Sunday, March 16, 2008

Tumultuous Week Ahead

I imagine the Plunge Protection Team (PPT member pictures below) put in quite a bit of overtime this weekend -- in an attempt to repair the damage caused by Bear Stearns, before the contagion spreads throughout the financial world and causes irreversible damage.

Treasury Secretary Paulson (Chairman of the PPT)

Ben Bernanke (Chairman of the Board, Federal Reserve System)

Christopher Cox (Chairman of the Securities and Exchange Commission)

Walter Lukken (Chairman of the Commodity Futures Trading Commission)

Well today, Secretary Paulson let it be known to the world that they are worried, and stated they will stop at nothing to calm the markets:

Treasury Secretary Paulson Says Administration Will Act to Calm Chaotic Economy

WASHINGTON (AP) -- The Bush administration will "do what its takes" to stabilize chaotic markets and minimize the economic damage, Treasury Secretary Henry Paulson said Sunday after a tumultuous week capped by the government rescue of a teetering investment bank.

All eyes now are on Wall Street as leading financial advisers prepared for a Monday meeting with President Bush and the Federal Reserve weighs another deep interest rate cut Tuesday to stem even more deterioration.

The treasury chief sidestepped questions about what would have happened if the Fed had not ridden to the rescue, whether other firms are on shaky ground and the possibility of additional bailouts similar to Bear Stearns'.

At the same time, however, Paulson sought to send a calming message that the administration is on top of the turbulent situation. "The government is prepared to do what it takes to maintain the stability of our financial system," he said. "That's our priority

As if the Bear Stearns problem wasn't enough to deal with this weekend, it now looks as if Goldman Sachs will report huge write-downs early next week.

As the former chairman and chief executive of Goldman Sachs, I imagine the PPT leader (Secretary Paulson) is monitoring the situation very closely…

Goldman Sachs to reveal $3bn hit

Goldman Sachs, Wall Street's most powerful investment bank, will this week announce asset writedowns worth about $3bn (£1.5bn), its biggest jolt to date from the crisis threatening to engulf the world's financial markets.

Goldman, which has largely thrived amid the turmoil elsewhere on Wall Street, is expected to report a fall in first-quarter earnings of about 50 per cent. The write-down will underline how the financial turbulence is now affecting even the most stellar performers.

With this said, I believe we will likely see Wall Street take an “E-Ticket” ride next week – potentially one of the wildest rides ever.

You see, the indexes are so incredibly close to extreme downside support levels that the PPT will fight tooth and nail to prevent a break below support.

If we do happen to fall below key support—automated sell signals will kick in from around the Globe—potentially creating a selling panic/free-fall. Example: Next downside support on the DOW is 11,630 (S&P and Nasdaq look very similar)

With that said, aside from the downside pressure caused by mounting credit problems and looming (additional) write-downs, we can also expect to see numerous Economic reports released next week (I expect very few to be positive) :

- NY Empire State Index
- Net Foreign Purchases
- Industrial Production
- Capacity Utilization

- Housing Starts
- Building Permits
- Core PPI
- FOMC Policy Statement (likely to see a 100bp cut)

- Crude Inventories

- Initial Jobless Claims
- Leading Indicators
- Philadelphia Fed

Additionally, it was only a mere 6 months ago that Congress approved a debt ceiling increase for our country (increased ceiling from $9T to $9.8T).

Well, with only $400B to go (see debt clock below) and plenty of bailouts/monetization schemes ahead, it now looks like our inept congressional leaders are once again looking to raise the allowable debt limit.

The Gross National Debt

If passed, this new $10.2 Trillion cap should hold us to ~ Jan 09, but what then?

Why don’t we just raise it to $100 Trillion and be done with it for a few years? Are they scared they might send the wrong signal in doing so?

Come-on, they aren’t fooling anyone… The hole is already far too deep and there are only 2 ways out of this mess: #1) Default or #2) Hyperinflation… I think we all know which route was selected...

House seeks debt limit increase to $10.2 trillion

WASHINGTON (Reuters) - The government's debt limit would be raised to $10.2 trillion under a budget plan for next year approved by the U.S. House of Representatives.

The House's fiscal 2009 budget, which passed on Thursday, would increase U.S. borrowing authority by $385 billion from the current limit of $9.815 trillion, according to the House Budget Committee

Congress last approved an increase in Washington's borrowing authority last September, increasing the credit limit by $850 billion.

