What will the Fed do ?

I feel certain they will not raise.

Goofer:

I also agree we'll see an easing of 25bps in the Fed Funds rate. They need to do something as growth is slowing. Not sure a 25bp cut in rates will do much for cash-strapped homeowners, but it would be a step in the right direction.

Little Fish

It would be nice to see another 1/2 point

I don't think it matters at this point.

Picture the US markets & economy as a Crack-addicted Monkey furiously slamming away at the Fed Lever for just another 1/4 point hit...and another...and another...and another.

The longer the Fed supplies the Crack...the bigger the mess we'll face in the end.

Will Ben give the monkey its fix--yes.
How big will the fix be? 1/4 point.

Will the fix help the housing market ? Will it ease the credit crunch ? Will it help those folks in jeopardy of losing their properties ? No, no and no.



GIVE US ANOTHER RATE CUT BEN!!




.

Picture the US markets & economy as a Crack-addicted Monkey furiously slamming away at the Fed Lever for just another 1/4 point hit...and another...and another...and another.

The longer the Fed supplies the Crack...the bigger the mess we'll face in the end.

Will Ben give the monkey its fix--yes.
How big will the fix be? 1/4 point.

Will the fix help the housing market ? Will it ease the credit crunch ? Will it help those folks in jeopardy of losing their properties ? No, no and no.



GIVE US ANOTHER RATE CUT BEN!!




.

....And let's not even mention the dollar!!
Just when I want to leave the country....damn.

Where ya goin'?

Will the fix help the housing market ? Will it ease the credit crunch ? Will it help those folks in jeopardy of losing their properties ? No, no and no.

Seems to me like the falling dollar will fall even farther with a rate cut which means the price of oil will rise even higher which would not help the credit crunch or the housing market or much of anything but what do I know?

Sounds like you know some good common sense.

Not Dead Yet:

You forgot to mention... The falling dollar will help our trade deficit, as exports appear more attractive to foreign consumers, while imports appear less attractive to US consumers.

Little Fish

The belief that Fed hikes strengthen the dollar is outdated and Keynesian (a bad word in economic circles). Supply siders such as John Tamny have been saying this for a while, and while many understand the Laffer Curve as it pertains to tax revenue, they miss when it comes to Fed policy. Here is one excerpt:

The dollar lost 67 percent versus gold between 1972 and 1975, despite the fact that the Fed hiked rates from 3.5 percent to 13 percent in that period. When the Fed reversed course in 1975, lowering its rate target from 13 to 4.75 percent, gold actually fell 23 percent. When the Fed raised the funds rate all the way to 14 percent in 1980, rather than strengthen, the dollar fell, driving the price of gold from $150 an ounce to an all-time-high of $892.

Just as tax increases don?t always yield commensurate revenue increases due to a downward shift in economic activity, interest-rate hikes frequently fail to enhance dollar demand. In historical terms, rate increases have rarely constituted ?tightening? when it comes to restoring the greenback?s value.

A case in point came at the tail end of Alan Greenspan?s tenure as Fed chairman. Greenspan is frequently blamed for keeping the fed funds rate too low for too long, in such a way that the dollar lost value. But the dollar price of an ounce of gold tells an entirely different story. Gold hovered in the high $300s while Greenspan held the fed funds rate at 1 percent between July of 2003 and June of 2004.Gold only began to rise once the Fed began raising rates that June. After 425 basis points of rate increases, gold has risen nearly 70 percent.

Targeting higher interest rates to combat inflation is very much a Keynesian concept whereby central banks seek to reduce economic activity as well as prices. Contrary to current Fed objectives, the surest way to decrease dollar demand and ultimately cause a net excess of dollar liquidity that would spark new inflationary pressures would be to target the economy for slower growth with higher interest rates.

http://www.reuters.com/article/ousiv/idUSN2634837420071026 go big, Ben

I'm with Shelly on this one. While it may temporarily help some (maybe even me), it's more of an attempt to boost morale. Ben can say he stepped in as he's stepping out.

keep rates where they are because???

If Ben does cut by 50 bps and the stock market jumps 200 -300 points, I plan to completely hedge my entire portfolio by buying S&P puts. I never thought this subprime and derivative mess would be as insidious as it has become. It has permeated every facet of the financial system throughout the world. And don't even mention the housing and related industries that have been affected. I think Julian Robertson is right that we face a doosey of a recession. The only thing that will cure the system and end the growling grizzly is a massive liquidation of spec homes, spec lot holders, and massive writedowns to the tune of hundreds of BILLIONS of dollars of worthless loans and exotic securities that are being carried on AND off the books. It will be very painful for many households but that is the only way a bear mkt ends... MASSIVE LIQUIDATION. I think even if the FED cuts by 50 bps, it would be like pushing on a string. Temporary relief rally in the markets but not much to cure the underlying disease. But of course the Pols won't let any of that happen in a big election year. My hats off to the many of you that were issuing warnings two years ago.

