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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (71713)	11/27/2007 8:10:59 AM
From: Crimson Ghost	Respond to of 116555

Will the Fed really cut as much as Wall Street hopes? The one thing it fears more than even a severe recession is substantial erosion of the dollar's status as THE reserve currency. The Newly Hawkish Fed's Communication Problem From time to time, Mark Thoma features the views of his University of Oregon colleague and Fedwatcher Tim Duy. Duy got his last call wrong. He genuinely believed the Fed would not cut, basically because not cutting was the right thing to do, and misread the FOMC's sensitivity to market reactions, or to be less polite about it, lack of backbone. Duy has more recently focused on the Fed's new hawkishness and the market's refusal to listen (and perhaps deliberate bullying). Duy says he spent the better part of the Thanksgiving holiday weekend trying to reconcile the central bank's recent statements and forecasts. If I did a Vulcan mind meld with the Fed, I'd need a lobotomy afterward. Tim is clearly made of sterner stuff; his sanity seems intact, but he exhibits another side effect of too much engagement with an alien thought process, namely, having his mental functions unduly aligned with theirs. For example, before the last FOMC meeting, the reason Duy had persuaded himself that the Fed would hold firm was that the consequences for the dollar and ultimately the global financial system were too grim. Those concerns are absent from this post. Duy comes to what pretty much everyone thinks will be the Fed's December move, namely to cut again, but he sees this as being a closer call, However, he find in the Fed minutes the magic key that unlocks this issue: To be sure, the Fed could simply ignore market participants and surprise with a pause, but if financial markets keep deteriorating over the next two weeks, I don’t think they will risk a surprise. From the minutes: Participants generally viewed financial markets as still fragile and were concerned that an adverse shock—such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses—could further dent investor confidence and significantly increase the downside risks to the economy. While the Fed would never say they were driven by market expectations, they also know that failing to meet the expectation of a rate cut is the same thing as an “adverse shock.” There is a time and a place for a credibility building negative shock, but I doubt the Fed believes that that time is now. That is the risk management side of policy. But the interesting question is: is the Fed's communication failure compounding its credibility problem? I vote yes. The very fact that we have to have Fed watchers says they are not conveying their messages effectively. The Fed is so used to relying on anodyne language that it seems unable to tell the financial community that it is just plain wrong. Now in my version of Fed speak, a Fed president poses in front of the most enormous bank vault with Fed seals in view, and his chat, based on what Duy said is the Fed's thinking, goes something like this: We have told you in several statements in the last few weeks that we view the economic risks as balanced. That means we don't see a rate cut as warranted until things change. Nevertheless, Fed fund futures prices have indicated for some time that the financial community thinks the odds of a rate cut in December is over 85%. To put this in lay terms, "What about "no" don't you understand?" We have told you pretty clearly that we aren't predisposed to lower rates. We strongly suggest you arrange your affairs accordingly. Now we recognize that we may have a difference of opinion on the fundamental outlook. We've used the phrase "rough patch" to say we know things will almost certainly get worse before they get better, but we don't see a meltdown in the offing. Yes, 2008 will be a lousy bonus and commission year. Yes, banks and investment banks will take big writeoffs and some players will fail. But that is not the end of the world, that is the normal operation of capitalism. If anything, the bar for failure appears may be set too high. As you have seen in the last few days, even serial near-bankrupts like Citigroup that are too big to fail manage to get outside investors and muddle through. In fact, there are some near bankrupts like Countrywide that some of us wouldn't miss at all, but we suspect they will muddle through too. The problem is that there are quite a few people in a decision-making positions on Wall Street have never seen a bear market. They all look terrifying for a few quarters, all the firms panic and fire too many people, but this passes. The other part of our disagreement is about inflation. We noted that a fair number of people working in the financial services industry have never lived