Thursday, August 16, 2007

$1,000,000.00 question

Fedspeak: "If I seem unduly clear to you, you must have misunderstood what I said."

Interesting conversation started today at my "day time hangout place" - TradeGuild Blog.
Below are few "cut/paste" from TradeGuild's Tagboard

( what started that conversation? I was looking at S&P chart and somehow it looked awfully familiar, gradually I come to realize that I saw similar chart before, I scrolled back and ... yes, summer of 1998 )

Start of quoted text
there is bad and some good of been old :) here is a link to what seems to be today's events, but it is dated 1998, PLEASE DO READ

Neo - I never watch CNBC :) BTW - it is funny that I just compared s&p to 1998 summer and all in a sudden talks about carry trade dollar/yen at the level of 1998

17/08/2007 01:02:26
David - Re: 1998, you may be right but as i understand it the reason the economy etc took off after that was the fed slashed rates, which contributed to the ever growing bubble that popped in 200/2001. The drastic lowering of rates that followed are what led to the current credit bubble, first in home buying, and also in leveraged buyouts. The question i have is, will the fed allow this bubble to grow even bigger by slashing rates again? Also, will emerging markets with surpluses continue to fund our deficit with such low interest rates as we have experienced currently? Otherwise longterm rates have to drastically increase to get enough people to buy T-Bonds

Sinsecato - you are asking really complex question, answer will require bigger surface than this tagboard and better economic knowledge than I have, I will try to put a post together tonight, one thing I do want to say - FEDs primary objective as we know is to fight inflation, but not at expense of collapsing stocks market and getting economy into recession. I agree that FEDs caused housing/credit bubble on the first place ( ) see my post as of Aug 3rd.. Well, I really need a bigger "notepad"
end of quoted text

As I truly admitted above my economic knowledge is on 101 level, I am not pretending that I know it all, just trying to use "common sense"

Q. will emerging markets with surpluses continue to fund our deficit with such low interest rates as we have experienced currently? Otherwise longterm rates have to drastically increase to get enough people to buy T-Bonds

A. "Emerging markets" ARE full of surprises, FEDs are aware of that better than a lot of average Joes, FEDs do know how corrupt and unregulated economies of emerging markets are and I truly do not believe that FEDs place their bets on that type of "solution" for American monetary system, not long term at least. Plus, I do hope that Japan's example 20 years ago taught them ( government ) a good lesson - you cannot rely with well been of US economy on anyone's else economy, but US.

Above is my "political" uneducated speculation, below is what Chairman Ben have said about China:
"Beijing couldn't damage the U.S. economy by selling bonds or boycotting Treasury auctions because "foreign holdings of U.S. Treasury securities represent only a small part of total U.S. credit-market debt outstanding."
Bernanke also said that the Fed could adjust interest rates."

So, if not foreign countries, then WHO will be "US bankers"?
With recent market turmoil "paper" (stocks) lost a lot of "buying power", so corporations will have to use cash where they would normally do a "stock deal" - will buying T-bills be their first priority?

Can government keep US economy stable without cutting rates? Even at the risk of sliding into recession? And I believe FEDs became very well aware of such possibility back in 2006 - they ARE economists, they do know that "inverse yield curve is followed by recession in about 12 months"

So far I believe new chairman has done remarkable job of keeping inflation in check ( Inflation as on the "big picture" level, not on Average Joe's level - Joe's level inflation stinks BIG TIME), economy is doing quite all right as well, and since FEDs understand that WAR cannot go on forever, they do care about "other than defense" economy. Are they?

Was "credit bubble" a target of FEDs? I guess - FEDs would not care less...
That was a normal event in free economy - buyers, flippers, mortgage companies, banks took their chances - some made money - the rest will and SHOULD be crashed ( how funny was the entire show - borrow the money knowing that it cannot be repaid, lend the money knowing that there is no way of getting it back. Puffffffff........)

People will suffer? Well, I have a friend who is smart, he was unable to justify paying 300% of the real price of the house he liked, so he RENTED apartment and patiently waited - who is laughing now?

One more thing - and no matter how paranoid it might sound:
No ruling party will end its term with economy in ruins - if they do, they can kiss presidency goodbye - "long time". Especially with wonderful approval rating Bush has even among republicans. ( At least Clinton's "escapades" were entertaining for general public )

Will FEDs sacrifice their integrity for political interests? My friend BT from TradeGuild said: "No way. He even called prior Chairman a person with "sterling" reputation and expressed firm belief that carefully selected follower (Ben Bernanke) will acquire the same kind of reputation and respect Chairman Greenspan had.

Cool with me. I just loosing my mind, I hear voices, I hear someone saying: "US economy is sound and stable, market does not exhibit any signs of weakness" - RIGHT BEFORE THE REALLY BIG CRASH of 1987.

Greenspan -- The Chairman...through the years