This was posted on the Prudent Bear page September 5, 2007. It references the liquidity problems at the time and what are still present today
SuperCycleBear posted this on the previous page. It pretty much cuts to the chase. I'm going to write some of my own below.
I posted this earlier today. Now the author has been identified, I post it again for the benefit of the board...
Two weeks away and little seems to have changed. Equities, commodities
and credit are slightly better and bond yields are little changed,
along with FX. The only change of note is short term interest rates as
the money market crisis that I wrote about three weeks ago persists.
Three month libor continues to rise. Yesterday it fixed 99 basis
points over the repo in GBP, almost 75bp over in euro and today
expectations are that 3 month dollars will fix at 5.69%, a level more
synonymous with Fed Funds at 5 1/2 percent.
So far other markets have treated these developments with a remarkable
degree of insouciance. Indeed they seemed to have completely ignored
the deteriorating situation. I can't help believing that this casual
approach is a mistake and largely due to the widespread ignorance of
many financial market participants about the functioning of money
markets, yet ultimately everything comes down to money and it's
availability. And that is the point about what is going on now.
There is a credit crunch going on. Believe it. It just has taken on a
different guise to previous forms. It's not a run on banks but on
non-banks, institutions that have become quasi-banking operations but
lack the capital and depth to ride the storm. The sheer size of the
positions of many of those entities (I can't bring myself to call them
businesses) is staggering. Tiny XYZ bank suddenly has a $20bn dollar
exposure along with numerous "conduit" vehicles and then there are the
SIV lites and the various hedge fund CP based mutants. In short things
are a mess and unless central banks start to properly recognise the
dangers, the situation could reach critical.
This may sound overly dramatic but the risk of a significant failure
is building and LTCM may come to be regarded as a walk in the park.
The problem is of course is that central banks don't seem to recognise
the dangers. Equities et al are not flashing red and the current
situation is unprecedented in recent financial history. Just look at
the chart of 3 month libor versus base rates over the past twenty
years. The spread has occasionally been as wide but this was back in
the late eighties when rates were moving dramatically higher and
interest rates moved in 1 percent steps. The reality is that central
banks don't know how to do to deal with the current situation within
the confines of their existing rule books. [[UK CREDIT CRUNCH.gif]
Fixed rate term repo is an obvious solution, but that doesn't itself
address the problem of financing all the rubbish out there. Ultimately
that will mean a continued liquidity unwind which will inevitably act
on risk asset valuations and economic activity. Rate cuts are
inevitable against this background and the Fed should move by a
minimum of 50 basis points on September 18th and another 50bp on
October 31st. The danger is of that even such aggressive action may
come to be seen as merely pushing on a string.
European Derivatives & Bond Trading
RE: Post from previous page mannfm11
NEW 9/5/2007 12:09:46 AM
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I think some of you recognize this and others don't. By this, I mean the reasoning in this post. It is something the doom sayers have been talking about for awhile, but the CNBCers seem to fail to report except maybe in a one liner from time to time.
The problem here is the whole paper game is tied together in the hands of operations that act like they are banks. They are leveraging capital rather than lending it. Thus bonds and other capital instruments are now nothing more than credit of some sort, maybe from a repo agreement where the differential in interest rates is utilized. The yen carry trade,contrary to much talk is going to go on until the Japanese raise their rates or the entities carrying on the trade lose their net worth in their speculative lending. This is all a credit game, but it appears tobe a capital game.
The problem here is the same capital is leveraged over and over again, the dollars recycled, borrowed and re-loaned. You can't borrow capital and re-loan it like that, you just can't unless you are an insurance company or a pension. I suspect that the collateral behind this entire mess is STOCKS. This is where liquidity is easiest to find. It explains all this crap and how wild the stock market can get out of the blue. I remember the LTCM market because I traded it. I think it had some of the wildest 20 minute swings in history, but I don't recall the sands of the market shifting like this market. I watched the bug roll on CNBC and when it would leave and come back, it had 20 points quite often, stopped and went back 10 to 15 by the time it rolled again. I'm talking about maybe 10second intervals. This is a shaky animal out there and the bull are out of their minds playing in a game where the liquidity of the players can collapse over night.
This is our credit machine that has been feeding the worlds appetite for credit cards, capital and infrastructure expansion in China and India and Eastern Europe, Housing booms all over the world. It isn't our fathers credit machine, to coina Chevrolet phrase. This is something from outer space and it is hidden. We missed the last credit crunch, the Enron and WCOM debacles because they were covered up by 9/11. In fact, I think it is a good conspiracy to explain 9/11 by these 2 huge failures. Enron has positions that made LTCM look like a couple of kids playing bank intheir back yard. How did they get all that unwound? How many of these SIV and SIV lites are there? They sound kind of like the double books that ENE ran with the help of the banks involved, JPM, C and I believe Bank of America. How much more of this double dealing is hidden in the depths of places like the Caymans?
This is debt and there isn't a market for it. There isn't a market for it because the funds to create it in the first place were created out of thin air, but not out of the printing press or the banking business. They were created by pretending. Selling the same securities over and over again with apromise to buy them back, a short sale backed by the ability to mark tomarket.
There is always a problem with this type of debt. For one, the repayment with interest is impossible. We aren't talking about rent on capital. The money has to come from somewhere and my pea brainat this time can only guess how this stuff is really structured. But,if I owned $1 billion in stock, something tells me that not only could I write all this credit against it, much larger than the margin on stock, but that maybe I could also do some delta neutral stuff, maybeby contract.
The point is there isn't any way to liquidate this stuff and it has to be liquid to some point to move. There was another post on here about the banks just holding what they have untilit gets right again. Well, it isn't getting right again and the banks are the only entities that can create the liquidity to hold the stuff.Look at the huge decline in money supply that could be tied merely tothe mortgage market shutting down? CFC has something like $80 billionby themselves. That is hard money. Plus the operations that have been clearing their books of this warehouse debt are now in deep freeze.
The Fed isn't going to solve this mess. I think what this guy is saying is that LTCM is small potatoes compared to this and that the central bankers need to get busy pulling these failing entities out of the fire long enough to stop them from seizing up the system. The credit system has reached its peak performance and has thrown a rod. I seriously doubt once the top comes off this mess that it is going to be allowed to operate in this fashion again. The result will be that never again in our lives will we see credit availability as it has been the past decade.
RE: debt escalation withering simeon
NEW 9/5/2007 2:25:43 AM
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problem is that the debt based system MUST expand or die. It is now dying due to its not being able to expand. That is not a joke of logic. The system must increase indebtedness or else even a flat lining of debtwill cause the system to eat itself due to the interest repayment problem. That is, interest has to be paid but the only way it can bepaid is by borrowing it (idrectly or otherwise), which means an overall increase in total indebtedness.
RE: debt escalation withering mannfm11
NEW 9/5/2007 9:55:13 AM
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It has always been a debt based system. Only the collateral and where it is kept has changed.