Hey LongKnock ----
Larry, over on the Z posted this earlier today and I thought, for the ones who haven't already read it, they should ......
Cramer has some good thoughts here ---
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People, the bond market is bigger than the stock market.
(About 10 times bigger. And far more important to the
way business is done in this country.It is the lifeblood of
business, not the equity market, and it provides the
day-to-day cash for many enterprises large and small.)
The problems are in the bond market, not the stock market.
Right now, the Fed could give a%^$#&^^#%&^# about the
stock market. If it saves it, that's a moral hazard that the Fed
will have to pay the price for. It will. (I could not believe
how many people told me I was nuts for saying this. Except
our fixed-income readers -- they all applauded this piece as
the first piece that told of the real plight. They know the truth.
You can't float a bond in this environment. In fact, the last
piece of paper that got done of any size was that giant
Worldcom (WCOM:Nasdaq) offering. Boy that could never
get done today. We hear hints of the problems.
Ascend (ASND:Nasdaq) and Lucent (LU:NYSE) advance
capital -- people like it from Lucent, hate it from Ascend. But
you never read about the real pain in this market. It has always
been like that on Wall Street.
The day I first interviewed at Goldman Sachs, I was amazed to
find that equities, at the most important equity house on Wall Street,
were virtually Lilliputian compared to bonds. All the real big
money came from underwriting. As the bull market took off,
it got even worse. The big money came from securitization of
different pieces of credit, car mortgages, house mortgages,
credit-card mortgages. You name it. These giant pieces of paper
were sold and sold aggressively. That's where the real money
was. The underwriting fees from the issuers were enormous.
But you could trade these pieces of paper and take 1/8th, as
they say, and make millions. I never made as much money
selling stocks as I did with bonds. Ever. And bonds
alway ssell like hotcakes because people have to own them.
Pensions have to own them. Retirees have to own them.
They can take every piece of paper ever made and sell it -- even
that Milken junk. Until now.
Now, there is no money. Now, there are no buyers. That's the
point of this article. By the way, Treasuries used to be sold
aggressively when the government used to print them like
newsprint. You could make pretty good money taking 1/64th
on those! And what the heck is Jimmy Rip Van Rogers
talking about? Our government doesn't do this stuff any
more. We are skinflints. Have been since Clinton got in. I am
no fan, but he's gotten the bond market right, for certain.)
I keep reading that the worst is over. It may be in the stock
market. But the bond market? Heck, it is just beginning. (In
other words, the margin albuyers of everything but treasuries
were, for the most part, accounts that looked and acted exactly
like Long Term Capital. When you buy stocks and you want to
leverage, you can borrow up to half of the value of the stock.
When you buy bonds, you can repo them, get more money,
leverage that and leverage it some more. Heck, you can borrow
10 times what you have. And if the Fed and the lenders turn a
blind eye, you can borrow 20 times. And if the ex-Fed
guys are involved and the lenders are invested, we know now
you can invest100 times your money. Or their money. Or
whatever money you may be playing
with.
This market was like that scene upriver in Apocalypse Now
when Martin Sheen is asking those soldiers at night "Who is
in charge here?" and they turn to him and say "You are." Sure,
nominally the Fed in New York is in charge, but that's a whole
other story, one that no one is willing to do because it is
too hard. Bond traders have always acted as if they had the full
faith and credit of the U.S. government behind their purchases.
Turns out they don't have the faith or the credit of anybody.
Since Long Term Capital, what has happened is that no firms
want to lend you money to finance bond
inventories.
If you are sitting on a giant inventory of bonds and you are
Fannie Mae(FNM:NYSE), that's cool. You have no financing
problems. But if you are anybody else, believe me, you need
some financing to keep all of that inventory. In normal times,
you could sell off what you had to sell if the lenders want
their capital back that they lent you to take down bonds. But
these are not normal times. The lenders want their money back,
as they are all capital-constrained right now and are trying
to slim down their balance sheets -- they basically loaned way
too much, every brokerage house loaned way too much –
and the borrowers can't sell the fixed-income junk they have
because the brokerage desks won't bid for the stuff and every
other buyer is full up.
So, one by one, these big players either liquidate via auction
at prices that are barely able to keep them in business, or they
default and lose the whole ball of wax, or they file bankruptcy
a la Criimi Mae (CMM:NYSE). The numbers are staggering.
We are talking billions of dollars in loans from brokerage
houses that can't get paid. To make matters worse, the brokerage
houses already have billions upon billions of dollars in inventory.
And the yare sitting on pieces of Long Term Capital's
inventory. And nobody has the capital or the inclination
to buy this stuff except at vastly reduced prices. As the
crisis is worldwide -- all of the major banks in Europe were
in this, and the Japanese were in too -- and simultaneously
everybody wants to shrink his balance sheet -- there has
been no movement in the market whatsoever. If the sellers
elect to sell at the prices that the brokers are bidding, they
will be forced to mark their other positions down to where
they will have even less collateral, which will beget more
margin calls, which will beget more forced selling. It is a
real Mexican standoff. So, one by one, these holders of paper
wither or default.) That's where the layoffs and the shutdowns
are occurring. (Not only are the brokerages all trying to
shrink their balance sheets, they are all trying to shrink these
departments. They may not need all of those fixed-income
traders and salesmen because there are no new issues to sell,
nobody to sell them to right now as everybody just wants
plain old Treasuries, where very little money is being made
trading and selling because it has become so competitive
and there are so few 30-year auctions, where all of the juice –
mark-ups, commish, whatever -- was to begin with. So,
Inexorably, everyone of these firms wants to fire people,
streamline fixed income and get these incredibly expensive
people off their books. It will only get worse when the bonuses,
if there are any, get dispensed next month. Then I imagine
we will see real bloodshed.) That's where the market that has
ceased to function. (No one wants to take down any inventory.