through a bear market. Even fewer have experienced inflation. Central bankers have been so successful at keeping it at bay, at least until recently, that the public isn't as fearful of it as it ought to be. Inflation is corrosive; it makes investment unattractive, which hurts growth. It depresses both stock and bond prices and historically reduced new issues and trading volumes. And as Paul Volcker demonstrated in the early 1980s, it is painful and costly to subdue. If more of you had direct experience of it, you would be more willing to take some short-term pain to forestall it. The world has moved to communication by sound bite. The Fed is the most listened to and least heard bunch in the English-speaking world. and that is due to its failure to adapt its presentation style. Bernanke needs to work not just on transparency, but on communication strategy. Much of the content in their carefully wrought speeches gets lost because they are so worried about nuance that the main points get lost in the media recounting. Although it is a long and detailed document rather than a speech, contrast the Bank of England's semiannual Stability Report (latest edition here) with Fed publications. It conveys a tremendous amount of information and analysis, but the document is clear, lively, and quite accessible given its subject matter. Back to Duy's conclusion: The conflict between the long term outlook and the short term risks leaves this once again a close call. Although the Fed would be happy to pause, recent deterioration in financials markets, including a flight to quality that threatens to push the 10 year rate below 4%, will make it difficult for the Fed to follow through on their hawkish rhetoric. But there is a point to the rhetoric – to keep us focused on the future, which the Fed can affect, not the present, which is already written in stone. The Fed will leap at the first opportunity to pause. For December to be that opportunity, markets need to stabilize and data need to conform to the Fed forecast. Posted by Yves Smith at 3:58 A

To: mishedlo who wrote (71713)	11/27/2007 8:41:02 AM
From: Chispas	Read Replies (1) \| Respond to of 116555

"Wall Street's bonus-laden ark sails as Main Street gets clobbered" ........................................................... (MarketWatch) -- Noah's Ark is my favorite Biblical story; books, statues, memorabilia all over my study. It's about hope. Helps me laugh at human foibles, like the "irrational exuberance" Fed chairmen constantly feed America. Greenspan went off the deep end several times. Now it's Bernanke turn as we all wait for a $300 trillion derivatives bubble to pop, triggering a global deluge. My tale begins with The Wall Street Journal's recent editorial page "Salt and Pepper" cartoon. We see Noah's huge ark pulling away from shore, loaded with animals. Dark clouds closing fast. Angry thunderbolt crashes. But wait! Suddenly, Noah sees a pair of unicorns standing on a cliff. They're late. As he sails away, Noah waves: "There's another one coming right behind this one." Yes, hope springs eternal with Noah and Fed chairmen! Unicorns are mythic one-horned white horses. Symbolizing innocence, they're only visible to the pure of heart. There's a powerful metaphor here. This Wall Street Noah knew the unicorns would trust him. But there wasn't another ark. Just false hope. I imagine Noah saying to himself: "We warned those naïve unicorns. It's too late, I gotta set sail now, to save these political animals, loaded lobbyists and other fat cats." Yes folks, this Wall Street Noah (and his pals on the yacht, er, I mean ark) misled those naïve Main Street unicorns. That's why the cartoon's a perfect metaphor for today's bizarre financial world. As Bloomberg reports, "Shareholders [unicorns] in the securities industry are having their worst year since 2002, losing $74 billion of their equity. That won't prevent Wall Street [The Ark] from paying record bonuses, totaling almost $38 billion." First: Greenspan's dot-com 'irrational exuberance' Hope? Hype? Gallows humor? Like Fed chairmen, this Wall Street Noah had a bad habit of dishing out hope about "more Arks" coming, knowing none existed. For example, in 1996 when Greenspan warned us of "irrational exuberance," that unsustainable momentum driving the market. And yet, for over three years, Greenspan failed to cool his "irrational exuberance" as interest rates hovered around 5.5% ... as the market was flooded with zero-earnings IPOs ... as stock price-to-earnings ratios soared to 40, 50, 60 ... and as dozens of funds listed dizzying returns in excess of 100% in 1999 with the top-performer an absurd 323%! In short, Greenspan could have cooled the dot-com bubble, but he did just the opposite. Like a teenager on speed, he let it run wild. He was high on the ideology of the queen of free market individualism, Ayn Rand, author