 USFED
Behind the Curve
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Nov 29, 2007
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smallcap companies positioned to rise during the ongoing panicky
attempt to sustain an unsustainable system burdened by numerous
imbalances aggravated by global village forces. An historically
unprecedented mess has been created by compromised central bankers
and inept economic advisors, whose interference has irreversibly
altered and damaged the world financial system. Analysis features
Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics
with the US Economy and US Federal Reserve monetary policy.
The US Federal Reserve is behind
the curve. Great consequences have resulted and are likely to
continue to result. Many words can be used to describe this group.
What come to mind are inept, compromised, corrupted, distracted,
ill-trained, but also clueless, deceptive, myopic, overly cautious,
and off the market in their focus. When they remain transfixed
on economic growth versus price inflation, they are stuck in
the past, in a world that no longer exists. The corrupt spew
of fraudulent mortgage bonds disseminated throughout the investment
community has both crippled the banking system from profound
distrust, and inhibited the USEconomy from credit supply fraught
with obstacles. With their irresponsibly slow reaction to significant
threats to the entire economic and financial system, the hapless
USFed has put several things at grave risk. Since mid-September,
the USFed has cut the official rate twice by a total of 75 basis
points (0.75%), and reduced the discount rate. These are minor
steps. More important to the matter is the flimsy net aggregate
action taken by them to provide desperately needed liquidity.
Since many USFed official actions are merely temporary lending
actions, withdrawn soon, whether overnight or for a full week,
they can actually take away all medicine very soon after delivering
it. In fact, John Hussman points out that the USFed on a net
basis has injected only $15 billion into the banking system since
March, a tiny sum given the $12 trillion size of that system.
The USFed is dithering. The longer they dither, the bigger the
gold response will be to the Final Solution, sure to center on
a powerful gigantic Resolution Trust Corp, bigger than the previous
one in 1991.
The banking system is burning,
but the USFed firemen are still focused on the hustle & bustle
of activity scurrying about the business centers surrounding
the structure in flames. The misdirected firemen are still focused
on the horrendously doctored price inflation figures. They seem
more interested in denying the slowdown with powerful momentum
in the USEconomy, replete with exaggerations to hide its current
recession, than to address the problem in ways it can. They seem
more interested in the boomerang effect of price inflation stemming
from a weak USDollar, replete with laughable exclusions, substitutions,
omissions, all useful to hide its current rampage in prices,
than to address the problem in ways it can. The USFed is suffering
from a credibility problem. They are the object of rather harsh
but deserved criticism, for being slow to address the situation
effectively, and for ignoring the real problem. When the core
of the banking system exhibits deep distrust from the cancerous
toxins floating about, and cannot trust the lousy quality in
financial collateral, the USFed must react to fix it. Unless
and until the USFed removes toxins in grandiose style, the problem
will persist. The remedy must be as grand as the problem. The
medicine must match the sickness. Powerful medicine is coming,
which will ensure bigger rate cuts and bigger USDollar damage,
the next impetus to power gold upward toward 1000 !!!
These guys are clowns, who
are matched by greater clowns on the White House Council of Economic
Advisors. They spend far more time lying about the economic condition,
defending falsified perspectives, than they do in putting in
place effective remedy, even for a burning building. Good riddance
Al Hubbard. You are perhaps dumber than a run-of-the-mill 'C'
student in a secondary school, and that aint saying much. Your
public comments have sounded more obtuse, clueless, and promotional
than a toothless obnoxious loud barking pimp standing in front
of a brothel to promote an aging unattractive inventory. Hubbard
epitomizes the stupidity, blandness, and mental vacancy that
dominates economic policymaking. Is mental wattage no longer
important in such crucial posts? John Snow established a pattern
when his empty headed parroted commentary used to dominate the
Dept of Treasury. Paulson has caught the Snow disease. Hubbard
sees a housing problem, sees a mortgage bond problem, lies about
job growth, but points blame to Congress for inaction while bipartisan
bickering has rendered that once august institution useless.
The whole world is watching, and the Untied States look like
an embarrassment in stewardship. When not warranting shame from
ineptitude, they provoke shame from corruption. As the world
reacts with disdain for the stewards aboard the USShip of State,
they sell the USDollar and purchase gold.
The USEconomy had relied upon
the housing boom as its perverse foundation for over three years,
even endorsed by that monetary drug dealer Alan Greenspan. What
did we once hear? A sophisticated economy was led by the financial
sector, which benefited from financial engineering to reduce
risk? A clean economy free of smokestack industry? An economy
set to advance from a lower cost structure after massive unprecedented
outsourcing to Asia? An economy well supplied by reliable foreign
sources of credit, their hard earned savings? Import dependence,
including capital, is not an issue since trade partners are all
our friends? Well, the harsh news is that the housing boom is
a bust. An economy cannot rely upon asset inflation. What a heretical
concept! The main products from the financial sector are fraud,
mispricing, leverage, and backfires, resulting in toxin and seizure,
with a guarantee to unwind in seeming endless fashion as mutual
distrust seethes. Wall Street favorite sons poisoned our credit
suppliers. What a suicidal concept! The lack of income growth
stems from jobs being shipped outside the country. Prosperity
does not come from jobs sent overseas. What a moronic concept!
