Denning, Bonner,
From Dan Denning at the Old Hat Factory:
--Glenn Stevens laid the covering fire with his one percent cut. Yesterday, the rest of the world's central bankers fixed bayonets, smoked their last cigarettes, and checked their Bloombergs. Then, on Ben Bernake's signal, they went over the top...straight into no man's land.
--Markets are now caught between debt deflation and policy attempts to reflate. After Japan's market fell 9% yesterday and Australia's 5%, you had to expect some concerted central bank counter-attack. It finally came.
--The Fed, the ECB, the Bank of England and the central banks of Canada, Sweden, and Switzerland all lowered their key rates by a half percentage point. The bankers fired a volley of rate cuts into a human wave of selling on the share markets. Some shots found their mark. Others did not.
--The credit markets appeared to de-thaw just a tiny bit after the rate cuts. The spread between the interest rate on a ten-year government bond on an interest rate swap narrowed from around 61 basis points the night before to 54 basis points in the heat of the battle. When the spread is wide, investors shun the credit market. The narrowing is an improvement.
--But negative events are overwhelming good intentions at a breakneck pace. The Fed, for example, is lending another US$37 billion to insurance giant AIG. Some of AIG's U.S.-based life insurance subsidiaries will post collateral with the Fed in exchange for investment grade bonds. What's the collateral? Hmm. Let's hope it's not credit default swaps.
--Then again, in Ben Bernanke's fabulous collateral emporium, anything can be pawned in exchange for credits that actually trade. Corporate America's balance sheet trash is the Federal Reserve's balance sheet treasure. And Australia's central bank is getting in on the act.
--The Reserve bank expanded the collateral it will lend against yesterday as well. And here we thought the well-regulated, well capitalised Australian banking sector would have no problem funding the country's credit needs.
--Think again! Or for the first time!
--The bank took two measures to provide Australia's economy with more credit. First, it's now accepting asset backed commercial paper (ABCP) as collateral. Second, you can swap collateral for fresh cash for either six months or a year. That's a much longer term than a normal swap (called a repurchase agreement, in central bank speak).
--How big will the ABCP swap facility become? Well, as the chart below shows, since the RBA began accepting residential mortgage-backed securities (RMBS) as collateral in October of last year, Aussie banks have exchanged over $8.1 billion of RMBS for "cleaner" assets. The terms for each swap had different lengths.
chart: dailyreckoning.com.au 20081009dra.png
Source: Reserve Bank of Australia, Open Market Operations, Monthly
--Why would the Aussie banks be capital swapping with RBA if they are as well funded and as well capitalised as we're told they are? And here's another banking question for you: How big of a risk is it for the Big Four that 60% of their profits come from fees? How healthy is it to have 50% of your loan portfolio in residential housing loans?
--Honestly, we're not a banker. So we don't know the answers. But if the loan portfolio was so healthy and Aussie banks so well-capitalised, why are they parking RMBS at the RBA? Is it because the RBA has become the only source of short-term AND long-term funding in the Australian market? Is it like leaving your car at long-term parking at the airport when you know you're not going to need it (or want it) for a really, really, really long time?
--Enough about the banking. How about an overhead conversation? We were on an early morning conference call with colleagues in the States and Europe to discuss the credit crisis. Here's how the pre-meeting chatter sounded:
"I called the bottom today at noon. I'm buying stocks."
"Yep. I'm buying too."
"Me too. Lots of them."
"I bought Apple at $90. It's already up to $96." [ed note. it closed below $90 on the day]
"If you like Apple you should check out Intel. They make all of Apple's chips. They've got much better margins. It's got a three percent dividend too. Crazy! And Tiffany's. Check that out. Doesn't matter what'll happen in the economy. Rich people are always going to buy jewellery. The stock is cheap."
--And so on. So here's a question...are shares over-sold? --"We believe a significant rally is set to take place," writes Bespoke Investment Group in the States. It released a report earlier this week that said, "Only 28 companies in the S&P 500 closed yesterday above their average price in the last 50 trading days." The report said that it was a signal that shares were oversold.
--Are Australia's best blue chips selling at bargain basement prices now? Can you get world-class companies for a song? Is it just a matter of courage?
--You may have missed it, but we recently consulted our technical oracle on all matters charting: Gabriel Andre. We asked him to call the bottom in the ASX/200. You can read his reply below.
--"Obviously the timing for a rebound has not come yet. The bad news coming out from the US is not over. And equity markets can remain oversold for a while. This argues for a further decrease on the S&P/ASX 200. After 4 years and a half of continuous rise between March 2003 and November 2007, the ASX/200 has retraced 50% of its bullish move. Take a look at the chart below to see what I mean.
