10/7 market update

[muldoon]

I have been holding off on doing an economy post while I think about what's been going on and what the ramifications are.  All I can say is wow, a lot has changed in the last week.  Literally we have restructured the role of government and how our economy works.  The model that was previously used did indeed hit the wall and went bust; now we have some weird band aid that on the surface looks like it's holding the wounds together for the time being. 

What has happened, the federal reserve and treasury have coordinated to provide funding to the world in hopes of offsetting the losses that continue to mount.  This includes the 700billion (now 850billion that is) securing some 1 trillion of the 1.6trillion in commercial paper, a huge increase in the taf of now 900billion.  I don't know where this money is coming from, it is not on the treasury balance sheet or the fed balance sheet.  Every country on the planet is fighting their own battles and no one could have lent us some 3trillion in the past week.  Even if someone could have, it would have been a big news item and I would have seen it.  All I can conclude is that we are indeed printing without any promise to pay behind it. 

Based on that, it is no wonder the credit markets are not budging. 
TED spread still off the charts http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND
Libor still high, but the number doesnt matter as much, because its bids only.  There are no offers.
http://b2b.thefinancials.com/styles.asp?id=LIBOR_Majors_3m

What I am hearing says that commercial paper has locked tight, municipal bonds have locked tight.  Most corporate bonds have locked up as well.  Companies such as GE, Nextel, Sprint are offering 15-18%.  But money isnt going anywhere right now.   The banks are underwater and are hoarding cash.  The fed changed the rules on reserves, making the banks not required to keep ANY reserves with the bailout bill and they still are not loaning.  They would rather leave the funds on deposit with the fed and collect the interest they are also now receiving because the bailout.  As a history lesson, the same happened in GD1, only the banks sat the funds in treasuries because guaranteed return was better than risky return. 

With lending and the wheels of commerce and business stopped, many central banks and governments are meddling trying to get things moving again.  Some good ideas, some bad ideas out there in my opinion.  I like the idea of getting credit default swaps into the ICE or CME exchange as a regulated insurance product.  I like coordinated rate decrease to remove any arbitrage or carry trade and push the regional banks with new funds.  I don't like much of the rest of it. 

Now what?

Yes, the stock market is gonna fall.  Back after the dot-com boom our dow touched the 7500 range three times.  Does anyone think this current situation is in any way better than what we went through in 2003?  The stock market is not that big of a deal, other than about 3-6 months after stocks devalue you will see the increase in unemployment as companies deal with it internally. 

But still no lending, thats bad juju.  In fact, the libor curve is inverted.  That means it costs more to borrow for 3 months than for 1 year.  The fear is insane and that model will kill any business that uses the formula of borrowing short to lend long.  (like car dealerships for one). 

It looks like we bought some time with this.  But I see no real solution out of this mess today.  We either collapse from lack of lending in the very short term, or we collapse from hyper-inflationary forces due to printing our way out of this. 

We have to have a market solution to this, governments cannot fix commerce.  Without a market how can you price anything?  If the government is the one doing 100% of the buying, how do they fund themselves, by taxing the transaction?  That doesn't add up. 

We should be thankful for any time given to us, take this GIFT and use it wisely.   

I am hoping for the best, but planning for the worst. 

[glenn kangiser]

Thanks, muldoon.  I was waiting for that and it agrees with what I thought.  Printing money - transferring wealth for what it is worth and no long term fix.

I don't see any way for us to loan anything to anyone as we are spent and taxed into oblivion...

Only way is to print funny money.

[ScottA]

Tricky stuff. With all this money hording it stands to reason that the dollars that remain in circulation will actually increase in value. Even though the government is printing money it's distributing it in such a way as it stays out of general circulation. So in effect the only ones hurt by this money printing in the short run are the banks themselves since they are holding most of the cash. I tink what we are seeing here is really a war between different banking factions. All we can do now is watch.

[Pox Eclipse]

At least we can be confident the billion dollar bailouts to Wall Street are being spent wisely:

Less than a week after the federal government committed $85 billion to bail out AIG, executives of the giant AIG insurance company headed for a week-long retreat at a luxury resort and spa, the St. Regis Resort in Monarch Beach, California, Congressional investigators revealed today.

The St. Regis Resort in Monarch Beach, California, was the site of a week-long luxury retreat for executives of the AIG insurance company, who headed there less than a week after the federal government committed $85 billion to bail out the company.

"Rooms at this resort can cost over $1,000 a night," Congressman Henry Waxman (D-CA) said this morning as his committee continued its investigation of Wall Street and its CEOs.

AIG documents obtained by Waxman's investigators show the company paid more than $440,000 for the retreat, including nearly $200,000 for rooms, $150,000 for meals and $23,000 in spa charges.

