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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: pater tenebrarum who wrote (46276)	12/11/2000 5:16:30 PM
From: NOW	Read Replies (2) \| Respond to of 436258

The greenspan put is shot From Daily Reckoning.com GREENSPAN'S PUT IS SHOT Gentle reader, the whole world now turns its weary eyes to Mr. Greenspan. The financial press portrays him as the savior of the modern world. TIME magazine, in fact, once put him on the cover, along with Robert Rubin and Larry Summers with this headline: Committee To Save the World - with no trace of humor. In Bob Woodward's book he is the "Maestro." Fortune ran a cover story: "In Greenspan We Trust." And on Tuesday, Mr. Greenspan...the former jazz saxophonist and Ayn Rand devotee...seemed to live up to his billing. "Greenspan Arrests Wall Street Collapse," said the headline in La Tribune. Greenspan had apparently done it. He had pulled out his put option and saved the day. And yet...the dollar continues to fall. And the price of credit continues to rise. Either of these are probably sufficient to render Mr. Greenspan's put option worthless. "Euro continues to rise," reports the financial section of France's Figaro newspaper. The hapless European currency has defied almost every financial pundit in the known world by doing what none of them expected - it has gone up. So delicately balanced - at the margin - is this international flow of funds that merely a small shift in sentiment away from the dollar could be devastating. In effect, if the dollar falls - it means that foreigners will demand a higher rate of return for buying U.S. assets...and the cost of credit will increase, not go down as the Greenspan Put requires.. Alas, Mr. Greenspan's put is shot. Mr. Greenspan's only real weapon is central bank interest rate policy. But, as mentioned here in the last few days, that weapon only works when the enemy is in retreat. Lowering the price of credit does no more to alleviate credit problems than lowering the price of Jim Beam whiskey helps cure dipsomania. In both cases, the problem is not the price of the elixir...but the use to which it has been put. Over the last few years, every silly idea that came along could belly-up to the credit bar and imbibe almost as much as it wanted. Trillions of dollars worth of capital were raised...spent...and have now disappeared. What's left are I.O.U.s, stocks, bank loans, and bonds. The quality of these debt instruments is falling rapidly. "The junk bond market is suffering through its worst funk since at least 1990," reports Boston Globe. "The market is cheap," according to Fred Cavanaugh, director of high-yield assets at John Hancock Mutual Funds. "The question is whether it represents value." "The average junk bond mutual fund had lost 10.85 percent for the year through Tuesday.." continues the Globe article. "In 1990, by any measure a disastrous year for junk bond investors, the average high-yield fund lost about 9.6 percent." "So-called 'TMT' companies, working in telecommunications, media, and technology, are the most worrisome creditors in the junk bond market. They borrowed huge sums to build out new communications networks and some are running into financial walls. ICG Communications Inc. had borrowed $2 billion by the time it filed for bankruptcy protection last month." Falling prices for junk bonds means rising costs of credit for the borrowers - and not just TMT borrowers. J.C. Penny's bonds now yield 18%....Tenneco Automotive's bonds yield 21.3%. And the gold producer Ashanti's bonds can be bought to yield 27%. These are all troubled companies. But that is what you get after a credit binge - companies with problems...companies that have taken up too much capital and spent it too freely. You also get consumers with problems, for much the same reasons. One company with trouble to spare is the Bank of America. "They let credit quality get away from them and it's coming back to haunt them," said an analyst quoted by Bloomberg. "Loan problems are mounting at U.S. banks," the Bloomberg piece observes, "...as customers find it more difficult to pay debt. Bank of America expects to write off $1.1 to $1.2 billion in bad loans in the 4th quarter, compared to $435 million in the 3rd quarter. BOA was the a main creditor of Armstrong, the vinyl floor maker that went bankrupt a few days ago and Owens Cornings, which filed for bankruptcy on Oct. 5. Both companies were plagued by asbestos suits. BOA wrote off a $500 million loan to Sunbeam...and also lent to Pillowtex and ICG - both of whom went bankrupt on Nov. 14. A bank with this keen a nose for deadbeat borrowers could have hardly missed the movie business. In fact, it lent $1.2 billion to Regal Cinemas - the nation's largest theatre chain - 2 years ago. Naturally, Regal defaulted and may also go Chapter 11. When credit is too cheap, people treat it cheaply. The result is trouble. But it is not the sort of trouble that can be cured by even cheaper credit. The U.S. economy is now at the end, I believe, of one of the biggest credit binges in history. The headaches and regrets cannot be dodged or ignored. And easier credit is not likely to make much difference - just as it has had no effect in Japan over the last decade. The entire psycho-profile and attitude of the market is changing. Instead of dreams...there will be nightmares. Venture funds are being replaced vulture funds. And hard- nosed, bitter-end investors and workout specialists are taking the places of naive amateurs... The focus of serious investors will no longer be on cleaning up in the market...but on merely cleaning up. Investors, who used to believe everything was possible and who accepted every fairy tale business plan, chapter and verse, are coming to believe nothing and accepting only chapters 11 and 7. Things can't be put back in order without cleaning up the trash and butt ends. This won't be done by quarter-point decreases in the Fed Funds rate. More on this next week...including more insight into why people would borrow and lend at such a furious pace...and why Mr. Greenspan's Put will not work... Bill Bonner Your constantly amazed, always amused, and often surprised correspondent

To: pater tenebrarum who wrote (46276)	12/11/2000 5:23:43 PM
From: eddieww	Read Replies (2) \| Respond to of 436258

"inflation expectations are waning fast." They wouldn't wane very fast if the fed eased .50 next week and promised much more soon. "...an attempt to inflate out of this morass, if it were seen to be potentially successful, would lead to a deluge of foreign selling of US assets, destroying the dollar in the process." As I mentioned, foreigners hold around 40% of Treasury debt/bonds. If they all try to sell them, who's going to be on the other side of that trade? Not me. Deliberate destruction or gross devaluation is what I proposed and what we would get. The crux of my original question revolved around avoiding recession/depression here by creating beaucoup liquidity and using the resulting devalued dollars to also pay off, at a greatly reduced real rate, our trillions of debt to foreigners. Japan had no external debt and so could not benefit in the same way. I don't know this for certain, but I think we were, like Japan in '90, a net creditor in 1929. The primary thought is that the economy and well-being of the US might be better in a stimulatory inflationary environment than in a depression, with the added benefit of paying off our foreign debts at fifty cents on the dollar. You say it will not happen, and I don't disagree. My original question was could it happen, and I see nothing to stop it if the powers that be decide to. As to the question of if it should happen, I have no answer. However, there is a certain perverse beauty to the idea of foreigners supplying us the means of production, be repaid at a negative real interest rate, and then face competing with our suddenly cheap export services and products.