(snip)"I'll start off with a brief description of a bond trader's day on Thursday, just to show you how crazy his day was... This email was received from a former colleague of mine at the old Mark Twain Bank... He's now a very important bond guy in Florida!
"You should have seen the mortgage market yesterday... collateral was gapping lower while treasuries were rallying thru the roof... and just when you thought it was safe... collateral rallied through the roof... major whiplash... major pain... thank God we are light in inventory."
And that story could be told on 100's of trading desks, whether they be bond, stocks, commodities, currencies, etc. But... What happened to calm it down on Friday? Ah grasshopper... Remember, on Friday I said that there were rumors of an emergency Fed meeting? Well... Those rumors came true... And the Fed decided that there should be a Discount Rate cut of 1/2%...
OK... Let me explain this Discount Rate thang... The Discount Rate is what the Fed charges for banks that need to borrow funds from the Fed... They call this having to go to the Discount Window. Now... Normally, if you need to borrow from the Discount Window, the Fed doesn't take kindly to this... But if you need to go two times, then the Fed is looking into your books!
Well, this time... The Fed said... "Come on, borrow... And do it at a cheaper rate... We understand." Now... The thing that scares me about this move is this... What if... The Fed is repeating the bail-out of the LTCM episode in 1998? What if... The Fed is bailing someone out that we won't know about until months later, like the LTCM episode?
Anyway... If is isn't any of that scary stuff... Then the rate cut is strictly a symbolic move... And should be looked at as a precursor to a Fed Funds rate cut... And the markets took it as such... Stocks rallied... But so did the euro and sterling and the other currencies that had gotten sold earlier in the week... At one point on Friday, the euro had gained back over 1 cent!
And one more thing here... Isn't life strange... A turn of the page... Just two weeks ago, the Fed Heads would only talk about inflation fears, and now they have turned their backs on inflation to care about financial market stability... Hmmm... Didn't know that was in their job descriptions!
Before I go on, though, I want to remind everyone how my colleague Ed Bonawitz and I would sit with Hy Minsky, the famous economist, and listen to him explain economics... Ed reminded me on Friday of something Hy Minsky taught us and it rings so true in these times...
"Remember Kindleberger/Minsky said it best 'all panics, manias and crises of a financial nature have their roots in an abuse of credit.' That held true in the 1600's with the Tulip Mania as it does in the 21st century. We humans are doomed to repeat history. Over and over again!"
And don't think for a moment that the cut by the Fed might have been the cure for what ails the markets... This was just a "relief rally," not a "recovery rally"... The problems of last week are still hanging around, and are far from resolved! Remember, the story I told you last week about Sentinel Management Group and how they were trying to block money market withdrawals? Well... They filed Chapter 11 on Friday...
Now... As I go along here... I see that the Asian stocks are soaring and a high yielder, Aussie dollars, has rebounded... Hmmm.. You don't think, nah... Well, maybe... Yes, maybe baby, more carry trades are going on the books... Sure smells like carry trades, doesn't it? I sure wish the markets would make up their collective minds and get on with this unwinding and stop going back... The carry trade must be like a drug to the markets, and every time they get out of rehab, they fall right back into the clutches of this drug!
I'm happy that the Aussie dollar is recovering... But not to carry trades... If, in fact, that's what's happening...
Personally, I think that all we need is some stability in risky assets and current account surpluses and long-term financing flows start to see the dollar drift lower in Asia again..."(snip)
I would add that, arguably, the US Fed's intervention and liquidity injections last week cost each and every American $250 of future tax money or $250 in lost purchasing power of the US dollars that they already have !!! Of course, since only 50% of Americans actually pay taxes, and less than 50% of Americans have assets / savings which are worth more than their debts, it comes out to something more like $1000 for every 'middle class' household.



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