"They're getting their pedicures and their manicures and the American people are paying for that," said Cong. Elijah Cummings (D-MD).

.

[muldoon]

At least we can be confident the billion dollar bailouts to Wall Street are being spent wisely:

Pox, I share your frustration and anger.  I mentioned the same underlying story 4 days ago in
http://countryplans.com/smf/index.php?topic=5342.msg67773#msg67773

Personally I am trying to put this, and the AIG guys and Fuld from the hearings out of my mind right now.  As ridiculous as it sounds, I think it is more important to resolve the issue in front of us than go looking for blood and placing blame today.

We have no shortage of rope and big oak trees down here in Texas, we can fry those guys later.  Right now we need to right this ship somehow. 



...
Scott, I think your post is very insightful. 

Tricky stuff. With all this money hording it stands to reason that the dollars that remain in circulation will actually increase in value.

Yes, the nature of deflation is that our dollars will buy more.  As assets come down in price the dollars we earn will purchase more goods and services.  We can see this in all commodities, silver, copper, sugar, soy, wheat, oil, gasoline, etc.  We can also see this on a forex chart as the DX, or relative strength of the us dollar which continues to increase as foreign currencies lose ground. 

Even though the government is printing money it's distributing it in such a way as it stays out of general circulation.

Yes, but hopefully not be design.  We increase base every year, with a target of 2-3% inflation.  Its been this way for decades and is why prices always creep up.  Its why the stock market always creeps up and houses always creeps up.  Its why we all get raises every year.  Whats happening now is much much more and its beginning to show up.  Note that spike, not in the trendline at all. 

So in effect the only ones hurt by this money printing in the short run are the banks themselves since they are holding most of the cash. I tink what we are seeing here is really a war between different banking factions. All we can do now is watch.

I can see that point of view.  I think the distinction between the way I view it and what you described is very minimal.  I believe that we have 7500 banks in this nation; of those perhaps 100 are "broken".  Of those, perhaps 15-20 are broken too bad to repair.  What we are not seeing is those banks being forced to come clean and report the truth.  All this circling is to paper over and cover for these broken banks.  By SHERE COINCIDENCE, they happen to be the very same banks that are largely responsible for purchasing US debt and keeping our economy (and other countries as well) on track. 

http://www.newyorkfed.org/markets/pridealers_current.html

Until we figure out how to fund ourselves with our "spend more than we make" lifestyle we have to keep the train on the tracks.  While this statement also applies to consumers and families, mostly I am referring to city, state and federal government spending habits. 

I believe that is the crux and core of the problem.  How do we keep our government afloat in this?

Thanks, muldoon.  I was waiting for that and it agrees with what I thought.  Printing money - transferring wealth for what it is worth and no long term fix.

I don't see any way for us to loan anything to anyone as we are spent and taxed into oblivion...

Only way is to print funny money.

It's starting to look that way. 

** edited to change image from Fed BASE chart to another image that shows just this decade.  The size of this recent action is more obvious in this chart. 

[muldoon]

It's not getting any better.  We now have a treasury market settlement fails, and a treasury auction disaster this morning.  I cannot imagine a bigger signal that things are about to take a noticable nosedive. 

If you haven't already done so, today is the time to visit the bank, and go to costco for a major stockup.  I put our odds of getting out of this with our country in one piece at about 25% right now.  Doable, but looking very dicy. 

http://www.marketwatch.com/news/story/treasury-severe-dislocations-market-notes/story.aspx?guid={73A8F2E1-F796-4885-8ED4-1EE44B5E5EFF}&tool=1&dist=bigcharts&

WASHINGTON (MarketWatch) -- Treasury said it will reopen multiple securities across maturities to combat "severe dislocations" in the market for notes and bonds, a Treasury official said Wednesday. High demand for Treasury securities is causing acute, protracted shortages is several securities, the official said. This has called settlement fails. The move is also being taken because Treasury has massive upcoming borrowing needs to fund the $700 billion mortgage rescue plan signed into last week, the official said. Treasury said it will work with market participants and regulators to identify remedies to prevent a reoccurrence of these fails in the future.
...
Here is what was announced this morning:  For auction today:
11:30 May 2015 $10 billion
1:00 August 2015 $10 billion
For auction tomorrow October 9:
11:30 February 2015 $10 billion
11:30 February 2018 $10 billion

----
Too many people are buying the 3 month treasury because stocks are falling and they want to get "safe".  Not enough people are buying the 2 year or 10 year treasuries because the ability of the government to actually be around to pay then is in question as is the recognition for a hyper inflated environment makes those coupons look way unappealing.  Our government is having a difficult time trying to fund that 700billion and are in dislocation.  Settlement fails on government bonds is the worst news I have seen.  Once bondholders smell that printing press they want nothing more to do with it because it means the likely hood is increasingly high they will not be paid, or if so - they will be paid in worthless dollars.  So they demand higher premium to undertake higher risk.  This is a spiraling condition.   

