An extraordinary money-market development has occurred in recent days. The safest liquid credit instrument — the gilt-edged 91-day Treasury bill — has seen its yield plunge.
Here’s the story: Last Wednesday, August 8, T-bills traded at 4.49 percent. On Monday they dropped to 4.74. On Tuesday, 4.63. And yesterday they fell to 4 percent. This morning they dropped another 50 basis points to 3.52 percent. What’s this mean? It means the entire banking system has turned completely risk averse and is fleeing into the safest haven possible.
It is fear. It is hording cash. It is a mountainous tremor that has seized financial markets.
In terms of funding requirements — for big mortgage banks like Countrywide, or perhaps the major money-center banks and various hedge funds — it shows financial dysfunction.
Now, what to do?
Canada did this;
[The funding crisis in a key part of Canada’s debt market may be over.]
“May be ..”
http://www.globeinvestor.com/servlet/story/RTGAM.20070816.wbailout0816/GIStory/
The usual foolishness. Remember the old investment saying: when the tide goes out, all the boats go down. Not sure about this, but isn’t sub-prime market problems largely a US phenomenon? Seems good bargains await. I only hold the best quality securities (great company, great product, great management, good dividend payout). They ride out corrections well and are the first to benefit to “flight to quality.”
It is bad, but will only get worse and become a real problem if the herd stampedes. The talk in bond fund management circles is hold on and ride it out. If the fund managers cave look for real trouble. Watch the housing mortgage market in the US. These words are from the head of a bond fund worth 13 billion, make what you want of it.
From Canada.com:
LINK
Consider the context of what’s happening with liquidity — and why. We know that since June, 2006, the Fed has maintained a federal funds target rate of 5.25%. Since then, on occasion, whenever the actual rate has traded above 5.25% the Fed has quietly and innocently added reserves, without a single press release or sensationalist headline. But then there comes the bear market, which few foresaw. The bulls are incredulous, in denial and in the red. Soon they start seeing red. They’re infuriated. They scream and cry like babies. They demand that Papa Fed bail them out of the jails which are their unsustainable and unprofitable investment positions. The bulls deny that the real problem is self-inflicted, a case of personal error leading to localized unprofitability; seeking to deflect blame, they vaguely decry the drying up of liquidity, even though they were the ones who not long ago were the most vocal in telling everyone that stocks would rise ever more, due to the world’s vast pools of liquidity.
Don’t know if y’all had heard, but this outfit Coventree went from $15 to $2.50 in a day or so.
http://finance.google.ca/finance?q=TSE%3ACOF
They have a bizarre banking niche where they buy car loans and etc. from banks, then package them up and sell them as commercial bonds. Their cut is the 8 basis points of difference.
Problem is the people who are buying the bonds have no way of knowing whose debt they are buying, how many middle men have their hands in it, what the true risk is or anything about it.
Its been all over the business news the last few days because most of the consumer loans in the country are packaged this way. Hello sub-prime Canada.
Notice also the TSX took another kicking today.
I’m thinking of battening down the hatches here at HMCS Phantom. Stormy weather brewing.
Larry Kudlow should be reminded that what he’s advocating (essentially that the fed should just print money until things settle down) has been done over and over again in the past twenty years. Rather than allow investors to take their lumps for bad decisions, the fed bails them out. But the liquidity that the fed creates for the bailout winds up fueling the next boom phase in some other ill-considered part of the market.
Sub-prime mortgages are called that for a reason. The market seriously over-valued them. A fed bailout doesn’t change that fundamental reality.
If you want to really understand what’s going on in world financial markets, try Bill Bonner’s dailyreckoning.com
For some brief, concise articles on fed policy and why it’s so lousy, check out a website called brookesnews.com
The US needs to start taking regulation of the financial services industry more seriously.
If it isn’t S&L’s, it’s morgage companies lending out more money to bad creditors than their collateral is worth. When you hear of home loans of 130% of the house’s worth going through, you have a problem.
If the public has to bail these idiots out, they should be buying the shares of the companies and selling them to more responsible buyers.
Silly season has arrived.
The Fed placed the subprime market space at 50-100 billion.
Market reaction: Wipe out a couple trillion in market appreciation.
Gee a 1000 to 1 over reaction is reasonable !?!
After the Enron fallout of 2002 JP Morgan Chase appreciated 50 to 100%.
I suspect the volatility will subside going forward after an opening bell sell off of some ~600 points.
This is just the “hot money” finding a new home.
The speculators hit the exits, the investors will be there tomorrow and going forward.
The sky is only falling for people like Al Gore.
Cheers.
Great comments so far.
IMO, Alan Greenspan started this bailing out thing with the 6.5 to 0.5 fed-rate drop to bail out Clinton’s NASDAQ bubble. Didn’t work, but it induced a housing bubble that is hissing now.
