Sunday, Aug 26, 2007
Will the "Bernanke put" happen?
Telegraph: Should the Fed cut Rates? Should it Heck!
Global stock markets appeared eerily calm last week. In London, New York and elsewhere, share prices ended most trading sessions flat, if anything posting small gains. But don't be fooled. Under the surface, the markets remain extremely volatile. Reassuring closing prices mask alarming daily swings. Across the world, the fear of another big drop remains palpable as more and more evidence emerges that banks beyond the US are nursing serious sub-prime losses.
Posted by auntir @ 09:04 AM (972 views) Add Comment
16 Comments
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1. stillthinking said...
So in the expectation of a rate cut, the stocks are holding value because money will be getting cheaper so nobody wants to hold it anymore. Although an unrelated story I read and lost track of, is that the value of metal in nickels and dime (or the low value coins I can't remember the names) exceeds the cost of the coin. It is illegal to take large quantities out of the US. So actually the dollar is backed up by metal in a way, as long as you have a big enough bag for the coins.
However, if the problem assets are cdos with a real value of only 5% of market price, surely you would need to devalue the dollar in real terms to an equivalent to make them a good buy at the market price, and that is a leap too far. So Bernanke has unfortunately said he will intervene and everyone expects him to intervene. So there will be inflation in the US and the dollar will drop. So auntir is right in that everyone is waiting for a possible collapse and if that happens it will be before or shortly after Bernanke announcement in September if he doesn't lower rates. However, surely Bernanke can't control the long term rates either.
If this major drop/realignment is so inevitable, why are such learned people trying to delay when it happens. Surely earlier is better. Also, why would dealers wait at all, surely the best time to get out of dollars is right now. Or is it that basically there is nowhere for money to go anymore apart from shares and the fact that shares have held is because people are spending dollars on them as quick as possible. So Bernanke has the choice of inflation to devalue the currency or pension funds etc just losing money as in it disappears. Isn't it also possible that this a way to shield the general population from a sentiment change that would be self-fulfilling like Japan had. Personally I would get out of dollars and us companies which get profit in dollars. This isn't happening though.
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2. planning4acrash said...
You know, this is all rediculous. For years now people have been warning about the US deficit, about levels of debt, but everybody avoids it. Maybe the heart of the problem is that "democracy" particularly in America has become overly controlled by the vested interests. Because, if government acted for the populace as a whole, they would have acted long ago. But then again, America would also have free healthcare. The question I'm posing is this, is the financial fiasco the expression of a more fundamental political or social issue, if so, what could that be? Is it rot at the core of democracy? Or something else? OR, is this financial fiasco the result of a financial fiasco that can be solved in the long term by Bernake bailing us all out. I think the answer to this question must be somewhere in the history books of time!
3. Planning4acrash said...
I meant to say, OR is this financial fiasco the result of a technical error in financial policy, reporting, etc, that can,,
4. Alan said...
It's been said before, but regulation is needed. The investment grading system has surely let down the USA.
Dropping rates simply reduces risky-ness. It doesn't add any extra money to fill the liquidity gap caused by a whole nation spending money they don't have (and can't earn in the forseeable future).
So, over to the UK. If we had a really hard look at house prices, would we really pay the amounts of money the markets are now demanding? ( I'm not going to...) But, I suspect this nation will continue to be driven by the Vested Interests telling them to buy, trade up etc.
5. Retiredbanker` said...
Stillthinking:-
Not since 1982 when the copper content of US coins was very much reduced;excepting the nickel which still has a "melt" worth of approx.
25% more than its face value.
6. stillthinking said...
I think that one way or another the missing value is going to come from somewhere. The people do deserve it in a way. The average US saver must have noticed in the press that savings are on a negative real interest rate. For rich people, that means get your value out. For poor people as long as it isn't such a negative interest rate they can't be bothered, I suppose given the amount they lose it could be considered as a minor bank charge.
The whole thing comes down to lengthy delays as things go through the system in my opinion. If inflation was immediate and all prices, wages etc adjusted immediately, who would care? Nobody because it wouldn't make any difference. There is a considerable lag on all of these things and that is what is causing the difference. Also, the reason why studying economics is completely w*nk is because there are no fundamental issues to consider. We are waiting for two groups of people to decide based on what they want to happen, speculating in a way. Basically the big problem here is that the rich people (by rich people I mean anybody in credit, including poor people with pension plans paid into) are about lose money, or the genuine own nothing poor are going to lose money by their real wage going down even further.
I think that the genuine poor are going to lose out, for the UK this isn't even all that sad because of the expectations of the nanny state. Interest rates WILL NOT go up, and by go up I mean enough to make a difference not .25 or .75 percent. King and cronies will not make that decision, apart from the fact they are and have been naturally reluctant to raise interest rates in the past, now they are looking at a crisis which will be blamed on them they certainly won't (public sector mentality, always, always avoid responsibility or blame). So what will happen is that the value of sterling and the value of the dollar will sink together, and while they still have value they will still sink lower and lower. So the timespan on this is immense. I sometimes think that a house price crash won't in fact happen because the problems of affordability won't happen. If King fails to put up interest rates then we get inflation, prices go up and affordability takes a hit, so on its own merits either your money becomes insufficient to pay your mortgage -or- your sufficient stable money isn't enough for the mortgage, same effect both ways. However, over a billion people in China are supplying us with goods and they don't need anything back.