of "Atlas Shrugged" and "The Fountainhead." Eventually Greenspan was forced to do an about-face, after the 2000 crash, going to the opposite extreme. Cutting rates to 1%, he ran the presses at high speed for too long, printing cheap money to restart a failing economy that he led into a recession, and to finance the Afghan and Iraq wars. Unfortunately, his easy money policies unleashed two new rounds of "irrational exuberance." Second: Wall Street's 'irrational exuberance' A new round of Wall Street excesses exploded: Private-equity deals, leveraged buyouts, hedge funds and securitized credit deals. Wall Street loves Alan's "irrational exuberance." Third: Main Street's 'irrational exuberance' Greenspan's cheap money policy also unleashed the subprime housing boom. That helped the post-dot-com recession recovery, pumping money into homeownership, construction, home-equity loans, credit-card debt, consumer spending and high-risk condo flipping. To make matters worse, Greenspan threw jet fuel on his new "irrational exuberance" by hyping adjustable rate mortgages before Congress. Naive? Denial? Delusional? Hardly. He must have read many reports like The Economist's June 2005 special report concluding that: "Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000 ... The worldwide rise in house prices is the biggest bubble in history." Earlier this year Jeremy Grantham, whose GMO firm manages $150 billion, came to the same conclusion: "New global money flows have probably created the first truly global bubble, almost everywhere in almost everything." In short, Greenspan's "irrational exuberance" was responsible for igniting speculation worldwide. The evidence was everywhere. One Fed governor warned him of the coming subprime problems in 2000. So Alan was disingenuous in 2005 when he dismissed the housing bubble as mere "regional froth." And again in 2007 when he told "60 Minutes" he "didn't get it until very late." Nonsense, says Nobel laureate and former chairman of the Council of Economic Advisers Joseph Stiglitz in a recent Vanity Fair article: Greenspan "made a mess of all this." Greenspan's "irrational exuberance" created the 1990s dot-com boom, the 2000-2002 bear/recession and today's subprime/credit boom/bust. Spot on? Let's see now...turn over the patient who's gorged himself half to death to a new doctor...then trash the poor guy because he can't pull off a miracle? How about everyone from the mainstreeter who lives his life on credit and... Listen closely as you prepare for the popping of the next big bubble: It was Greenspan who was "irrationally exuberant!" The markets followed his lead. He was projecting his extreme "irrationally exuberant" ideology onto the markets. He could have stopped the excessive swings anytime. But would not. What's next? Unfortunately, his heir, Bernanke, has the same genes. Even though he pretends to be his own man, he's a clone. Greenspan's his mentor. And the next cycle of "irrational exuberance" will be proof that Greenspan's long shadow haunts Bernanke's decisions.. Fourth: The 'irrational exuberance' of derivatives All this became painfully obvious while reading Greenspan's comments in a recent Fortune magazine interview. The next bubble popping will be the huge global derivatives market, now around $300 trillion. And unfortunately, Bernanke is stuck in the same rigid ideology, dealing from Greenspan's Ayn Rand play book. You could see this connection clearly in a recent USA Today political cartoon. R.J. Matson brilliantly satirized Benanke's mastery of Fedspeak during testimony before Congress. Bernanke is seen staring like a deer into the committee's headlights. In four successive panels we see him uttering four contradictory sound bites: "Falling home prices, rising foreclosure rates ..." "A weak dollar and high oil prices ..." "Not to mention a crisis of confidence in credit markets ..." "All suggest a period of moderate, but positive, growth going forward." And below the four panels in bold caps: "IRRATIONAL EXUBERANCE!" Yes, folks, Ben is Alan's clone: "Irrational exuberance" lives on! He's mastered Alan's Fedspeak gobbledygook. He's destined to carry on Alan's misguided legacy of blowing bubbles too big, hanging onto funny-money policies for too long and messing up at both ends of the business cycle. Hope? Hype? No, endless misleading "irrational exuberance!" This time, as usual, Main Street America [the unicorns] didn't get the warning soon enough. Ominous clouds and lightning arrive. We're stuck on the shore and the ark's set sail (with hefty bonuses for all, including those disgraced Wall Street CEOs). Main Street's unicorns may be pure of heart, but so what. The only thing "coming next" for the unicorns is a deluge, not another yacht or ark. So say goodbye to Noah, Alan and Ben, tune out the "irrational exuberance," and run for high ground. marketwatch.com