Ironically, the best thing that could happen for the market would be for this Bear blowup to get really ugly and threaten Bear and other banks and numerous funds. Then the Fed would more or less be forced to slash rates like Greenspan did in '98 when LTCM blew up. And unlike LTCM, this is purely a Mde In the USA problem. There is nothing wrong with any of that paper that a 75 BP cut wouldn't cure.
Bear Blowup Could Reignite Bull Market
- Thread starter AAAintheBeltway
- Start date
The EMs are already hurting due to the weak $, a 75bp cut to save the system would send the $ reeling and in turn crush liquidity in the EMs. Careful what you wish for, in this layered and leverged global financial house of cards any sharp move can create the instability that could bring unintented and unmaneagable consequences.
Overnight rates being slashed at this point would do little to re-ignite a bull market. For one, we are at or near the end of this cycle. Also to note, what has really provided the extended liquidity to fuel this market is the ten-year.
Pretty much everything revolves around the ten-year notes as that is what most asset financing is tied back to. The enormous buying of treasuries by our friends in Asia, has fostered a low rate environment for some time now, and has continued to stay low even as the fed ratcheted up the overnight rates.
The trend of Asians pouring dollars back into treasuries has turned. So even if do-nothing Ben lowered over-night rates, that would have little if any impact on the ten-year notes.
More importantly, the Fed's main goal is about fighting inflation, not saving a hedge fund and subsequent fallout.
A major fund blowup and domino effect WILL happen and cannot be stopped. It is by design that this will take place. There is an enormous amount of speculation going on by funds in the CDO markets, thus providing a large payday to the holder of these derivatives. There is a major motivation for these obligations to eventually be triggered somewhere. It is just a matter of time.
Pretty much everything revolves around the ten-year notes as that is what most asset financing is tied back to. The enormous buying of treasuries by our friends in Asia, has fostered a low rate environment for some time now, and has continued to stay low even as the fed ratcheted up the overnight rates.
The trend of Asians pouring dollars back into treasuries has turned. So even if do-nothing Ben lowered over-night rates, that would have little if any impact on the ten-year notes.
More importantly, the Fed's main goal is about fighting inflation, not saving a hedge fund and subsequent fallout.
A major fund blowup and domino effect WILL happen and cannot be stopped. It is by design that this will take place. There is an enormous amount of speculation going on by funds in the CDO markets, thus providing a large payday to the holder of these derivatives. There is a major motivation for these obligations to eventually be triggered somewhere. It is just a matter of time.
Comanche, good post.
RE: Reigniting the bull market with a "forced rate cut" is something similar to what I (sadly) heard Kudlow say the other day. He said that the Democrats threatening to tax hedge funds and thus scaring the market into selling off could turn into a rush to buy when people realize it's false. These are silly dreams about more reasons to extend this bull run.
Emerging markets are what has fueled the great growths in some of the larger cap companies. Look at MCD, GS, AA, etc....many of these companies have seen much of their growth rate coming from overseas.
If you factor in liquidity tightening, Asians not buying treasury bills, increasing rates worldwide, etc. you should see the end of the bull cycle or at least a hampering of equity bullishness in my opinion.
RE: Reigniting the bull market with a "forced rate cut" is something similar to what I (sadly) heard Kudlow say the other day. He said that the Democrats threatening to tax hedge funds and thus scaring the market into selling off could turn into a rush to buy when people realize it's false. These are silly dreams about more reasons to extend this bull run.
Emerging markets are what has fueled the great growths in some of the larger cap companies. Look at MCD, GS, AA, etc....many of these companies have seen much of their growth rate coming from overseas.
If you factor in liquidity tightening, Asians not buying treasury bills, increasing rates worldwide, etc. you should see the end of the bull cycle or at least a hampering of equity bullishness in my opinion.
I was in management consulting (financial risk, hedging, etc.) for many years. During LTCM's implosion, I saw a memo at a very large international bank (to remain unnamed), which was an internal memo, about why the bank had been providing liquidity to certain hedge funds. This was a move that was considered bizarre and unnecessary by most senior management.
The gist of the memo was that they were approached by the Federal Reserve, who said that stability of the financial system was an important goal of theirs. If this bank (among many others) did not help out in this time of need, they would all have much bigger problems to worry about soon after.
This was the argument put forth by this memo (from the Chairman / CEO), who said that the US Federal Reserve was convincing on this issue.
So, it would seem (anecdotally, of course) that the Federal Reserve also has stability of the system as a goal, and will go to great lengths to prevent systemic crises.
My humble opinion is that preserving the currency's "store of value" aspect has long ago been discarded, and we have moved to a new phase of simply preventing disaster.
The gist of the memo was that they were approached by the Federal Reserve, who said that stability of the financial system was an important goal of theirs. If this bank (among many others) did not help out in this time of need, they would all have much bigger problems to worry about soon after.
This was the argument put forth by this memo (from the Chairman / CEO), who said that the US Federal Reserve was convincing on this issue.
So, it would seem (anecdotally, of course) that the Federal Reserve also has stability of the system as a goal, and will go to great lengths to prevent systemic crises.
My humble opinion is that preserving the currency's "store of value" aspect has long ago been discarded, and we have moved to a new phase of simply preventing disaster.
asragov, your point is interesting and your experience is detailed in "When Genius Failed" in part.
I'd have to add though that LTCM was so far ahead of themselves that they could have thrown the whole financial system into chaos whereas Bear blowing up would lead to them getting picked apart after a big mess.
LTCM could have been a catastrophic cherry on top of an already very sweet cake of worldwide financial markets melting. I believe it was a case that couldn't be mimicked in this day and time due to the liquidity flow. I think a worldwide financial disaster could happen due to the derivatives market and it could be hard for anyone to save it due to complexity, but for one fund to do that seems nary impossible to me to even imagine.
cheers bro.
I'd have to add though that LTCM was so far ahead of themselves that they could have thrown the whole financial system into chaos whereas Bear blowing up would lead to them getting picked apart after a big mess.
LTCM could have been a catastrophic cherry on top of an already very sweet cake of worldwide financial markets melting. I believe it was a case that couldn't be mimicked in this day and time due to the liquidity flow. I think a worldwide financial disaster could happen due to the derivatives market and it could be hard for anyone to save it due to complexity, but for one fund to do that seems nary impossible to me to even imagine.
cheers bro.
I don't think the feds can lower interest rates (although trying to guess the fed is dang near impossible). There's been a recent spike upward in interest rates and this will put pressure on the feds to follow suit since "market forces are dictating". In addition, there is somewhat of a global trend toward rising interest rates which will put some additional pressure to increase rates in order to not devalue the dollar any more.
Plus, the Bear fund isn't near the magnitude of LTCM, is it?