Some lawmakers recently have estimated that the Treasury Department could bump up against the current $9.815 trillion limit either shortly after November presidential and congressional elections or early next year, depending on revenues and economic performance.

Lastly, allow me to share with you some snippets from a fantastic Christopher Laird article (from, as Mr. Laird understands the current situation far better than most.

Gold Says That Central Banks Fail To Stop World Deleveraging

Right now, we are looking at the precipice of a total world financial collapse. When the stock markets finally let go, people will wake up to the reality of world financial bankruptcy. Millions of people will lose much of their retirement savings, in a super world stock crash, and you will again see stories about people refusing to open their 401k statements because they don’t want to see how far down they are. That’s what happened right after the Tech crash. Well, think of that episode as merely a taste of what is to come.

I am not exaggerating. To date, the US and EU central banks have put up an astounding $2.5 trillion worth of money to their respective banks and bond markets. They are doing this to prevent a total banking collapse. So far, they are barely staving off a massive wave of bank failures world wide, but particularly in the US and the EU region.

Unfortunately, the ones really on the hook for all this coming market collapse will be the big retirement funds, as they are the ones invested in all these bubbly world asset and financial markets. That shoe will drop.

Bond and securitized debt chaos

We are not going to detail the many stories about how the bond and credit markets are collapsing. But, suffice it to say that many huge credit markets are literally frozen. Whether it’s the mortgage derivative securities, a $3 trillion plus market, or the US GSE markets, something like $ 7 trillion in size (this is Fannie and Freddie and such), or municipal bond markets, $10 or more trillion, and if you can believe this, or even the US treasury secondary market (already existing US T bonds that are sold between investors), these credit markets are freezing up in a big way.

Securitized debt markets new

Just to make a comment on this, the securitized debt market is fairly new. This is where large investors bought big packages of mortgages, or whatever kind of debt you can imagine like credit cards or student loans, that were securitized and sold off. There are many types of these, like CDOs, MBS, SIVs, etc. (CDO – Collateralized Debt Obligations, MBS – Mortgage Backed Securities, SIVs – Structured Investment Vehicles).

This type of lending became a standard in the last ten years, and has effectively absorbed the entire world lending market for everything from corporate bonds to municipal bonds to credit cards to mortgages.

Being a new and very complicated market, and utterly gigantic, the treasuries and central banks have stated that they don’t understand them well enough to try and solve all the problems. The Fed, the ECB, and the BIS have all commented that they don’t understand this new securitized world debt market that has taken over all credit worldwide. This is not a good thing – to put it mildly.

What I am trying to say is that this entire new, huge, world credit apparatus is now imploding.

Gold says central banks are failing this time

Gold has risen in tandem with the credit crisis because the central banks are falling behind the world credit deleveraging since August. If the gold markets felt that the central banks had a handle on the credit crisis and world financial meltdown, ie that cutting rates would work to stop financial deleveraging and economic contraction, then gold would not rise as much.

This time, gold is clearly giving a verdict that Central Banks are failing to reflate a massive world deleveraging, that markets are going to unwind no matter what the CBs attempt to do.
If central banks fail to reflate credit and financial markets, then the only alternative for world governments is big deficits. More programs to bail out banks, more central bank $ trillions to try to stem the losses...Effectively, more debasement of world currencies.

If central banks could succeed in stopping the world deleveraging, and stop the massive financial hemorrhaging on every consumer’s balance sheet, every financial institution’s balance sheets, then gold would not rise as much as it has. If gold expected things to normalize, and gold expected that central banks could escape outright monetization of problem markets this time, gold would not be rising as much as it is now. Gold is up 50% since August, when the credit crisis and world deleveraging began.

Clearly, gold has decided that central banks have lost control of the situation, and the only alternative is more interest rate cuts, which makes borrowing cheaper and is economically stimulative, but lowers the value of currencies. On top of interest rate cuts, central banks are now doing outright bailouts, which also devalue currencies. Outright bailouts are monetization.

World economy credit driven

The trouble is, none of these central bank efforts seem to be working. New big credit markets are freezing up each week. The already frozen ones are not recovering either. Given the fact that our world economy is primarily credit driven, what do you think that means for the next several years for the world economy? I’ll let you answer that yourself.

