The Credit Crisis Financial Stocks Short Journal

How did that experiment in lower rates for a "considerable period" work out.:D

This time will be different - there will be no telegraphed 25 bp increases over a period of years. There will be no 0% rates for a "considerable period" while the committee believes the economy "continues to expand". The rate hikes will come sooner, and, more importantly, faster than the last cycle. Look for the 1st hike to be 75-100 basis points.

As for the GE option trade, I believe that at some point over the next quarter, there will be a rate hike scare (similar to summer 03 when eurodollar futures dropped 200 bp in a few weeks). I will look to get back in that trade in size at that point. I just hope to have the opportunity.:(
 
Quote from ralph00:

Look for the 1st hike to be 75-100 basis points.
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I hope this is right, although I dont think the first one will be more than .25(to avoid disnecessary market disruptions as the first hike will be a big day) but if they do a few .50 .75 a long the way this means they were too late and got desperate to prevent inflation in that case my GE calls tripled. They will only hike that much in a overheated economy, which might take years with banks zombified
 
Looks like Einhorn is non longer a 'true believer' buffettlogist, W Tilson also gave up on the 'forget macro, just buy good companies', Monish Pabrai is also singing this song a bit more(and there is a true believer if I ever saw one). Heres Einhorn speech where he starts by saying he was wrong in ignoring the macro picture of the US housing bubble

http://www.zerohedge.com/article/david-einhorn-value-investing-congress-speech

Bottom line is that buffett is wrong for only looking at micro. WFC is no good long-term buy at all in my view
 
One of the best market timers that I know had problems in the bear market as his historical analysis kept saying buy and the market would get more oversold. Lately shorts have induced a drawdown, he still did quite well but it makes my wonder why since the crisis started things have been 'so different'

My main theory is that as total debt as a % of gdp rises, so will human emotions but only when a catalyst hits.

The leverage will increase macroeconomic volatility(think the UR), the uncertainty will make humans respond by getting more emotions involved in their decisions both on the downside and as we see now on the upside as well. If thats correct one needs to be more careful about historical data right now because macroeconomic volatility have little reason to decline to pre-crisis levels(leverage is still out there) at least not in a sustainable basis, therefore big emotions should continue to dominate financial markets

This makes me skeptical of the view that if risk aversion takes a turn, it will be contained and everything will be fine after SPX drops 15%
 
http://www.econbrowser.com/archives/2009/10/unemployment_an.html

Some empirical evidence for the cyclical phillips curve. Yes there can be high unemployment with high inflation but thats not the point, the point is the inverse mervin king principle "its not the level is the rate of change". A high UR creates downward pressure in inflation, even if the inflation numbers are to be considered 'high', they get to be lower than they would otherwise be. This evidence for a cyclical PC does not mean I subscribe for a secular PC, attempts by central banks to print money with abandon to create employment should lead to both higher rates of change inflation and high UR, which is why this Fed will hike rates before the labor market gets tight

That model predicts no inflation pressures for a long time
 
San Fran Fed predicts low fed funds for a long-time based on a model that predicted the funds rate effectively in the last 2 decades

el2009-17b.gif


"According
to the historical policy rule and FOMC economic
forecasts, the funds rate should be near its zero lower
bound not just for the next six or nine months, but
for several years"

http://www.frbsf.org/publications/economics/letter/2009/el2009-17.pdf

In the 94 and on the model failed, as I wrote here Greenspan conviced the FOMC to start a new strategy of preemptive hikes, starting a tightening cycle before inflationary pressures emerged. Cited the 'relative tranquility' of the period as a reason to take that chance

The current period resembles more 2003-2004 then 94-95 because the core inflation rate is so close to 0%(making preemptive hiking a bigger risk, a japanese risk), therefore I find more likely the Fed will keep rates lower for longer than the San Fran Fed model says, a repeat of 03-04 even if for a shorter period this time and with perhaps bigger hikes during tightening to avoid pulling a Greenspan
 
Jeffrey Lacker speaks today to journalists, no word yet on whether he is currently on or off his meds
Beige book is also out 2PM
 
Wall Street Journal, 4/30/04:
“Speculators do know that it's important to get out, however --that's the lesson they took away from the crateringof the dot-com highfliers. And they appear to believe that they will be able to get out before a stock craters, as illustrated by numerous trading experiments conducted by Vernon Smith, a professor at George Mason University who shared in the 2002 Nobel Prize for economics.
In these experiments, participants would trade a dividend-paying stock whose value was clearly laid out for them. Invariably, a bubble would form, with the stock later crashing down to its fundamental value. Participants would gather for a second session. Still, the stock would exceed its assigned fundamental value, though the bubble would form faster and burst sooner.

"The subjects are very optimistic that they'll be able to smell the turning point," says Mr. Smith. "They always report that they're surprised by how quickly it turns and how hard it is to get out at anything like a favorable price."

But bring the participants back for a third session, and the stock trades near its fundamental value, if it trades at all, the professor's studies show."

This is what makes a third equity, RE bubble so unlikely right now. There was another study by a guy named Montier that showed the same thing, by the third time the rise in assets was quite contained
 
^^^ Of course.

The question before the court is where will the new asset bubble be? Smart phone stocks, treasuries, gold, Goldman Sachs, foreclosures in SoCal, ...
 
I dont see much of anything hawkish in this beige book, and dont get why the front end didnt like it

http://www.federalreserve.gov/fomc/BeigeBook/2009/20091021/default.htm

"Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels."

Those reports are from the supposed 3-4% GDP growth Q3 and it doesnt sound great at all. The 2003 Nov report sounded much better. And this quote is borrowing a bit from mervin king, the Fed is trying to remind everyone that 'its about the levels'
 
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