Um, so I looked at the NYTimes this morning b/c I had heard something about Thailand and how there are protesters at the airport and stuff. The NYT headline is: "Thai Army Chief Advises Prime Minister to Quit"
So I started reading and at some point I was like: "Wait, what's the PMs name again?" But it didn't say (until page 2!!) so I looked him up on Wikipedia. And then I was thinking: "Hold on, that guy looks really unfamiliar, wasn't he kinda chubby?" Turns out that apparently they totally got rid of that guy, you know, the one who had a cooking show. I was aware of the protests and stuff over the summer but then, they get rid of their PM and I don't notice at all? How does that happen?? Anyways, seems like the new guy's fate might be short-lived too...
Wednesday, November 26, 2008
Putting the #s in perspective
So the Ukraine or Hungary or Poland or one of those countries over there just got a package from the IMF for something like 12 billion? Maybe it was 15 or 18, I forget. Point being, that's much less for an entire country than even just the first injection into e.g. Citibank or JPMorgan or someone.
Anyways, it's hard to conceptualize such big numbers. 700 billion here, 306 billion there, 200 billion yet somewhere else. My friend Priya sends me this:
http://www.ritholtz.com/blog/2008/11/big-bailouts-bigger-bucks/
Of course, that's all a little spurious b/c it is very unlikely that all of our banks will go under and that all the assets the Fed buys will be reduced to zero value (implying that all the people behind the mortgages in these MBSs will just walk away from their mortgages.) More likely than not the government will not just lose all this money. They might even make a good deal of money, who knows. Somehow I doubt, though, that if that happens either a) we get it back or b) it's put to good use to compensate people for the pain and suffering this whole mess has caused many people -- institute an actual unemployment insurance, makes sure we have a better safety net, etc. But regardless of all of that, I just tend to think governments should be governments and not giant investment management firms, making huge bets on mortgage-backed securities.
But anyways, alls i'm saying is that just labeling this all as a cost is somewhat spurious.
Anyways, it's hard to conceptualize such big numbers. 700 billion here, 306 billion there, 200 billion yet somewhere else. My friend Priya sends me this:
"If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion dollars. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.
Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:
• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion
TOTAL: $3.92 trillion
That is $686 billion less than the cost of the credit crisis thus far."
http://www.ritholtz.com/blog/2008/11/big-bailouts-bigger-bucks/
Of course, that's all a little spurious b/c it is very unlikely that all of our banks will go under and that all the assets the Fed buys will be reduced to zero value (implying that all the people behind the mortgages in these MBSs will just walk away from their mortgages.) More likely than not the government will not just lose all this money. They might even make a good deal of money, who knows. Somehow I doubt, though, that if that happens either a) we get it back or b) it's put to good use to compensate people for the pain and suffering this whole mess has caused many people -- institute an actual unemployment insurance, makes sure we have a better safety net, etc. But regardless of all of that, I just tend to think governments should be governments and not giant investment management firms, making huge bets on mortgage-backed securities.
But anyways, alls i'm saying is that just labeling this all as a cost is somewhat spurious.
"The U.S. government has a technology, called a printing press"
That's what Bernanke said in a speech on how to avoid deflation "and the special problems that entails." That was back in 2002 when deflation was an actual worry. This is the link:
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
I think it's a good speech and in general, I think Bernanke is very smart and understands what the problems are and what needs to be done. I agree that, in the short term, liquidity is needed, and that the Fed is doing the right thing to inject loads of it into the system. I am worried about a) the way it's done and b) what to do in the aftermath. B/c this much liquidity will come around and have an inflationary impact -- and possibly create another bubble. I mean, isn't that what Greenspan did, when he lowered interest rates so dramatically back when?
Aaaaaanyways, the speach has some policy measures in it to combat deflation. I'm too lazy to reformulate them all myself so here's what my sales coverage at Goldman sent me:
"The steps in short summary:
1. Use the discount window aggressively to lend to banks (done)
2. Cut rates early and fast when growth and inflation slow (done)
3. Push for fiscal stimulus (done, more to come)
4. Pre-commit to zero or close-to-zero rates for some time (likely in Dec)
5. Target the treasury yield curve and flatten it by buying longer-dated
treasuries (GS forecast for 2009)
6. If credit doesn't expand, buy agency debt (*new* done today)
7. Start printing $ by having Treasury buy risky US assets (incl equity)
8. Start printing more $ by having Treasury buy foreign assets to get the $
value down and create export stimulus"
Interesting. Prescient.
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
I think it's a good speech and in general, I think Bernanke is very smart and understands what the problems are and what needs to be done. I agree that, in the short term, liquidity is needed, and that the Fed is doing the right thing to inject loads of it into the system. I am worried about a) the way it's done and b) what to do in the aftermath. B/c this much liquidity will come around and have an inflationary impact -- and possibly create another bubble. I mean, isn't that what Greenspan did, when he lowered interest rates so dramatically back when?