What is happening in general is that financial and asset markets are deleveraging. The general world economic situation can be regarded this way, as deleveraging, and it won’t be a bad oversimplification. All this borrowing that went into bidding up world financial and asset markets is now going to be unwound. I read a banker’s comment around September that ‘The credit unwinding will not be denied.’

That appears to be exactly what is happening.

USD, Yen, Euro, gold

If you agree with this, then what is the prognosis going forward for the Yen, Euro, and USD? And thusly for gold?

In a nutshell, the central banks will attempt to stop the deleveraging. They have failed so far, and will continue to fail. As the economic contraction worldwide gets more and more painful, they will make more big efforts to stop the deleveraging that ‘will not be denied.’

At some point, I expect one of the central banks among the ECB or BOJ to give up on the reflation efforts (to counteract the deleveraging.) At some point, they will realize that the efforts to stop the deleveraging is futile, and only adding to public debt, and just making things worse.
At that point, everything just finishes unwinding rapidly. It will be very very scary for everyone and every country. The implications are really rather staggering.

Which is why the central banks are fighting this deleveraging as hard as they are now. In fact, the Fed would have cut interest rates faster, but they risk cutting the ground from the USD. Their hands are tied to a significant degree.

The ECB will be forced to cut this year, otherwise the Euro continues its painful strengthening. The Fed has basically no choice but to continue cutting. The alternative would be collapsing stock markets. That will likely happen anyway.

Maxed out this time

Basically, the only solution to massive unwinding of credit, theoretically, is to get borrowing and economic activity to start growing again. That way, world consumers would then start buying everything and, if the economies recover, then the present leverage out now can be carried forward.

But that is not happening, is it?

Why is it not happening? Why are lower interest rates failing to restart things? Because, this time, unlike 2001, people cannot borrow any more. They have already borrowed all they can. This time, cutting interest rates will not work to revive economies. The only other option is government spending, and or using currencies to stimulate things. Using currencies to keep things going will fail because the deleveraging worldwide is way too vast.

If cutting interest rates will not work to revive economies this time, then the deleveraging will continue relentlessly. It is that simple.

And, why are the bond markets freezing, and such? Because lenders of all types, who bought all the securitized debt, now realize that the present levels of debt in every sector, public and private, cannot be kept up. So, then, why do new lending? Everybody is maxed out. The reason for the collapse of the credit markets is also that simple.

The only thing standing in the way of a total world financial collapse right now is all this massive emergency lending by central banks to financial institutions. That means that, when enough big investors realize there will be no economic recovery from cutting interest rates this time, the stock markets will finally collapse big. I expect this to happen sometime this year, election or no election. The problems are just too big.

For the full article, please click link: Gold Says That Central Banks Fail To Stop World Deleveraging

Bottom Line: Things are going to get much worse before they get better and this upcoming week could be the beginning of “the much worse to come”…

As I pen this message, World markets are starting to open with downward pressure (due to ongoing credit turmoil), while the dollar continues its slide into the abyss. Meanwhile, Gold/Silver are up almost ~ 1%.

Hold on to your hats!



Tom said...

This is a massive cleaning out of the excess. It will change life as we know it but it is a necessary evil. Always trying to delay any little correction is synonymous with always putting out Forest fires. Eventually the underbrush builds up until you get a raging fire that you cannot put out easily. When it is all said and done, hundreds of thousands of acres are scorched and everything begins anew.

Trying to avoid every recession is what got us into this trouble. Thanks a lot Greenspan and Bernanke.

Randy said...

Great analogy Tom,

Have you looked at the dollar tonite? Holy Crap!!! Its barely holding on to 71 -- Yen is currently at 97; euro at $1.58. Gold broke through $1,021 and futures for tomorrow's open:

DOW currently down 168
S&P Down 22
Nasdaq down 33

Additionally, Asian indices are tanking ATT...

It's going to be an interesting week indeed...


Randy said...

The Panicked Fed just cut discount rates to calm markets:

WSJ--Fed Cuts Rates,Extends Loans To Calm Markets

March 16, 2008 9:58 p.m.

In an extraordinary weekend intervention, the Fed announced the most dramatic expansion yet of its lending, promising to lend for up to six months to securities dealers under terms normally reserved only for tightly regulated banks.