4,300: the ASX/200 Technical Line in the Sand
chart: dailyreckoning.com.au
View larger version
--"The coming weeks should be particularly sensitive as the global equity markets are on the edge (lows of the year, 50% retracement of the 2003/2007 bullish trend). The news from Wall Street about potential new collapses will keep investors nervous and anxious therefore markets will remain volatile.
--"The weekly chart shows the 50% retracement of the bullish trend occurred between March 2003 and November 2007 (between points A and B on the chart). This support level has already been hit in early August (point D), generating a small rebound.
--"The indexprice closed below this 50% retracement level. It's an additional bearish sign and may confirm that the previous support at 4,552 is broken for good. With the price support broken here, where is the next low?
--"Rebounds are difficult to assess right now. The price action rebounded in early September but was unable to retain positive momentum. New longs entered the market, but it was not enough to convince the rest of the market to fly back into the ASX 200 stocks. As a result, the technical indicators which were moving up since mid-July again triggered bearish signals. Stocks were sold.
--"So where is the new low? The new target will be the 61.8% Fibonacci retracement which is set around the level of 4,300 points. There will be a probable rebound from there. It's the last significant support level for the index. Indeed, the 61.8% ratio also corresponds to a previous high which had been posted in March 2005 (point E). Previous highs become new lows therefore some buying interest should appear at this level.
--"Ultimately, if 4,300 cannot hold, there is another support at 3,500 points, which was a previous high level posted in June 2001, February and March 2002 (points F and G). On the upside, the current resistance line goes through the highs posted in early November 2007 (point B) and in May this year (point C).
--"My view? The index is setting up for a mighty rebound. That means individual stocks will rebound as well. It will be impressive. But between now and then, we'd expect further declines in confidence from the U.S. banking crisis to lead to lower lows here on Australian stocks. We'll be biding our time and building a list of rebound stocks to trade when the new lows are put in, or some other external event triggers an unlooked for reversal.
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And now over to Bill Bonner in London:
It's the end of the world as we know it - and we feel fine. Really.
Usually, markets stumble along, day after day. But occasionally, their hearts start racing and their palms sweat. They stop sleeping at night and begin pacing the room. When this happens, one of two emotions has gotten the better of them - greed or fear.
Greed made fools of investors for many years. At its height - probably in 2006-07 - people were ready to do the damnedest things with their money. The moms and pops bought an extra house - sure it would go up. The masters of the universe sold moms' and pops' debt to each other. Rich investors gave their money to hedge fund managers - and paid them hundreds of millions for gambling it away. Others paid fortunes to executives to run companies they didn't really understand into brick walls they didn't see coming. But, for many years, everybody was getting rich; so what was not to like?
Now, fear is back.
Delayed...denied...denounced...fear is back - and he's mad as hell.
This week, panic set in. On Monday, the Dow fell more than 350 points. After such a big drop, you'd expect a big bounce. But not Tuesday. Stocks just kept falling, with the Dow down another 508 points.
Oil rose $2 to $90. The dollar held steady at $1.36 per euro. And gold rose $22. Coin dealers say they can't keep up with the demand for bullion coins. No wonder; smart investors are looking for shelter.
It's full-scale war, in other words, with the forces of inflation in full retreat - even rout.
Investors await every bit of news like dispatches from the front lines. Will the Dow hold at 8,000? When will the Fed cut rates? Can our soldats keep the huns out of Paris?
The news comes fast - too fast to take it all in. Today, Russia has lent 4 billion euros to Iceland - 'we'll work out the terms later,' said the nice Russkies. The Russians are also pumping $37 billion into its own banks. England says it will bailout its banks - with 50 billion pounds of equity and another 200 billion in loans.
The Australians already cut their key rate by 1%. And this morning, the Fed, the ECB, the Bank of England and Swiss, Canadian and Swedish central banks made emergency rate cuts. While coordinated rate cuts do happen on occasion - the Fed and the ECB made cuts following 9/11 - joint statements announcing a cut at multiple banks is a rarity. But in this market, we suppose anything is possible.
At first, it looked like it might turn the tide in the Asian theatre. Reports last night showed Asian stock markets holding the line. But this morning comes news that Japanese stocks are falling even harder - down 9% today alone.
In the United States, the Fed says it will buy commercial paper; that is, it will buy up loans made to U.S. companies...or even loan the money directly to troubled firms. And not just financial firms. General Motors says it is turning off the lights at all its European production plants.
The poor lumpeninvestor doesn't know what to make of it. It seems like only yesterday he was told that everything was all right. Alan Greenspan said so. So did Hank Paulson. And Ben Bernanke. And George W. Bush. We have the strongest economy in the world. We're unbeatable. Our economy is so dynamic! Our financial sector is so inventive! We're just so damned smart!