It is just not a US sub-prime thing that the media loves to dwell on. As mentioned above, hello sub-prime Canada also.
Some of these funds have “innovative” methods — are getting kicked and bringing others down with them.
Equities are a different ball of wax but are being affected also. We have to keep this “calamity” in perspective though. In roughly 5 years or so the TSX has climbed from 6000 to 14500 by last month. Today’s 12600 is still double. The graph lately was straight up —- a sure sign of a correction coming.
A 100 year graph on the wall tells the story. Hope it is not different this time 🙁
The run up on the TSX was energy driven, and I cannot see massive losses unless oil goes beneath $40 a barrel. The real estate bubble in the states is a whole different matter(with localized bubbles in Toronto, Calgary and Vancouver). The fed should just let the bubble burst, and things will straighten out eventually. Pumping more liquidity only postpones the inevitable. I will say though that it will be fun to see latte idiots who purchased 2000 sq ft dumps for 800k going bankrupt. Buying time by next summer.
BTW, our family owns 200 + rental units, student rentals and commercial property. We have a pretty good handle on the Ontario real estate market. Anybody want to get involved in the scab picking next summer?
The main problem is that you have a lot of leveraged hedge funds getting margin calls which can’t borrow more money to cover them in this market due to tightening credit and low liquidity.
They can’t unwind their positions without selling their equities. Ergo, they drive the market down by selling. Hedge funds tend to all do much the same thing at the same time amplifying any carnage.
Time to have a hard look at those twits as well.
This is precisely the kind of market signal that preceded the market crashes of both the Depression and the late ’80s. Sub-prime lending, borrowers and brokers and subprime lenders overextended, and an initial ripple followed by a wave as the dominoes all fell.
I say that not as a fearmonger – I think our and the US markets and the international banking system are much stronger and better informed about how to correct this “correction” – but as a note of serious concern.
In both those cases, banks failed and your average hardworking stiff was the one who lost.
Now, what to do?
What you do is buy. I always buy when my favorite’s goes on sale. Bought 100 of BNS, 100 of BMO, waiting on CIBC
Buy low, sell high.
Works for me.
August 3, 2007
Jim Cramer: Part 1
http://www.youtube.com/watch?v=rOVXh4xM-Ww
August 9, 2007
Jim Cramer: Part 2
http://bigpicture.typepad.com/comments/2007/08/jim-cramer-on-t.html
There are two ways to restrict borrowong, by price or quality. Both have similar effects, slowing things down, but a credit squeeze leaves solid borrowers in place without raising their price.
I worked at a bank in 1990 and I remeber the memo that came out raising the quailifications for credit cads, mortgages and loans. 6 months later the bottom feell out of everything.
This is a similar, people are restricting who they lend to. It will cause a slowdown. But inevitably it was a kinder gentler way rather than killing everyone and everything with price or credit.
It is a weird time because I havent seen a correction like this in the summer time. Technology may have brought the fund managers back from their vacations early.
As long as inflation remains low then rates can stay down. Confidence comes back and we carry on our merry way. The worry is inflation, which I dont see, or worse, deflation….that is something we dont want to face, falling asset values is never a good thing.
No cash bailouts but they do need to make sure there is credit available.
I’ll wait a little while longer before dumping my bre x.
One thing I noticed during the start of this current meltdown was the North American central banks turning on the newly-created-money spigot and the markets responding, initially, by dropping further. This drop ended in about a day or so afterwards as the BoC and the Fed continued sloshing the new “liquidity” in.
I found it worrisome, because the whole system is kept afloat on the understanding that the central banks can reliably staunch any sudden market collapse through inflating. If the quick triggers are getting the idea that “a rush of new liquidity” doesn’t mean “central bank to the rescue; all will be well” – and does mean “things are worse than we thought” – then there’s going to be quite a sudden thud.
Of course, it didn’t happen this time, but seeing it hinted at through an extra-day continuance is eye-opening enough. If a car you need for emergencies coughs a few times before starting, instead of starting right away as usual, then the car does get running – but the extra delay says something’s not quite right with the car.
I posted on this last week…. recommending selling off equity and accumulating cash.
It is now BUYING TIME ……
Oh darn, I just read on a blog a few days ago that the big ciddy guys were the ones that created all the ‘real wealth’.
So on this sound and indisputable advice, I changed my entire investment of zero dollars from the farm to the the big ciddy guys.
And now this happens!
So, now I’m wondering if it is ‘real wealth’ in the ciddies, why have the scared crapless govts around the world pumped some $500 billion into propping up all this ‘real wealth’?
Hey who needs the casinos, when there is the govt backed stock markets to gamble on?
Damn near as good as farming, eh?
Jim Cramer was obviously mad because he was losing a lot of money and didn’t see it comming …
You NEVER see anyone (even Jim Cramer) that mad unless they have personally lost something.
@kingstontard (4:15 PM): What would that involve?
