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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: pogohere who wrote (99832)	11/23/2008 3:21:37 AM
From: pogohere	4 Recommendations Read Replies (3) \| Respond to of 110194

Re: carry trade observation from a poster on InvestorVillage: IAE.V msg # 948 11/23/2008 1:26:44 AM By: to1 Markets Most people are looking at the wrong reasons for the selling and this is why there timelines are all screwed up. Most of the forced selling in the world, mostly threw hedge funds, is due to the US-Yen & Euro-Yen carry trades with the UK-Yen carry trade to a lesser degree. The housing collapse spilled into the credit cycle which hit the economy and has forced the world to plummet interest rates. Its that drastic drop in rates in a very short period of time that has caused the selling pressures on all world assets (stocks, real estate, …etc) to escalate as hedge funds and financial institutions were forced to pay back loans from Japanese banks that have been acquired over the last 15 years or so as Japan’s interest rates have been next to 0 in that time. Currently Japan’s rate is 0.3%. So when the US cuts its rate to 0.5% from the current 1% that US-Yen carry trade will all be over within a couple of weeks of the cut. So that leaves the European Central Bank and the Bank of England to get their rates down from the current 3.25% & 3% closer to Japan’s current rate to end the selling pressures caused by those 2 remaining large Yen carry trades. The Bank of England said they are prepared to cut all the way down to 1% if they have to. When Leman went down it started the downward spiral that made the US government buy AIG, Fannie Mae & Freddie Mac. Then Merrill Lynch and Wachovia got bought out and Goldman Sachs and Morgan Stanley turned into retail banks. The problem was that for the US government to bail you out with a cash infusion or to become a retail bank you could not take on more than 10x leverage on your balance sheet. The problem was that all these companies were facing the fact that they all had to deleverage quickly to a max of 10 times all within a 1 month timeframe of each other. And the table below was what their leverage was prior to being forced to deleverage: Goldman Sachs – 26 x Morgan Stanley – 32 x Leman Brothers – 34 x AIG – 40 x Fannie Mae – 42x Freddie Mac – 43x Merrill Lynch – 45x (To put it in perspective all of the Canadian banks usually don’t go above 8x leverage) So when these companies are selling almost everything they own to get to 10x leverage in order to get the US government’s financial protection in backing them it caused the FED and other Central Banks to drop rates drastically in a very short period of time to try and stabilized their economies and financial sectors. But in doing so that triggered about15 years of borrowing from Japan to unwind extremely quickly. That’s why the Yen has been on an absolute tear against all currencies since the drastic drop in US interest rates began a few months ago even though Japan’s economy is in worst shape then the US and European economies. Unwinding financial institutions are selling assets and repatriating those sales into Japanese Yen to give it back to the Japanese banks in the same form that they received their loans originally. That buying of Yen to give back to Japan’s banks has caused a huge demand for the currency. It has nothing to do with Japan’s actual economy that is very weak at this time. Once the Europe and the UK get their rates close to 1% the majority of the heavy selling should be over as the global Yen carry trades were in the double digit $Trillions range, far greater than any US sub-prime issues. Then any potential selling will have only to do about the global economy and not the unwinding of the carry trades on top of a bad economy. It’s like taking gasoline and oxygen away from a fire as financial institutions no longer have to be forced to sell their assets at any price as the world's largest margin call is off their books. As for the Depression statements that’s not going to happen and it’s a waste of time bringing it up IMHO. In 1929 the US government actually raised rates during the economic collapse, making the problem far worst than it should have been. That forced unemployment to rise to 25% back then. The US is currently at about 6.5% and it is expected to rise up to possibly a worst case scenario of 9%. A far cry from 25% back in 1929. Also in Q4-2008 it’s expected the US will gave a GDP of -3% and that is expected to be the worst of the crises in terms of growth numbers going forward. In 1929 the economy contracted by 20%!. Not going to happen this time. The world has never had this amount of liquidity pumped into it by Central banks all at one time. Europe – 2.4 $Trillion, the US – up to $700 Billion, China - $586 Billion, the UK – 200 Billion Pounds, ….. ect. Then add on the huge interest rate cuts by the same Central banks. This will all add to a huge inflation spike down the road as interest rates usually take 9 months or so to filter into the economy. Same goes for the $Trillions in liquidity being pumped into the system. So why people expect to see a sharp turnaround in the economy when rates began to be cut only a couple of months ago is completely absurd! The economy is like a freight train. It takes time for it to slow down and speed up again. from: investorvillage.com

To: pogohere who wrote (99832)	11/23/2008 1:18:00 PM
From: bart13	Read Replies (1) \| Respond to of 110194

We're very much tracking together, and I do intend to track down and review more of Zarlenga's work. Thanks for the heads up. Your other links and observations also echo quite a few of Ben's comments in both the 2002 helo drop paper and also the 2004 paper on ZIRP. It sounds like you got my basic points on deflation, debt deflation, timing, etc, too on my iTulip effort... and I'll raise you at least three more 'no sh*ts' on how tough it is getting a read on the turns and twists. <g> I'm also with you on velocity and also noted in that iTulip post that neither it nor the concept of monetary lags is included. As you probably know, I do track many ways to measure and view velocity on my nowandfutures.com page (there are also some comments on lags on my nowandfutures.com page ). For what its worth, GDP/M3 turned in late 2001 and turned again in July 2008 which lends some credence to an initial turn in 2Q 2009... and also generally agree with your Dec 10-15 target period as a recognition and possible crash period.