The central bank also cut the rate on such direct loans by a quarter of a percentage point, just two days before it is likely to slash interest rates more broadly. It also made a rare weekend cut in the discount rate -- ordinarily charged on direct loans to banks, and now also to securities dealers -- to 3.25% from 3.5%, while helping bring Bear Stearns into the arms of J.P. Morgan Chase.

That narrows the spread with the more economically important federal-funds rate, now 3%, to a quarter of a point. The Fed is also expected to cut the fed-funds rate target by at least half a point at its meeting Tuesday.

The moves were the latest and most aggressive yet in a series of steps that demonstrate how the Fed's traditional tools aren't suited to dealing with a crisis now sweeping the modern financial system. But, by also agreeing to lend up to $30 billion to J.P. Morgan Chase to finance illiquid assets inherited from its purchase of Bear Stearns Cos., the Fed is taking on new risks.

The Fed was created in 1913 in part to be "lender of last resort" during crises such as the one now sweeping through the financial system. But it was equipped for an economy in which banks provided most credit. Now banks share that role with institutional investors, finance companies, asset-backed pools and securities dealers such as Bear Stearns.

Since the current credit crisis began in August, the Fed has taken ever more innovative steps to push its remedies beyond the banking system.

The Fed can lend with few constraints to banks through its "discount window" to prevent a shortage of cash caused by a temporary interruption or a generalized loss of confidence. But it has rarely lent to nonbanks, although it has had the authority to do so since 1932, if five of its seven governors approve. It last lent under this authority in the 1930s.

Even as it innovated in the current crisis, the Fed had avoided favoring a particular firm or class of securities. On Friday it crossed that line, stepping in to provide emergency funding to keep Bear Stearns afloat amid a severe cash crunch at the Wall Street firm. That funding will now be replaced by $30 billion lent to J.P. Morgan but secured solely by hard-to-value assets inherited from that firm's purchase of Bear, meaning if the assets decline sufficiently in value, the Fed will bear a loss.

Adam Posen, a central-banking expert at the Peterson Institute for International Economics in Washington, said other troubled firms claiming an equally critical position at the nexus of the financial system now "have political and legal precedent to ask for" help. He said the expectation of such help could also harden the negotiating position of a troubled firm, potentially complicating private-sector solutions.

Fed officials say they didn't act to prevent a big firm from failing, but to prevent a firm enmeshed in critical markets from failing in a single day, causing a potentially huge disruption in the financial system.

Fed officials don't dispute that their decision carries "moral hazard" -- the risk that any sort of bailout encourages more of the same risky behavior later. But they believe that compared with the alternative scenario, that cost is small. The funding had been structured so that the greater benefit is to those who lent money to Bear Stearns in the "repo" market for secured, overnight loans, not to Bear Stearns itself. Moreover, they note it's unlikely any firm will consider the loss Bear Stearns's shareholders are likely to sustain as an acceptable price for taking the same risks in hopes of a bailout.

Still, with the credit crisis showing no sign of ending, "Thinking about the appropriate terms of bailouts is especially important if, as seems likely, other firms require similar help down the road," said Doug Elmendorf, a scholar at the Brookings Institution and former Fed economist.

The Fed has intervened from time to time in specific situations, from Treasury loans to Mexico in 1994 to brokering the rescue of the hedge-fund Long Term Capital Management in 1998. But it has been rare for the Fed to put its own money at risk. The most important example of this was in 1984 when it and the Federal Deposit Insurance Corp. lent billions to Continental Illinois. Efforts to find a buyer were fruitless and the federal government ultimately ended up owning most of the failed bank.

"The financial system is much more interconnected and opaque than in 1984," says Kenneth Kuttner, a monetary economist at Oberlin College and former Fed staff economist. That has made "the lender of last resort role much more complicated." The crisis, he said, is exposing "the limitations and constraints" of the rules laid out for the Fed in the Federal Reserve Act.

Since the 1980s, Congress has limited the ability of regulators to prop up weak banks. At the same time, the financial system has moved away from insured deposits to other sources of funding. Securities dealers' "repo" borrowings -- short-term collateralized loans that grease the market for a wide variety of securities -- have more than doubled to $4.5 trillion and now exceed banks' federally insured deposits.

Fed officials believe that multiple sources of credit have made the economy more resilient and less exposed to problems in banks. Less than a year ago, Fed Vice Chairman Donald Kohn predicted that with a more market-based and less bank-based system, the Fed would rely more on interest rates to stem crises than direct loans to market participants.