A nation run by aggressive leaders with little concern over fiscal
discipline, foreign resources, treaties, with a strong stick
used in financial inter-relationships cannot expect heavy handed
actions to go without retaliation. Stability, cooperation, and
progress cannot come from intentional designed chronic import
dependence. What a ludicrous concept!
LIBOR REJECTION
Perhaps the single
most important global short-term interest rate is the LIBOR.
The London InterBank Overnight Rate is used for supply of credit
to adjustable mortgages, even in the United States. The LIBOR
is used to supply credit to hedge funds, those villainous agents
for speculation, who once were praised by Greenspan for assisting
in offloaded risk. The LIBOR is used to supply credit for vast
supply of credit derivatives, that mountain acting as a rooftop
to cap prices for an assortment of things like long-term rates
and gold. The LIBOR is used to supply credit for a vast hoard
of credit spread positions, which play USTreasurys against more
risk laden securities like mortgage bonds and corporate bonds.
The LIBOR has taken center stage in recent months, perhaps as
a signal that London has superceded New York City itself. NYCity
has clearly taken the mantle of the Financial Fraud capital of
the world. London has eclipsed it in size and importance. LIBOR
is its baby, not new by any means, but new in recognition across
the Atlantic Ocean.
In the last two months, LIBOR
has taken center stage. As corporate paper for interbank loans
has shrunk massively in the United States, the source of LIBOR
for interbank lending has become crucial. With higher demand
comes a higher rate. However, a more important factor has made
itself evident. The LIBOR rate has rejected the USFed solution
to date so far. It has delivered a powerful 'Vote of No Confidence'
to the USFed itself and US bank sector. That vote loudly states
that the USFed has not put in place any solution at all. The
net $15 billion in system liquidity increase is woefully inadequate
when banks distrust the collateral put up by other banks and
major borrowers. The LIBOR 3-month rate has moved with an independent
mind to the USTreasury short-term bond yields.
When the USTBill 3-month yield
went from late August at 4.4% to late October at 3.95% to late
November here at 3.08%, a firm trend was set. The 3-month TBill
yield has fallen by a total of 1.38% since August. The LIBOR
has not followed suit. Its 3-month interbank rate has moved from
late August at 5.51% to late October at 4.98% to late November
here back to 5.08%, in defiance. Its total move has been down
by only 43 basis points. Above is shown the LIBOR one-month daily
moves, which parallel the moves in the 3-month.
What does this mean? THAT THE
USFED WILL CUT THE BENCHMARK INTEREST RATE AGAIN, BECAUSE THE
US CENTRAL BANKERS HAVE NOT SOLVED ANYTHING. The USFed has
failed to alleviate any credit problems, evident in actual credit
flow. The credit markets continue to turn to London for the
starved credit. One can make a credible argument that the USFed
has taken its cue from S&P stock market droops. In August
the credit problems, the banking fraud issues, the huge portfolio
losses were all evident. In August the S&P500 stock index
fell down sharply. The droopy swoon must have motivated the USFed
to make their first official rate cuts. Now with the S&P
stock index once more drooping badly, instability in the stock
market seems once more to motivate USFed Governor designee to
make public pronouncements. The Dow Jones index move up by
over 300 points on Wednesday highlights both the effective response
of the Fed Governor Kohn commentary made in the morning, and
the motivation for making such comments. He spoke to the stock
market. The USTreasury Bond market is well managed, as in manipulated,
so as to support stocks. Despite foreign flight out of USTBonds,
despite revolt by foreign central banks and their sovereign wealth
funds, a phony 'Flight to Quality' has been engineered. JPMorgan
can take a bow for that project, using yet another small mountain
of credit derivatives. In fact, the JPMorgan share of 2Q2007
credit derivative growth is larger than the entire market! Federal
regulators are asleep at the wheel, which is to be expected when
they not just are the federale's pockets, they are the federale's
working agents.
Bear in mind that the Kohn
comments, keeping the door wide open on additional official rate
cuts, came the same day that US existing housing data was released
from October activity. The housing market is nowhere near stability,
or even leveling off. Existing home sales have fallen by 20.7%
from October 2006 to October 20007. Well, that assumes no cancellations,
so the decline is worse. The existing home inventory lifted by
1.9% to 10.8 months of supply. The national nightmare continues.