The prince of darkness comments…
http://www.townhall.com/columnists/RobertDNovak/2007/08/16/the_global_fed
Worth reading (as usual).
The Jim Cramer video is epic.
Monetarism: Dead at Last?
“Now here’s the point. If the economy decides to demand more money, as reflected by the “soaring” demand for it, how then does money supply matter? The Fed’s supposed tinkering with the monetary base as reported in the weekly data from the Federal Reserve Bank of St. Louis is meaningless. In fact, its tinkering has everything to do with maintaining the fed funds target rate and nothing to do with attempts to control the money supply. The “demand side” theory of money creation, or the “quality of money” theory, is in essence liquidity created by the system since the structure demands that liquidity. Effective money supply is determined by money demand, or velocity.
The idea that central-bank increases to the money supply are inflationary is debunked by the modern Japan example. The Bank of Japan (BOJ) lowered its policy interest rate to zero, without regard to controlling interest rates, in order to pump money into the economy. This surge in money supply was enormous, yet inflation in Japan was non-existent. In fact, the problem in Japan was deflation, even though central-bank-induced money supply was exploding.”
What the US is really suffering from is a huge credit bubble as a direct result of a huge increase in the money supply over the past 20 years.
The effects of which are stated by Ludvig Von Misses.
“This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”
The US fed is now in the position were they must inflate or die in other words they must choose between supporting the dollar or the economy.
The only wager against the dollar that has a chance of winning in the long run is the one staked out by the gold marble. Ironically, it is also the simplest, and anyone can play it, even people of modest means.
NoOne: “Jim Cramer was obviously mad because he was losing a lot of money and didn’t see it comming …
You NEVER see anyone (even Jim Cramer) that mad unless they have personally lost something.”
Not that you’re an idiot, or anything, but Cramer does not hold any stocks, and he notes that frequently on his show.
That said, I think he’s usually a loudmouthed fool, but like a stopped clock, he’s correct about twice a day. And, in an American economy of about 120 million households, if 7 million lose their homes, that’s a huge hit, and it’s going to affect everyone, from Cramer’s Wall Street buddies to the losers who bought their Miami condos last September. And, yes, it will hurt us here in Canada, as lumber exports to the US will fall as housing collapses.
However, Cramer’s “cure” is worse than the disease. Pumping up the bubble will just prolong and worsen the eventual burst. The US has been living beyond its means for years and the time to pay the piper is now at hand.
Oh, and OMMAG – “time to buy”? Um, “catch a falling knife” mean anything to you?
Why do you talk about things you don’t have a clue about and 99% of your readers don’t? Why don’t you get real and down to earth. You’re obviously a rich farm wife who thinks because you and your husband are loaded you’re going to enlighten the rest of us peasants. I’m a great B.Ser myself but go with your story I’m listening.
“We need to restore banking confidence. Right now.”
That’s the rub isn’t it….the current trouble is just a reflection of credit melt down….too many in the markets are debt leveraged…dollar based investment vehicles which rely on inflated currency…over extended credit that relies on the same inflated currency….no rationalizing contraction in sight…just the mint printing press working 24/7….no disclosures of M3…refusals by the fed for reserve audit…. the Fractional reserve fiat money system and the credit systems which rely on it are in trouble….yes it’s a matter of trust and confidence failing,,,how large will the currency and credit inflation bee allowed to grow in relation to the reserves backing it?
It’s fairly simple what you have to do…as Canadians this does not effect us that greatly(unless the BoC has foolishly backed our currency reserve with US dollars…but who knows what is on reserve in the BoC?)and we will see mostly a trade deficit as the US deflates and contracts the next 10-20 months…. get out of debt and out of dollar based investments and go to metals and solid prefered shares or buy tangible accruing assets.
Thic contraction/deflation was predicted as “necessary” 2 years ago by the IMF and WB and the US Fed was warned to manage the contraction or watch it run uncontrolled….obviously they let it go till the markets lost confidence and now we have an uncontrolled deflation cycle.
This week I heard 3 market gurus say that gold could hit +$800…tells you were the market is stampeding.
Sell, sell sell (Movie: Trading Places). Money is made when there is “blood on the streets.” Speaking of the man on the street, I heard some impromptu interviews yesterday, and the tenor was, “I’ll go back in the market when it goes up again.” There are a total of 50 individuals and companies in US directly affected by subprime fiasco. They were speculators who got burned. Nothing new here, move on. The only thing predictable about markets and economies in the short run is, well, they are unpredictable.
Thanks anyway, but I think I’ll hold my high quality dividend stocks through this correction, and look for some great buys. So, keep selling, folks, you’ll find a willing buyer of quality right here.
In order to invest money you have to have spare dollars around to invest. 90% don’t have that kind of cash they’re too busy paying for a house , car and feeding the kids. And I know damn well most of you on this blog are in that catagory.