Aaaaaanyways, the speach has some policy measures in it to combat deflation. I'm too lazy to reformulate them all myself so here's what my sales coverage at Goldman sent me:
"The steps in short summary:
1. Use the discount window aggressively to lend to banks (done)
2. Cut rates early and fast when growth and inflation slow (done)
3. Push for fiscal stimulus (done, more to come)
4. Pre-commit to zero or close-to-zero rates for some time (likely in Dec)
5. Target the treasury yield curve and flatten it by buying longer-dated
treasuries (GS forecast for 2009)
6. If credit doesn't expand, buy agency debt (*new* done today)
7. Start printing $ by having Treasury buy risky US assets (incl equity)
8. Start printing more $ by having Treasury buy foreign assets to get the $
value down and create export stimulus"
Interesting. Prescient.
I really wish I understood mortgages a bit more
Does anyone look at these things more in detail? My data releases on Bloomberg today tell me that Mortgage applications are up:
"MBA Mortgage Applications (United States)
OBSERVATION PERIOD: NOV 21 (Weekly)
ACTUAL : 1.5%
PRIOR : -6.2%
REVISED : - -
SURVEY : - - "
What kind of applications are those? Are those new buyers? Refinancers? Mortagage rates have collapsed (should I say "decimated"?) over the past coupla weeks.
Is this new buyers stepping in and buying houses? Or is this something totally spurious?
Update at 12:40
This is what JTR has to say:
"lower rates will help refi's and that's it. the sales numbers
seem to indicate that there are no real 'new' buyers out there.
i dont think this helps a lot - maybe at the margin."
"MBA Mortgage Applications (United States)
OBSERVATION PERIOD: NOV 21 (Weekly)
ACTUAL : 1.5%
PRIOR : -6.2%
REVISED : - -
SURVEY : - - "
What kind of applications are those? Are those new buyers? Refinancers? Mortagage rates have collapsed (should I say "decimated"?) over the past coupla weeks.
Is this new buyers stepping in and buying houses? Or is this something totally spurious?
Update at 12:40
This is what JTR has to say:
"lower rates will help refi's and that's it. the sales numbers
seem to indicate that there are no real 'new' buyers out there.
i dont think this helps a lot - maybe at the margin."
What's the Smart Money Say?
I tend to think that fixed income is the smarter money whereas stocks is much more emotional. Just hang out with some equity people for a bit and you'll hear them say things like "tight-run ship, great company, yahdi-yahda, and it feels like they could just completely blow the competition away!" a) they often say that "it feels" a certain way and b) they often use these superlatives like: "it's an absolute monster" or "massive outperformance" or "they're just getting hammered/hosed/crushed/obliterated/decimated/burried." Maybe equity people are just a little more prone to the dramatic and a little less prone tto rational thought than fixed income people. And that makes sense b/c, you know, returns are bigger (on the up and the down) in equities than in bonds. Sexier. More action. Break out the champagne. Jump off a building. And what do you have to do in equities? You do some discounted cash flow, you get a target price, that's it. Not exactly rocket science. In bonds you actually have to have a good quantitative grasp on what interest rates will be, what inflation will be, how sudden changes will be and when they will occur, and you have to get your head around something like the convexity of a bond. Of course I oversimplify...
Aaaaanyways: I tend to think that the fixed income market has a bit better grasp on where the economy as a whole is headed than the stock market. So yesterday the Fed announced HUGE new liquidity measures. I mean, they explicitly said they'd use "quantitative easing" to pay for loans and for assets they are taking off the balance sheet of financial institutions and other firms. "Quantitative easing" is the technical word for "printing money." The stock market rallied on that (see graph.)
The bond market, however, did jack. The TED spread remains elevated at 209 (essentially where it came to after the Fed started throwing the kitchen sink at the "frozen" credit markets:
And high yield bond spreads as well as BBB bond spreads didn't react at all (white and green lines below):
(Interestingly, 10 year high-yield spreads did come in, not sure why.)
So all I'm saying is, the stock market is all into the latest measures that the Fed is taking. The bond market doesn't seem to agree. I'm putting my (figurative) money with the latter.
Aaaaanyways: I tend to think that the fixed income market has a bit better grasp on where the economy as a whole is headed than the stock market. So yesterday the Fed announced HUGE new liquidity measures. I mean, they explicitly said they'd use "quantitative easing" to pay for loans and for assets they are taking off the balance sheet of financial institutions and other firms. "Quantitative easing" is the technical word for "printing money." The stock market rallied on that (see graph.)
The bond market, however, did jack. The TED spread remains elevated at 209 (essentially where it came to after the Fed started throwing the kitchen sink at the "frozen" credit markets:
And high yield bond spreads as well as BBB bond spreads didn't react at all (white and green lines below):
(Interestingly, 10 year high-yield spreads did come in, not sure why.)So all I'm saying is, the stock market is all into the latest measures that the Fed is taking. The bond market doesn't seem to agree. I'm putting my (figurative) money with the latter.
Monday, November 24, 2008
Time to start documenting
I've been on the frontlines of this very strange time in financial markets for about a year now. Two things to frame this blog: First, I never thought this is where I would be. Second, I have never experienced a "normal" time in the financial markets. Maybe it's time to start documenting my experience.
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