... first auction was a disaster
They paid 40 basis above, and are trying to cramdown more.  The cost of government debt is about to skyrocket. We paid 240million just to underwrite 10billion in bonds. 

..
I think one could make the case that we are seeing yields go up because people are leaving treasuries and going back to commercial paper and equities and that this is a good sign.  I dont think thats the case based on bond market dislocation but even if it was, were still going to see higher rates.  Even if that best case scenario explanation is true it's bad for for housing borrowing rates, and if not, its bad for government funding itself rates. 

In other news, it looks like the Iceland story from a few days ago was real. They are bankrupt and defaulted.
-They seized icesave and froze 300,000 acounts and will not let anyone withdraw anything.
-The currency Krona has collapsed, http://www.bloomberg.com/apps/news?pid=20601110&sid=abjzC1zbw8VI
-fitch cuts sovereign rating to bbb-  www.marketwatch.com/news/story/moodys-downgrades-icelands-ratings-may/story.aspx%3Fguid%3D%257BF6849E67-0DC1-4077-8B3D-BC435EE61DBB%257D%26dist%3Dmsr_2&cid=1255537505&usg=AFQjCNGobhPipgM78TtQYr3fdWYOYRgZ1g

[ScottA]

You're just full of good news today. 

[peternap]

Wait till he tells you how far the markets dove this afternoon. I actually heard the "Crash" word on CNBC.

How low can you go?

[muldoon]

I'm not going to say much about the stock market other than it did indeed decline a bit.  Dow came down some towards the end, and the S&P did as well, it now sits less than gold for what that's worth. 

The stock market is not the problem, it is a symptom, but there are other symptoms as well, some much worse.  The credit markets are still frozen, in fact it is worse again today than yesterday. 

Here is a simple exercise to illustrate the point.  We have heard that the banks are sitting on the money and not lending, that they are hoarding the cash and wont put it into businesses or consumers.  This is indeed why loans are not happening, why commercial paper did not roll over for Q3 and why the situation is rapidly accelerating downward.  Why are they not lending?

Look at these simple rates:
http://www.bloomberg.com/markets/rates/keyrates.html

Notice these two specifically.
Prime Rate           4.50
3-Month Libor        4.75

So, lets say I am a bank, I borrow at 4.75% and I loan it out at 4.5% - is it clear why banks are not lending?  Bookmark that url and keep an eye on it over the next days or week. 

Yesterday, the libor was 4.52 today it is 4.75, were going in the wrong direction.  Before the federal reserve cut the prime was 5.0, again were headed in the wrong direction.  On August22 the libor was 2.70, on September 22 it was 3.70, today 4.75.  It is going up because risk is increasingly higher and higher. 

The prime rate is lower because the federal reserve cut target rate, and prime is defined as FFT+3.  With a new target of 1.5, we have prime at 4.5%. 

I dont care what anyone says on TV, or in papers, the federal reserve and the treasury have taken active and deliberate steps to put us in this situation.  By passing unconstitutional emergency laws (and simply breaking other laws) they have enabled some dozen or so bankrupted banks to continue to exist and place astronomical losses on our global financial system.   You know, when I was in the country last weekend I had a thought that struck me as funny; it was a clear chilly night and I could see thousands of stars in the sky.  I think from science that there are roughly 10^11(10 to the 11th power in scientific notation) power of stars, what was called an astronomical number.  That works out to 100 billion.  100billion doesn't sound so astronomical anymore.  Hell we have dumped more than that into the worlds economy in the past 7 days in an effort to cover fraud and losses. 

Sorry for the distraction, back to what I was saying.  The US is a very wealthy nation, were fairly resilient as well.  Other parts of the world are not, and it is to be expected that in a global problem, the weaker players would start feeling the effects sooner.  They did not have the luxury of 700billion to buy them time. 

Iceland is in dire economic situation, they are bankrupt, they have a destroyed currency.  It is likely that Denmark will follow suite rapidly as they had significant exposure to icelandic banks.  They also are the only country that did not join the coalition of the rate cutters instead raising 40 basis points to offset their own declining currency. 
As for Australia/Usd, that currency has devalued some 20% on 3 days.  From 0.77 to 0.645. 
The mexican peso, went from 11 to 13.65 recently, loosing some 20% as well. yesterday was the largest drop since 1994. (back when everyone made fun of the peso)
Brazils real is down some 29% from its August high.
I don't have numbers for Chile but have heard from a trusted source it is showing similar path. 

There are other stories of assorted violence and riots and such from around the globe, I'm just going to skip those here. 