Until China says stuff this business as usual, and they are obviously leveraging their dominant position now, with veiled threats. They want the ability to make things like airplane wings (they can't), the semiconductor industry (they can't) and they are blocked by the US, which basically cannot stop them.
I mentioned this before ages ago, the idiot masters of ours never seemed to have travelled abroad. Other cultures have a different view. They don't want the money they want the power. Why would some Chinese guy high up in the party be interested in dollar/sterling wealth, the guy is a literal god where he is! Can Larry Ellison or Bill Gates say stuff it to the police. No. Their money isn't good for that. Power on the other hand is. The chinese have 4000 dollars for every man, woman and child in the US, but the average american has nothing apart from a legal obligation to work for it. Call that 4000 dollars,lets say, 16000 dollars for a married couple with two kids. !
So seems to me the only thing to do is to dump useless currencies while the going is still good. I remember, planning4acrash, you suggested waiting for the crunch in order to buy gold cheap, but gold is no good when everybody is broke, there was no rise in gold after the great depression because the paper money system wasn't abandoned, there was also no rise after 1990 in Japan. Gold is a long term bet on the collapse of the fiat paper money system and we are way way away from that because it takes a long time to whittle the value of 300 million US citizens to complete nothing. That depends on a crunch which as Bernanke has already said will never happen. If somebody says as head of the US financial system that they will drop dollars from a helicopter !!!!! Really I ask you, where can that possibly go.
Probably too many pints at lunchtime, sorry.
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7. stillthinking said...
Essentially I suppose I wanted to say that there is no way to preserve wealth because we are all deeply imbedded in an over-valued system, and switching assets from one thing to another won't change the fact that we don't actually make or grow any stuff. So my conclusion is that we all get poorer on average, no wiggling keep your toes in etc.
8. stillthinking said...
Actually there is one way, buy the yuan while it's value is heavily depressed politically.
OOPS!
I forgot, what a silly I am, we aren't allowed to buy yuan. What an amazing coincidence....
9. whiteknight said...
This "Fed Put" is precisely the problem.
The more they have bailed people out, the more reckless the behaviour. It is simple. Seems almost obvious. Yet they cannot resist this most obvious of errors.
10. uncle tom said...
Actually, you can buy the Yuan, but you need a suitcase, as the top denomination is only 100 - load up when you next go to China!
More seriously though, China has it's eyes wide open while the US is asleep - they want the US nicely over a barrel economically, so they can have a classic Olympics followed by an invasion of Taiwan without firing many shots. They know the yanks are in denial about the rise of China - they're not stupid!
Tom
11. Bloo Loo said...
House prices (real) will fall in one of two ways: either we get inflation of the pound, in which case, actual house prices will remain static, but wages will rise to meet them, or we, control inflation, and, because of the higher cost of borrowing to enable inflation control, actual house prices will fall to meet wages.
12. planning4acrash said...
Bloo Loo,,, Both eventualities could co-incide, indeed, high inflation is required to trigger the high interest rates that trigger a crash.
13. Game Over said...
The problem was caused by high levels of debt. By cutting interest rates debtors can now service their debts again.
The dollar and sterling WILL NOT fall!
The Chinese and Japanese are now fools. They need weak currencies to help thei export orientated economies. Plus they also make money from CDO's etc, provided the interest is low enough to stop the sheeple and banks in America and Britain from defaulting.
There is still plenty of money to be made from the re-inflated credit bubbles that exist in both the USA and Britain
14. Bloo Loo said...
P4C
indeed both eventualities would co-incide by natural forces, but I think we are at a point in time where the BoE must decide which path it is going to take. Its brief is to control inflation, but, in light of recent financial events occuring worldwide, and that there is likely to be an element of political behind the scenes involvement, then I think it is very dificult to call which way they will go. Being a bit cynical, I suspect they will go the route of cutting interest rates , therefore people wont see their house prices fall, but we will see inflation and this will be blamed on World wide factors". The last thing this government wants to see is a house price crash........I sincerely hope this is not the way they choose, because the crash, when it comes will be even more severe.
15. stillthinking said...
Maybe Game Over is right. If you owe the bank 100 pounds you have a problem, if you owe the bank a trillion pounds the bank has a problem. China currently manipulates currency exchanges, in 1971 the UK had currency controls with different exchange rates depending on which direction cash was going.
The US are already refusing to redeem dollars for certain 'security/vital' assets, so to introduce currency controls would not be such a far step. However, even a sniff of such a tactic coming would probably cause a major panic. Also the outside of the US world would see dollar dumping. Hopefully the personal amount they let you take in will be sufficient for a new laptop etc.
I agree that the UK government will accept inflation, possibly old Mervyn will have to step down as I think he is inclined to follow his basic remit, he has already voted for more interest rate rises than have happened and watching his speech on tv on the effectiveness of the BoE, "If the raise went to 50% would the world notice it, hmmph.." was either bluff or a genuine warning.
However, I don't see how inflation helps the indebted house buyer, as either they pay more on their mortgage and have cheap food, or they pay less on their mortgage and have expensive food. One way or another their outgoings are going to be the same. With slow wage growth maybe no good anyway.
16. Jojo said...
Hi Guys
Has anybody seen the google video, Money Masters? Our total economy is calculatingly controlled by the PRIVATELYowned banks so whatever we may think is logcal can be overturned by their actions by a flick of their little finger.
We should be guessing their next move to stay ahead of the game.