Dun't beheebe be booying da US treesoory ubunds!!!
Posted on 03/01/2006 10:27:06 AM PST by ex-Texan
The cash machine that sustained a world boom is about to close, and it's going to get ugly, says Ambrose Evans-Pritchard
One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.
The "carry trade" - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.
Arguably, it has prolonged asset bubbles everywhere, blunting the efforts of the US and other central banks to restrain over-heating in their own countries.
The Bank of International Settlements last year estimated the turnover in exchange and interest rates derivatives markets at $2,400bn a day.
"The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads: everything is poisoned," said David Bloom, currency analyst at HSBC.
"It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet," he said.
"People have a Panglossian belief in the march of global capitalism but that will change as soon as attention switches back to US financial imbalances," he said.
There were early signs of panic this week when the Icelandic krone crashed 8pc in two days, setting off dominoes in high-yielding currencies of New Zealand, Australia, South Africa, Hungary and Brazil.
The debacle was triggered when the rating agency Fitch downgraded Iceland's sovereign debt, a move that would not normally rattle markets.
The new skittishness comes against a backdrop of ever more hawkish moves by Japan and Europe.
"There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable," said Stephen Lewis, an economist at Monument Securities. "When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."
Toshihiko Fukui, the Japanese central bank governor, gave a fresh warning yesterday that this day is near, saying the country was pulling out of seven years of deflation. The economy grew at a 5.5pc rate in the fourth quarter of 2005.
In his strongest words yet, he said the bank would act "immediately" to curtail its extra injections of liquidity, preparing the way for rate rises above zero in coming months.
"The moment of truth is approaching,'' said Kenichiro Ikezawa of Daiwa SB. In Europe, Sweden raised rates to 2pc this week in the face of an overheated Stockholm property market, while Germany's IFO business climate index soared yesterday to its highest level in 14 years.
The European Central Bank will almost certainly raise eurozone rates to 2.5pc in March, with likely moves to 3pc by the end of the year.
Most of the world is now tightening, with no sign of a fresh credit window opening to keep the game going. This is new. Japan has had the tap on continuously as the trade exploded over the past five years, while America itself became the source of funds after it slashed rates to 1pc at the end of the dotcom bubble, and held them there until June 2004.
The US Federal Reserve has since raised rates 14 times to 4.5pc in a belated effort to restore monetary discipline, with at least two more rises priced into the markets.
It is an open question whether the yen, euro, Swiss franc and Swedish krona carry trades have occurred on such a scale that they have led to over-investment in Latin America and beyond, and compressed US yields, fuelling the American housing boom in 2005 despite Fed tightening.
There are other big forces at work: huge purchases of US Treasuries by Asian central banks, and petrodollar surpluses coming back to the US credit markets. Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess. "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.
"History tells us that carry trades end when central bank tightening cycles begin," he said. Ominously, almost every bank other than the Bank of England is now tightening in unison.
Dun't beheebe be booying da US treesoory ubunds!!!
this thread NEEDS MORE COWBELL!!!
"The US Federal Reserve has since raised rates 14 times to 4.5pc in a belated effort to restore monetary discipline, with at least two more rises priced into the markets."
In other words, the 5.875% 30 year conventional mortgages with no points that are widely available will be unmoved by two more rate increases by Bernanke and the Fed, because they are anticipated and already priced in ... not exactly a doomsday scenario.
I understand what you're saying completely, but as for me, my mortgages are paid off, so I would thank you kindly if you'd stop trying to hoist a new one on me! :)
LMAO!!!!! They were screaming "the bubble is bursting" back in 2000/2001 when I bought. If I had listened to them I would've lost a 300% return on my down payment and 5 years of tax benefits. In fact, if I had listed to the chicken littles at all during the last few years, I would be out a lot of money and then I would want to go looking for them...
Lenders are trolling for foreclosures. No big deal, right?
"Lenders are trolling for foreclosures. No big deal, right?"
Disreputable subprime lenders have always been trolling for foreclosures.
Kind of noticed that there is a bit of concern among the money guys as of late. Whether it is because of something real or imagined, I don't know.
>>>>>The cash machine that sustained a world boom is about to close, and it's going to get ugly, says Ambrose Evans-Pritchard
And I assume this man is about 30K shares short on Toll Brothers this am and is getting very itchy about having to cover.
I bet you were ridiculous enough to take advantage of the low APR's as well. All these people who bought homes should have waited until APR's go back up to 17%. As it is, I am advising my clients not to buy while the rates are still low and the homes aren't listing 20% over the last one sold...and still getting multiple offers.
By the way, lenders are just anxious for foreclosures. Nothing like holding real estate racking up taxes in lieu of being paid interest on a loan by a homeowner.
>>>>I would name names
You should name names. Consumers should warn one another when they smell a rat. Let's here who's out there trolling today.
Sweden's Finance Minister went on record this week saying,
"Hursh t heesh t hoort hort t hort." He added indignantly, "BORT BORT BORT!"
A massage from the Swedish Prime Minister: (Sounds of swedish massage) -- Monty Python
Hey, don't you want us to lose everything? Then we can finally go Commie!
Hell, I'd just appreciate the chance to go condo!
What sort of "money guys"? Every FX trading group I've ever walked past was shouting expletives at the top of their lungs, non-stop, all day, every day. A "bit of concern" among that crowd would be hard to detect, unless of course they went quiet, in which case I'd assume that the financial system as we know it had already come to an end.
Criminy, 5.875% is too high.
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