Talk is lively on the extension of home price losses, and whether
they will fall by 10% when dust clears. Try a figure at least
twice that, maybe more.
A comment in fairness to the
USTreasury Bond complex is necessary. There are two powerful
sources of money being channeled into USTBonds lately, having
nothing to do with manipulation. They are funds migrating from
stocks into bonds, motivated to some extent by recession fears
and withering corporate earnings. They are closed out US$-bound
spread trades in bonds. A sector carry trade exists to go long
the higher yielding higher risk bond like mortgages or junk,
even corporate bonds, while going short the USTBond. For instance,
as the mortgage spread trade ends, the anchor USTBond is covered.
As the junk spread trade ends, the anchor USTBond is covered.
The result is a short cover rally in USTBonds, advertised as
a Flight to Quality, which in a narrow sense is true. The lie
is that the flight is not global, since foreigners show signs
of shunning US$-based securities.
CURRENCY WAR TIDBIT
Wrapped up in the day
was a modest little USDollar bounce, exaggerated by the press
in a manner that would befit gallows humor, except they were
serious. The US DX index did not even manage a move to touch
76. Oh, by the way, that hefty euro selloff of over 100 basis
points evaporated by end of day. One of the justifications for
the big S&P stock rally was a rebounding USDollar. The Fed
Beige Book report seems to set the stage for another USFed rate
cut on December 11, since much weakness was reported.
The European Union has dispatched
a team of emissaries to plead with the Chinese Govt on currency
matters. With a sharply rising euro currency, and a managed slow
upward revaluation of the Chinese yuan currency with respect
to the USDollar, the euro has risen substantially against the
yuan also. The Europeans want China to take steps to reverse
the huge disadvantage left to European firms wishing to export
to China. We might soon see a second exchange rate of yuan versus
euro, but do not count on it. We have moved to the point where
the Europeans are more vulnerable to Chinese mercantilism than
the Americans. The Chinese, as my analysis pointed out two
years ago, will ravage the EU economy and built up surpluses
from it, in a rotating fashion. Such is the nature of currency
wars, as victims are rotated.
USFED NEEDED ACTIONS
Moral hazard has been
in the news lately. What Kohn essentially said is that this is
no time for morale hazards to be avoided, that the USFed might
have to take very strong action, that the USEconomy is at great
risk, that the US banking system is crippled enough to render
harm to the economy. My forecast is for a 20% to 30% fall in
home prices, depending upon creation of a serious Resolution
Trust Corp. If they are going to permit a mammoth housing
bubble, with an ugly leveraged bond extension, then an equally
mammoth and equally ugly resolution structure is needed.
Time is of the essence, while they dither. The USFed actions
with rate cuts so far have been rather trifling, insignificant,
and without substance. Salvaging Wall Street banks has been the
hidden preliminary agenda.
The USFed has dithered so far.
They are concerned about the morale hazard, about the perception
of bailing out Wall Street banks, about a focused rescue. Of
course, they are bailing out Wall Street banks, which are probably
first in line at redemption tables. The USFed has been overly
pre-occupied with its usual klapptrapp of economic growth versus
price inflation. The bigger problem is banking system insolvency.
The bigger problem is interrupted credit supply, from subprime
hairballs stuck in the system. The bigger problem is distrust
among bankers, enough to sidetrack many legitimate businesses
who have difficulty finding adequate capital. The interbank system
is replete with distrust and suspicion now. The Wall Street criminals
have infiltrated the entire US banking system with toxins. The
solution cannot be a measured reduction in interest rates by
the USFed. They seem hamstrung and dazed. So the USFed will be
cutting interest rates again, as they see themselves as having
no choice. This central bank is powerless to powerful market
forces. The Fed Funds futures contract clearly indicates a total
of 50 basis points in rate cuts by February 2008. Shown is a
FF reading at 96.0, meaning 4.0% on the Fed Funds target rate.
With a 2-year Treasury Bill yield at 3.17%, it too screams the
USFed is behind the curve. The official Fed Funds target is 4.5%,
which translates to the USFed being 1.3% wrong high. This presents
supply & demand problems within the banking system itself.
My Hat Trick Letter has cited
numerous simultaneous drastic measures needed to deal with the
cluster of related problems. One is inadequate. They are all
after effects of the housing bubble, since no bubble can exist
and thrive to bubblicious proportions without a constant powerful
stream of money. The entire housing bubble and mortgage monstrosity
apparatus is breaking, as the financial risk model is being
unwound, without proper recognition. The USFed does not
even recognize it, and if they did, they would not acknowledge
it. The USFed must take historically unprecedented drastic action
on numerous fronts. The Resolution Trust Corp must be put in
place immediately. England has taken steps to restructure all
adjustable loans so as to interrupt the foreclosure process.
The knucklehead corrupt denizens of the US banking industry are
too confused and compromised to accomplish much of anything.