These waves are crashing over our financial system right now.  Yes our stock market was down, it should be, trust me - stock market declines are really not that big of a deal in the bigger picture.  I am not concerned about stock losses as much as I am deeply concerned about the credit system and what a complete shutdown of it looks like.  I also am deeply scared of what the hyper inflationary effects of how we are keeping it alive now will look like. 

The fed released the H4.1, it shows some 100billion in new liabilities this week.  This in turn helped drive the longer term treasuries up.  (increased cost of government to fund itself). 
Another oddity in the H4.1, there's suddenly 8 billion more in circulation, during a time of deflationary pressure? 

The doozy is in the H3 tho.  better be sitting down for this one.
http://www.federalreserve.gov/releases/h3/Current/
It doubled from 150billion to 363 billion in a week.  This is the money borrowed from the banks from the fed. 
They have not updated the drawing yet, imagine that spike as twice as tall in this picture.
http://research.stlouisfed.org/fred2/series/BORROW?cid=122

I guess we already knew the banks were broke right?



I'll be honest, they may save the day and fix it somehow.  I dont see how, I do ok in math, I have a logical mind, but I dont see them on a path of any kind that can resolve this.  Let's all hope I'm wrong.


** edited to fix a few mistakes, and give update on H4.1 and H3. 

[peternap]

Your Right Muldoon. As usual.....

IMHO, credit is dead as we knew credit. The government will take it over...period.
I think all the Icelandic banks were taken over today.

Credit will also be rediscovered. Buy here, pay here car lots that have always pandered to people who couldn't get credit, are doing great.
Loan Sharks are doing great.
All the blood suckers are in good shape..........NEW CREDIT.

I think this is the meltdown I've predicted ad nauseam.
I don't know that the Country as such will survive it either.

There's money to be made now but whose currency do I want to stuff my mattress with.

I can't do anything about it and I am as prepared as I ever will be, so I'm going Bear hunting and let it run it's course.

[muldoon]

IMHO, credit is dead as we knew credit. The government will take it over...period.

I dont think were on the same page.  The government is the largest user of credit on the planet.  Without a credit system to buy their debt they are bankrupt.  Were broke as a nation. 

If credit is dead were likely looking at a new monetary system and new currency at best and maybe a new government at worst over the next few years. 

[John_C]

.....so I'm going Bear hunting

might I suggest Wall Street as a target rich environment.      

[peternap]

IMHO, credit is dead as we knew credit. The government will take it over...period.

I dont think were on the same page.  The government is the largest user of credit on the planet.  Without a credit system to buy their debt they are bankrupt.  Were broke as a nation. 

If credit is dead were likely looking at a new monetary system and new currency at best and maybe a new government at worst over the next few years. 

We're on the same page Muldoon. I'm just giving the Readers Digest Condensed version.

I think this is the meltdown I've predicted ad nauseam.
I don't know that the Country as such will survive it either.

There's money to be made now but whose currency do I want to stuff my mattress with.

[muldoon]

Hungary - on rumors that the largest bank was to be seized by the government (now being denied) the stock market crashed from 164000 to 15000 in 30 minutes.  The government bond market is at a standstill and their currency has fallen 5% against the euro (which is falling against others by itself).  Rumor now is that Hungary has defaulted on international debt, dont know how true that is and it is not official, but with no governent bond market that is the eventuality if not reality as of now.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3OJkiWRo3Lo
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a28g.iQsNy4c

ever played dominoes as a kid?

I'll admit I was wrong about not buying gold, looks like that would have been a damn good idea.   

[ScottA]

Forget the gold. Buy canned food and shotgun shells. And maybe a little voldka. I still say they did this on purpose. Look for the bargin shopping to begin soon.

[glenn kangiser]

New World Order - one world government --the one daddy Bush mentioned-- It's happening all over the world now. 

"The individual is handicapped by coming face-to-face with a conspiracy so monstrous he cannot believe it exists." J. Edgar Hoover

Does that make sense yet? hmm

http://www.youtube.com/watch?v=7a9Syi12RJo

[peternap]

Forget the gold. Buy canned food and shotgun shells. And maybe a little voldka. I still say they did this on purpose. Look for the bargin shopping to begin soon.

Actually Scott, while everyone should have an ample supply of ammunition on hand, it would be nearly impossible to have enough to last a long time (Like forever)

For those that don't reload, reloading equipment can be made without much trouble. The same goes for powder. Primers are another matter. I suggest buting bricks of small pistol and rifle primers, large pistol and rifle primers and shotgun primers.

A few thousand  or mote .22 Lr would fill it out.

[John Raabe]

Thanks Muldoon for explaining how the libor rates work. It explains the banking issues I posted on another thread here: http://countryplans.com/smf/index.php?topic=5374.msg68167#new