No one wants to extend financing. So, imagine a housing market
with no new houses being created and no mortgages
available so you had to pay with cash. Would you want to be
a realtor, a contractor, a developer in that market? That's what
the bond market looks like right now: a giant, multitrillion-dollar
housing market with no mortgages available.)
Let me write that again: ceased to function. (This is why I
branded Bankers Trust in denial. This is why I wish that there
were many more people writing about Long Term Capital instead
of the equity market. This is why, except for Tom Wolfe, nobody
seems to even know where the real masters of the universe used
to reside. They resided in the bond market, not the stock
market. And they are no more. And the people, the vast number
of people you see downtown, are not needed anymore either.)
As that market is only about 10 times as important to the U.S.
economy as the stock market, we should not gauge the stock
market's strength as a measure of whether the Fed should be
worried. (Remember, it is not just the corporate bond market
that is frozen. It is the collateralized securitymarket -- mortgages,
car loans, credit cards. It is the emerging debt
market -- that's just vanished, vaporized, without a trace. It is
the municipal market, nothing cooking there. Heck, even
commercial paper has dried up. There is nothing for these people
to do except eat pizza all day.)
If this freeze continues, a month from now, you could go to the
fixed-income floors of the major firms on Wall Street and turn
them into bowling alleys.(I am not being overly dramatic. These
people are dead men walking if this thing doesn't turn around soon.
And those who follow stocks won't know the
difference.) There is still no liquidity. No credit. Nothing.
So, if you think the Fed is done easing because the market rallied
1,000points, you are looking at the wrong market. It's the
fixed-income market, stupid. (Yes, there is a solution to all of this.
You cut the rate thate very body borrows at overnight to some
minimal level, say 3%, such as we had in 1990-91. That makes
it more likely that these firms can finance inventories without
going belly-up. Easier money in the form of lower rates
would make much of this paper more attractive to buyers.
It would solve the inventory problem. It would solve the
credit problem. If it is not solved, we will have a bad recession.
That is written. I don't care what the economists/talking
heads say, this logjam gets broken or we go into recession.
But the logjam is broken by making the overnight rates
dramatically cheaper, so inventories of illiquid bonds don't
cost much. The Fed, in its initial ease, hoped that the problems
weren't as systemic as they turned out to be. Worldwide bond
market shutdown isn't good for anybody. And it can be
changed. The rates are low in Japan, but no banks have
enough capital to finance inventories of bonds, and they are
already financing real estate that loses value by the day. So it
has to be us. We are the only ones who can break the logjam.
Heck, if it causes the stock market to shoot up, so be
it. We have no choice. Greenspan knows this. Now. That's
what the second ease said.
Why is no one else writing about this crisis? Maybe because
they don't have any friends in the fixed-income business.
I have tons of them. I know what's going on, and I don't want
them to lose their jobs because of this crunch.
But they will if the Fed does not ease big and fast. Amazingly,
everybody who trades at the multimillion-dollar level, where
corporations are financed, knows this. But no one in the press
has a clue, and the talking heads they present seem equally
oblivious. This is like if the Dow were to have dropped to 4,000
points overnight, except more stark, because the Dow
would not yield 12% at these prices like many of these bonds
do.) That's what you should be paying attention to. (How do
you follow this day to day? Read the credit columns. Look for
new issues. If you see a pickup, that's good news. But I don't
think you will.)
If it still exists. (Yeah, remember, bonds are capitalism. Stocks
are offshoots of bonds. Stocks can do well in the very environment
described, provided the corporations don't need financing and
have big cash flows. Right now, corporate America is very liquid,
so we don't see the problems yet. But if we wait around, we
will. The Fed knows this, though. I got very negative on stocks
when I did not think the Fed understood what I am
describing in this very column. How could they? The New York
Fed, which is supposed to monitor this stuff, was too close to
Long Term Capital to see the problems.
But, believe me, they know it now. And they can solve the
problem. Which is why I am no longer bearish. Can't be. Not on
equities. Not given the easings that the Fed will have to do put
the fixed-income markets back to work
again.)
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=====> Jim, and entire thread devoted to Lunacy ...... I guess I was ahead of my time, no?
What is that thingie called ----- a Morhpeus Circle (sp ? and definition ?)
where the further you go the behinder you get or a chap can be ahead of himself and be still catching up or ....... errrr ..... well, you get the idea ..........
as to the thread on Moonie trading by scotty ----- Pat, ol son .... you've already been there incognito , I just didn't call your name, but I did say where you'd posted it and didn't receive as much as a single reply wanting to engage in further study ......... gggggggg
anyway ---- here is you on reply #22 ---
Message 6098899
I really should go look up the Morhpeus Circle thingie before posting this but I know somebody will correct me, and anyhoo I'm tired from helping to unload several tons of tile .........
I dang near wore the fingernail off my index finger pointing out where to put the stuff off the trailer and onto the job site ...........
I've not been on line much, but the lack of speed on SI right now will keep me off here for a while ....
It is taking me several minutes to pull up a single post to read and the sending of this one has timed out twice .....
Nemer |