If Ben does cut by 50 bps and the stock market jumps 200 -300 points, I plan to completely hedge my entire portfolio by buying S&P puts. I never thought this subprime and derivative mess would be as insidious as it has become. It has permeated every facet of the financial system throughout the world. And don't even mention the housing and related industries that have been affected. I think Julian Robertson is right that we face a doosey of a recession. The only thing that will cure the system and end the growling grizzly is a massive liquidation of spec homes, spec lot holders, and massive writedowns to the tune of hundreds of BILLIONS of dollars of worthless loans and exotic securities that are being carried on AND off the books. It will be very painful for many households but that is the only way a bear mkt ends... MASSIVE LIQUIDATION. I think even if the FED cuts by 50 bps, it would be like pushing on a string. Temporary relief rally in the markets but not much to cure the underlying disease. But of course the Pols won't let any of that happen in a big election year. My hats off to the many of you that were issuing warnings two years ago.

Goofer,
I am probably stating or rather asking the obvious to those of you who know so much more than I about finances - but massive liquidations paid by whom? The federal government? And who will decide who qualifies for the writedowns?

Goofer,
I am probably stating or rather asking the obvious to those of you who know so much more than I about finances - but massive liquidations paid by whom? The federal government? And who will decide who qualifies for the writedowns?

I'm not goofer, and I don't agree with a lot of what he posted (sounds like the short posters on yahoo), but the liquidation is by the owner of RE, stocks, etc. paid for by the owners. Writedowns are determined by the financier, and isn't necessarily based on who does or does not qualify for one. For instance, if you owned a lot in Watercolor that you bought in 2005, Countrywide may write down $300,000 based on the fact that they don't believe they'll be able to recover the full amount of the note. They could also downgrade the loan and hold more in reserve to offset future losses, but 9/10 times you'd have no idea. You would still owe them the full amount of the note, but they would rather recognize the loss now to offset other gains, or for many other reasons. As for discounting the note, that's a whole different question and not easily answered in a post here.

Goofer,
I am probably stating or rather asking the obvious to those of you who know so much more than I about finances - but massive liquidations paid by whom? The federal government? And who will decide who qualifies for the writedowns?

That is exactly the right question. If confidence is shattered there will be no market for liquidation of any sort, much less "massive". Confidence is what the world runs on. Without a belief in value on both sides a trade will not happen, and trading is most of what we humans do. Much of the current mess has come from the "mark to model" method of valuing "assets". When I fantasize that my house is worth $1.2m I am "marking to model" when I go to sell it then it is "marked to market". Nobody is giving me $1.2m for my house right now and I may be forced to re-examine my delusions as to my net worth and fess up to everyone I know. Maybe marking to market would get me half of the mark to model amount and that isn't good enough because I used the model price to borrow lots of money. Anyway I'm getting away from the topic and my brain is hurting.

What I mean by massive liquidations is that, as an example, all of the property that is for sale all along 30-A by speculators that got in over their heads......all those properties will have to be sold to pay off the loans and drastically reduce all the inventory that is over hanging the mkt. Now those properties will be sold at a huge loss to the owners as well as a big loss to the banks that loaned them the money. The property owners owe more on their loans than their property is worth. The banks get to take the loss as well as write down the value of other loans that are non performing in their portfolios ( they do the latter by increasing their loan loss requirements ). Hedge funds, pension funds, banks, brokeragage firms, mutual funds etc that invested in mortgages that were securitized will need to write down the value of those securities because no one knows how to properly value them. By doing that, they will realize hundreds of billions of dollars in losses. Now you say WHY DO THIS. The answer is that our system runs on CONFIDENCE. By marking down securities to their proper value, and cleaning up the entire mess, confidence will be restored. There are going to be alot of dead carcasses on the side of the road but that is how capitalism works. There will be alot of investors that are going to get some great bargains by other people's troubles. The same thing happened in the 1980's with the RTC and the savings and loan fiasco predicated on real estate speculation. That is how our system works....the excesses are squeezed out and the party starts all over again but from a lower value. The MARKET will cure the problem not the govt....at least that is how it should work.

As for discounting the note, that's a whole different question and not easily answered in a post here.

They can just dump it in the "Superfund" will all the other bubble-era toxic waste and go on with business as usual. Next!


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Goofer,
I am probably stating or rather asking the obvious to those of you who know so much more than I about finances - but massive liquidations paid by whom? The federal government? And who will decide who qualifies for the writedowns?

Maybe the taxpayers if Mr Paulson has his way:


"Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans.

The Times has learnt that Mr Paulson is lobbying President Bush to provide funds so that mortgage lenders can reduce the loss that they would incur from either reducing the rate of an adjustable home loan or extending the life of the mortgage to make it cheaper for the property owner.

It is understood that Mr Paulson?s proposals are meeting significant resistance within Washington, where it is perceived that such a move would be a bank bail-out scheme."

