is clear thinking. As for the fiat currency argument, here is an excerpt from the greatest essay I have ever read with a link to the whole article:

    First, gold is money. It always has been. It’s the clear choice of free markets throughout recorded history.

    Second, what we call money today is not money at all. It’s just a rash experiment in credit expansion that has spun totally out of control. Like all such experiments before it, this one will end in tears.

    Third, following the failure of the current monetary system, gold will once again play its historic role as the anchor of a successor system. The market will demand it, and the authorities will have no choice but to let the market have its way…

    Gold has universal appeal and acceptability. If you were to send off to central casting for the perfect substance to serve as money, gold is what you’d get. Its many attributes include the following:

    Rarity. Gold constitutes only about 5 parts per billion of the earth’s crust. It is also difficult, dangerous and expensive to extract. Anyone who’s actually been down a mineshaft, as Tony and I have, knows just how precious a metal it is.

    Indestructibility. Gold doesn’t tarnish or decay.

    Density. Gold doesn’t take up much space. All the gold mined in human history amounts to about 130 thousand metric tons, an amount which would only fill about a 100 foot cube if gathered in one place.

    Malleability and divisibility. You can stretch it, pound it thin, and divide it into multiple tiny amounts.

    Controlled expansion. This is the most important quality, as we’ll see. Gold can only be produced in limited quantities, currently at a peak rate of about 2,500 metric tons, or roughly 2%, each year. No matter what wars or social programs urgently need funding.

    Once and Future Money

  67. Steve Barry commented on Jan 25

    The article on Gold notwithsatnding, I would not hold gold right now during the deflationary depression. Too much speculation right now and gold could crash with all assets. After the crash is the time to be in gold.

  68. getting older commented on Jan 25

    Some of you are missing the forest for the trees here with all this discussion of gold vs Italian cars. The monetary system is what it is, so grow up and deal with it.

    The real issue is that on Jan 10, Bernanke came out and said the Fed would be aggressive and then—- nothing. As the S&P 500 lost about 100 points in 10 days. Then, all of a sudden a 75 bp emergency cut sparked by some rogue french trader (supposedly). And there was really little or no new economic data over that time. So why didn’t BB cut 50 or 75 bp on Jan 10? Could have saved the world a whole lot of trouble.

    As far as the issue of bank ninsolvency-yes some banks like Citi may be technically insolvent. I haven’t looked at their books and doubt I would understand them if I did. But let’s suppose they are. Well, what do individuals do when they are insolvent. Declaring BK is one option. However, another option is to cut expenses and raise income (getting a second job) and trying to work out of insolvency. Well, for banks it isn’t that different. They are cutting expenses by laying off people. On the income side is where the Fed can help them by cutting rates and allowing them to increase their spreads until they get back on a sounder footing. Capische (for all you Fiat fans)?

  69. Greg0658 commented on Jan 25

    #3 – hate the FED for allowing a decadent system to flurish.

    Been playing the game right, working (pushing something besides paper) and spending in the black, while cost of living and middle age has me disadvantaged.

    On 1 and 2, #2.
    Would like to see the pension in a few years, which one lets it be there?
    #2 (edited) long stocks, don’t have much cash, are worried about losing customers in a recession, and am sick of watching the value of my house decline because everyone else appears to doing better – somehow.

  70. Greg0658 commented on Jan 25

    gold is not money
    human labor is money

    labors exploitation is wealth

  71. michael schumacher commented on Jan 25

    >>Fed can help them by cutting rates and allowing them to increase their spreads >>

    This is where people fail to understand why they keep cutting rates. It’s all about margins and since they are shrinking with each and every round of asset sales this is the only way they can help them by letting them have wider spreads.

    Now the irony is that this is EXACTLY what got us here is the first place.

    Fed cutting rates is all about margins….that is the only reason it cuts when the rest of the world (excluding Japan) is biased to hold them steady or raise them…or at least that is the perception that is allowed to grow (ECB)

    Ciao
    MS

  72. Philip commented on Jan 25

    Cindy (way above) and “getting older” are two very common people. Cindy, it is the people who intentionally don’t folow the business news but then do engage in very complicated financial transactions (what is a two or three year fixed pay option ARM if not that?) are thre PROBLEM. YOU are the PROBLEM. If you don’t expect any more than to save what you have earned and have it maintain value then you ARE NOT the problem. But old timer, you are are saying “get over the fact that lately the government has taken to retroactively devaluing your past work by arbitrary amounts in order to keep banks solvent though those same banks weren’t giving away their excess profits in the boom years.” Old timer, I say you are the problem. And people like you in NYC and DC and in every city. And I hope that your sort get run out on rails. I don’t expect it. But if I am forced by the pandering of your sort to put up with the nonsense and bail outs of Cindy and Citibank than you damn well better expect me to complain and struggle against it and wish you ill.

  73. Whammer commented on Jan 26

    Steve Barry,

    You have a very interesting outlook re gold — you are consistently against holding it now, yet you also argue that the long-term fundamentals are in favor of owning it.

    I keep thinking that this is a replay of the stagflation years, and that we should see $2000 gold on an inflation-adjusted basis.

    Could you elaborate on your thesis? I think you might be right, but I can’t put my finger on why……

  74. Steve Barry commented on Jan 26

    Whammer:

    There are several facets to my opinion on gold right now:

    1) Gold would be the optimal currency for the reasons I gave from the essay…it would prevent debasing of the currency. It certainly has more intrinsic value than a piece of green paper. Gold should back the paper. It can’t just be printed out of nowhere…it protects the people.

    2) Gold right now is very overbought short-term according to Commitment of Traders report…insiders in the industry are betting against gold prices and they are normally right.

    3) In a severe recession/depression, gold will likely fall as silver did in the Great Depression (gold was price fixed back the). In a depression all assets will deflate, including gold IMO.

    4) The time to buy gold will be after the credit bubble fully pops…in the Depresion, that happened around 1932 for silver. When it happens the next time is unknown of course.

    5) While gold should outperform stocks in a deflation, I think QID is a better investment (for my risk tolerance and style) than gold.

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