But the Fed has already learned that interest-rate cuts alone aren't enough to stem the current crisis, and has not only had to use the discount window, but in ways it never thought likely.

Tom said...

Bear Stearns got bought for $2 a share by JP Morgan and the Fed funded JPM and completely backstoped any losses.

Sucks if you owned them on Friday at $60 a share or if you bought them at $100 or $80 a share when Cramer said they were a buy because they 'might' get bought out.

Anonymous said...

HONG KONG (Reuters) - Asian stocks fell to their lowest in almost eight weeks on Monday while the dollar hit a record low against the euro, as the sale of Bear Stearns and the Federal Reserve's cut in its discount rate was seen underscoring the frailty of the global financial system.

Safe-haven assets rose, with spot gold surging more than 2 percent to a record high above $1,000 an ounce, while Japanese government bond futures jumped to a three-year high and U.S. Treasury futures hit five-year highs.

In an unexpected emergency step before the markets opened in Asia, the U.S. Federal Reserve lowered the discount rate it charges on direct loans to banks and announced a new program to lend directly to other big financial firms.

At the same time, JPMorgan Chase & Co (NYSE:JPM - News) said it would buy stricken U.S. investment bank Bear Stearns (BSC)N> for just $2 a share, though the lender said the deal-related costs of the purchase would total $6 billion.

"Desperate times need desperate measures. The Federal Reserve is doing what it takes to restore stability and if it means cutting the discount rate on a Sunday night in the U.S., then so be it," said Craig James, chief equities economist at Commesec in Sydney.

The MSCI measure of Asian stocks outside Japan (^MIAPJ0000PUS - News) dropped 1.5 percent as of 0108 GMT, trading at levels it has not seen since January 23.

Japan's Nikkei average (Osaka:^N225 - News) dropped 3.2 percent, while South Korean (KSE:^KS11 - News) and Australian (ASX:^AXJO - News) stocks fell more than 2 percent each. Shares in Taiwan (Taiwan:^TWII - News) opened down 2 percent.

Asian stocks, along with markets elsewhere, have been hit hard this year by the subprime- and credit-related writedowns in the global financial sector, and worries about the impact of a U.S. economic slowdown in the export-dependent region.

Meanwhile, local currencies have strengthened in line with the slumping dollar, further denting the export sector's outlook, while surging food and energy prices are threatening to raise inflation across the region.

All these factors were starkly evident on Monday.

Spot gold (XAU=) surged more than 2 percent to as high as a record $1,021.40 in Asian trade, compared with late New York levels on Friday of $996.90/997.70. Prices of bullion were last trading at $1,020.09/1,021.70.

Investors opted for other asset classes perceived to be safer, with Japanese June bond futures jumping as much as 0.63 point to 140.90 (2JGBv1), the highest since July 2005, before coming back down to 140.81.

U.S. June T-note futures jumped 16/32 to 119-19/32 (TYv1), hitting the highest since mid-2003. The two-year note jumped 8/32 in price to yield 1.357 percent, tumbling 13 basis points from late U.S. trade on Friday to a five-year low.

But oil edged lower, amid some selling pressure after last week's rally to a record $111 peak, with frontmonth U.S. crude for April delivery (CLc1) down 14 cents at $110.07 a barrel.

Tom said...

Dow futures point to an open off over 300 points tomorrow. Also the Nikkei is below the DOW right now which is ironic considering 8 months ago it was over 4000 points ahead of it.

Goldman Sachs leaked a $3 Billion write down and earnings that are 50% below last years quarter. Even the so called smartest guys in the room are finally getting hit.

Even the guys on CNBC are looking stupid saying you have to buy the banks.

How will the Visa IPO look this week? LOL

Elizabeth said...

Any suggestions of the best place to put money right now. Are there any 'stable' banks? My husband and I sold our house a few years ago - saw that train wreck and decided to get out with our equity. We have bought some gold, have money in German and Canadian accounts, but still have uncomfortable amounts in dollar accounts. I am just looking for a reasonably healthy bank to park the money in CDs. Help!

Randy said...


Wish I could help you out, but I'm really not in the position to advise you on safe banks.

Hopefully someone else reading here will chime in with an informed reply.


Anonymous said...

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Remember the $100,000 cap for FDIC insured accts -

Ira said...
This comment has been removed by a blog administrator.

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