T Much of the current mess has come from the "mark to model" method of valuing "assets".

i agree with this for the most part - trouble is: how do value something that is not very liquid? such as many of the instruments that are heading way south these days. you have no option other than mark to model - they are illiquid instruments (i.e. their is no readily accessible market to sell these assets)

presumably these instruments and their valuation models are based on some expected future cash flows versus the financial instrument's unsystematic risk - so, in theory that is pretty simply to value.

so now lets assume that delinquency rates on subprime mortgages suddenly go up & you as a CDO investor are highly leveraged & your business model is essentially buying CDOs with s-t borrowing and making money from the yield spread. now all of sudden since delinquencies have risen your lender is not so happy with your CDO as collateral for the s-t borrowing your accustomed to getting in the commercial paper market. & you were accustomed to using these s-t borrowings to not only fund existing debt you own but to buy more CDOs (& gain more revenues via the yield spread). so now your cash flow stream has diminished & your banker wants some of his money back - so where do you come up with cash? you are forced to liquidate assets to repay your indebtedness. concurrently your buddies you play golf with are doing the same thing & consequently their is a heck of a lot of CDOs available for purchase & since all pricing decisions are essentially based on supply & demand a dramatic increase in supply suggests price must go down. the increase in supply & the perceived increase in risk have in this case caused the asset prices to go way down.

consequently the valuation models have failed - they become irrelevant in the short-term b/c after all something is only worth what another individual will pay.

however, i would presume that everyone is pretty confident in the U.S. economy over the mid to long-term & in the longer-term (say 5 years) these models will again be closer to an accurate valuation.

so, i give this schpill only to say that these models cannot deal with s-t market disruptions like we have today (they don't deal well with uncertainty) - when mortgage delinquencies get back to a more reasonable level then the models will again prevail.

truth be told...if you can build a better mousetrap (in this case the model) you will be poised to make a ton of money in the near future...this whole mess has fasb, the fed, aicpa, treasury, etc. looking at how to value assets - will be a very interesting future!!

i agree with this for the most part - trouble is: how do value something that is not very liquid? such as many of the instruments that are heading way south these days. you have no option other than mark to model - they are illiquid instruments (i.e. their is no readily accessible market to sell these assets)

presumably these instruments and their valuation models are based on some expected future cash flows versus the financial instrument's unsystematic risk - so, in theory that is pretty simply to value.

so now lets assume that delinquency rates on subprime mortgages suddenly go up & you as a CDO investor are highly leveraged & your business model is essentially buying CDOs with s-t borrowing and making money from the yield spread. now all of sudden since delinquencies have risen your lender is not so happy with your CDO as collateral for the s-t borrowing your accustomed to getting in the commercial paper market. & you were accustomed to using these s-t borrowings to not only fund existing debt you own but to buy more CDOs (& gain more revenues via the yield spread). so now your cash flow stream has diminished & your banker wants some of his money back - so where do you come up with cash? you are forced to liquidate assets to repay your indebtedness. concurrently your buddies you play golf with are doing the same thing & consequently their is a heck of a lot of CDOs available for purchase & since all pricing decisions are essentially based on supply & demand a dramatic increase in supply suggests price must go down. the increase in supply & the perceived increase in risk have in this case caused the asset prices to go way down.

consequently the valuation models have failed - they become irrelevant in the short-term b/c after all something is only worth what another individual will pay.

however, i would presume that everyone is pretty confident in the U.S. economy over the mid to long-term & in the longer-term (say 5 years) these models will again be closer to an accurate valuation.

so, i give this schpill only to say that these models cannot deal with s-t market disruptions like we have today (they don't deal well with uncertainty) - when mortgage delinquencies get back to a more reasonable level then the models will again prevail.

truth be told...if you can build a better mousetrap (in this case the model) you will be poised to make a ton of money in the near future...this whole mess has fasb, the fed, aicpa, treasury, etc. looking at how to value assets - will be a very interesting future!!

the models will be correct because the subprime ARMs will be not be offered

The British explain the US subprime/SIV markets:


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Dude said; "trouble is: how do value something that is not very liquid?"

This is exactly why it will get worse before it gets better. When Merrill and other institutions recently wrote down the value of their securitized portfolios, they did so by estimating what they thought the market value could be at that time. Problem is... they have no way of knowing whether or not they were even close to projecting accurate estimates of value. Why is this? This is because no one is purchasing these portfolios. There is no market for these securities. Hedge fund managers are all playing the "wait and see" game. No manager wants to be the first one to offer 70 cents on the dollar, when the market may really turn out to be 50 cents. This is probably why we won't see the real extent of losses on FI's until the first quarter of next year.

There will be money to be made on the purchase of these portfolios. You can bet Hedge fund managers are interested in this market, but they won't step up until they have a greater sense on confidence in pricing. They need a little more information and then... one by one they'll be stepping up to the plate and bidding on these assets. Then we'll know the true extent of the losses in the market.

Little Fish