The Japanese can live with a 20-year slump if they want. The Europeans never seem to get their economy revved up. But we Americans know how make an economy hum - just give the consumer more credit!
But when the cycle turns from greed to fear...all that credit is like excess fuel in a crash landing. It tends to explode. When a bank takes a loss - say, from its holdings of sub-prime debt - the fractional reserve credit system sends out sparks. A loss of $100 million causes as much as $1.5 billion in credit to go up in flames. As the credit disappears, so does the leverage that kept up asset prices. So far this year, the world has lost $20 trillion in market capitalization. By September, U.S. property was down a total of about $6 trillion over the last two years. That's why the feds are losing this fight - they've got much less fire power. They've just passed a bill to put $700 billion back into the system - buying up Wall Street's mistakes. The Fed is loaning another $900 billion, according to yesterday's report. Put all the bailout spending together and you get a figure that is still not even 10% of what Mr. Bear Market has taken away.
Yes, it's all working against us now...the credit...fractional banking...and our own emotions.
*** This morning, walking to work, your editor was worried. The end of the world might not be as pleasant as he had hoped. These worries almost turned him into the latest victim of the credit crunch. That is to say, he almost got arrested.
What was he worrying about? He has no debt; but he has huge obligations. Of his six children, only one is really self-supporting. Others are in school or just starting their careers. He has houses to maintain - on two continents. And he has a business in full expansion...with new offices...and new products. Under the circumstances, expenses are not easily cut - to say nothing of taxes!
But that's what happens in a real panic. Each man looks to his own. How will he pay his mortgage? How will he be able to retire? How will he keep food on the table and a roof over his head?
He begins to think...to reflect...to regret. If only he'd sold those stupid bank shares. If only he'd gotten out of India and China. If only he'd sold his business...put the money in gold...and retired - when he had the chance!
The latest figures show American retirement accounts have lost $2 trillion in the last 15 months. That is, of course, in addition to the amount lost in the real estate market.
Naturally, these financial losses are now migrating to the economy. A report from MasterCard tells us that consumers are cutting back sharply. There was a big drop in September retail transactions, via credit card, says MC.
"Unfolding Worldwide Turmoil Could Reverse Years of Prosperity," says a headline in the Washington Post . Not exactly. What is actually happening is that the prosperity is being revealed for what it really was - phony. If people had been spending money they had earned - the money that you get when you are truly prosperous - we wouldn't have such a problem today. Instead, people spent money before they earned it. And now, their earnings are turning down...their assets are losing value...and they have no way to repay the loans. So, the loans go bad...the banks lose money...and credit is withdrawn throughout the entire system... forcing further sales, lower prices, more bankruptcies, more job cuts...and more worries.
Thus it was that your editor...his mind troubled by all these heavy concerns...walked into his office building without his identification badge.
"Where's your pass?" the guard wanted to know.
"Oops...I must have forgotten it."
"Then, you'll have to wait here until someone from your office comes to collect you."
Your editor is a calm fellow. But whereas he had been working in this very same building for the last four years...and whereas he and the security guards have seen each other practically every day... and whereas he was eager to get to his desk and find out how much money he lost yesterday - he permitted himself to throw a fit.
Fortunately, rather than call the police, the guards let him pass.
And instead of pitching a fit, we advise you, dear reader, to be sure that you are adequately prepared for the economic situation unfolding before us.
*** Finally, we rise to the defense of a dumbbell.
We like Sarah Palin; we don't know what she is talking about. But she is the only candidate we can't make fun of it for.
Consider this. You will find it hard to follow. Because it is not in English; it is in Palinese:
"That's what I say that I like every American I am speaking with we're ill about this position that we been put in where it is taxpayers looking to bailout, but ultimately what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy, um, helping the, oh, it's got to be all about job creation, too, shoring up our economy and, and, putting it back on the right track; so health care reform and reducing taxes and reigning in spending has got to accompany tax reductions and tax relief for Americans and trade... we have we got to see trade as an opportunity not as, a competitive, um, scary thing, but one in five jobs being created in the trade sector today, we we've got to look at that as more opportunity, all of those things under the umbrella of job creation, this bailout is part of that..."
But just because the woman is a half-wit hardly disqualifies her from public office. The average county commissioner or governor is not much better. And at least one of America's finest presidents was probably little smarter than a moron.
We refer to Warren Harding. He was one of the greatest of American chief executives. No one was ever sent to prison under the Harding Act. No gaudy office building in Washington is known as the Harding Building. And no monument we know of defaces the earth in his memory. He started no wars. He spent no more of the taxpayers' money than his predecessors. And he never gave a lecture to the American public that anyone could make sense of.
Three cheers for Warren Harding! Three cheers for Sarah Palin!
Until tomorrow,
Bill Bonner
The Daily Reckoning Australia |