The RTC must have broad powers:
- To provide a floor bid on
mortgage bonds, from 'AAA' to 'BB'
- To serve as a clearing house
on traded mortgage bonds and their instruments
- To deliver dead mortgage securities
to a cemetery
- To assist in renegotiated
adjustable mortgages, in workouts
Until these measures are instituted,
the USDollar will sell down continually. Until then, the USFed
will lose integrity. Until then, the phony Flight to Quality
in USTreasury Bonds will continue. Heaven help foreign FX reserve
holders if both the USDollar and USTBond fall together! What
we are witnessing is the US$ exchange rate used as a proxy vote
against the USGovt leadership, against the US Federal Reserve
leadership, against the Wall Street leadership. The US$ reflects
lost confidence, structural brokenness, absent leadership, unbridled
fiscal recklessness, utter locked ineptitude of Congress, perhaps
even anti-militarism. In my view the US Congress has become a
useless den of landlocked vipers, lobbied heavily, privileged
heavily, and compromised fully.
An added ingredient could soon
buttress the grand rescue package, whenever that occurs. Foreign
deep pocket sources have decided, starting with the Abu Dhabi
$7.5 billion stake in Citigroup, to provide some desperately
needed equity. That represents a 4.9% stake. The cost to save
Citigroup is dear, helped by a 11% junk bond type dividend. Yes,
Citi is a vampire, walking dead, masquerading as a bank conglomerate,
with what, 300 thousand employees? The trend will continue
with Asian and Arab leading institutions ponying up valuable
stakes of equity ownership, cold hard cash, to support the US
broken insolvent system. The trouble is that many firms they
will buttress are dead, so the stakes are to share the painful
demise. They are assisting liquidity, but not solvency. If assets
fail to surpass debts, then external cash for a stake merely
shares the failure. The cash infusion was to avert bankruptcy
by Citigroup, an event sure to garner some attention!!!
The US financial sector foundation
is crumbling. Without such drastic action and coordinated measures,
that financial sector foundation, fully networked with leveraged
securities gone amok, the basis of the risk management regime,
will continue to disintegrate. The longer the USFed & Dept
of Treasury & Wall Street banks dither and hesitate, the
more difficult the chartered job of the Resolution Trust Corp
will be. The road to such an RTC plan is full of potholes. The
Freddie Mac multi-billion$ loss was a brutal blow to anyone who
actually maintained the lunatic notion that either Fannie Mae
or Freddie Mac could conceivably serve as a foundation for any
mortgage resolution platform. Well, unless a cover firm and thick
enough can be constructed atop a financial sewage cesspool. What
exactly would such financial cement look like??? Can paper act
in such a role??? The longer the Powers That Be delay on the
solution platform, the bigger the size of the platform rescue
itself, and the greater the GOLD RESPONSE will be. The platform
will spill liquidity from massive stimulus, enough to ignite
gold. Unfortunately, the longer a delay in the Final Solution,
the more damage done to speculative stock positions. They, like
many other risk trades, suffer from the absence of risk capital.
Do not look to USFed Chairman
Bernanke for guidance, to show the way out of the wilderness.
Instead, look to him for an effective gauge on fear. He showed
fear before Congress in his last appearance. In my view, he is
a midget to fill a giant role. Greenspan would have recognized
the gigantic systemic threat, but not the former Princeton University
Economics Dept chairman. Remember, no bank operations experience,
no business corporate experience, no financial market experience,
no profit & loss experience. Bernanke was picked to be either
the Fall Guy or the Puppet to control by Wall Street for its
benefit. The USDollar will continue to be sold off, and gold
will be pursued as a haven, as long as no serious solution is
even discussed. The Wall Street SIV (Structured Investment Vehicle)
was a sham seen as a potential bailout of Wall Street mortgage
bonds, or a Hot Potato Party wherein nobody would step forward
to handle such burning items.
SOCIAL CHAOS COMING
In the next several
months, expect rising chaos to gradually strike the American
fabric. The list of triggering factors grows almost with each
new season. Look for problems and intense social reactions to
extend from:
- Rising food prices, such as
bread, milk, cheese, eggs
- Rising gasoline prices with
scattered shortages
- Lost jobs from corporate outsourcing
trend resumes
- Lost homes from bank foreclosure
- Later on, bank run on deposits
at failed banks
- Later on still, freeze on
stock accounts, as corporate parents go bankrupt
The 'crack spread' describes
the difference between the crude oil price and the gasoline price.
It has widened to do harm to gasoline refiners. Unless a 50-cent
move comes to the gasoline price, expect wide gasoline shortages.
It is simply unprofitable to produce it. The food price issue
is an offshoot from the mandated movement toward ethanol. In
this crazy world, almost everything is connected.
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Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
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