Posted on 03/16/2008 8:58:36 PM PDT by bruinbirdman
As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.
Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."
The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.
Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.
It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.
Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.
The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.
With the "financial accelerator" kicking into top gear - downwards - we may need everything that Ben Bernanke can offer.
"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."
Even monetary policy à l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.
"It is like fighting a virus with antibiotics," he said.
We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.
But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.
The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.
Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.
Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?
As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.
As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?
The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.
The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.
Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.
It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies". The monetary order is becoming unhinged.
I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe.
Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.
The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.
The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.
Better start nailing shut the windows on Wall Street. That huge crane that fell on NYC is a bad omen.
Our agent told us there were deals to be had, but that if we wanted to buy a home in foreclosure, we had to be prepared to deal with a LOT of red tape, misc paperwork, extra hoops, etc. Plus it would take a lot longer than a conventional purchase. Plus since the good ones had already gone, many were in pretty tough shape. We didn't buy a repo.
Fast forward to today, and I think the prevailing logic is that people currently trying to sell are going to have to start competing with the perceived foreclosure prices. Agents and brokers will push all those notions, of course. It will take a bit of time to sort out. The thing is, pricedropping is only one half of the story. The other half is that the seller still holds the mortgage at the original price.
It's my understanding that the bad subprime loans have been sold so many times, it's kind of tough to even figure out who the mortgage holder *is* in some cases, which will add even more time to the process. (That is, if Steve Kroft's 60 Minutes reporting is to be believed, and I'm not saying that it is.)
Another major difference this time is the sheer number of these foreclosed homes. I'm talking about California, but, of course, this is happening all over.
Here's an article from today's SF Chronicle: Mortgage crisis is creating new 'slumburbs'
So I thought I'd throw my two cents in, from the practical man-on-the-street standpoint. In the long run, what you said is true, I think. There is a lot of back-and-forth in the process.
That is soooo important! Back then lenders handed out toasters and calendars, we joked that the only way you could get a loan was to not need it.
So I wonder, why bail out lenders who started handing out loans? They lost. Why bail out those who bundled the mortgages on a global scale and exploded the credit bubble. They lost. Look at $2/share Bear Stearns. They lost. Hey! it's capitalism. You takes your chances. I thought all these guys hated "government interference." Now look at 'em crowding around Washington.
And you're correct. The housing prices are still relatively high. But what about next year? I wonder.
I wouldn’t want to have debt tied to the prime - get it “fixed” and quickly...
They say that during the great depression when everyone was broke and starving, somehow or another booze was flying off the shelves and they couldn’t make enough of it at any price...of course it was illegal, so that kinda dampened the production of it a little. But still, somebody always finds a way to get rich, no matter how bad it gets.
You got me where the deals are this time around. Maybe it will be realesate by the end of the year.
Why bail out those who bundled the mortgages on a global scale and exploded the credit bubble. They lost.
Because the consequences of not bailing them out are far worse.
If someone is dumping treasuries wholesale, interest rates would have to go up.
Now, ChiComs might not be buying U.S. treasuries, but they ain't dumping.
If Uncle Sam had a problem unloading new debt (AEP, "Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes."), interest rates would have to go up.
Everything I see at Bloomberg is down http://www.bloomberg.com/markets/rates/index.html
I think smart money is taking profits in euros and pounds and sending it to safety (U.S.A.).
yitbos
And our president did not know that gas prices were reaching $4.00 a gallon.
Well...smart, and liquid. Snapping up real estate, good deal or no, requires a bit of moolah. :-)
But at the same time, we have the dollar falling and fuel rising. So I don’t know what to make of the big picture yet.
I say not a comparable datum. McCain is a Senator, and he had no knowledge of an act he had participated in. As for the gas prices, they hit 343.9 here in Chicagoland, where they’re traditionally high, and have dipped to 339.9. Tomorrow? Who knows! But that’s just it ...
Me neither which is why I bought two Ruger LCPs last week as well as a re-supply of shotgun shells.
This recovery is perhaps made more difficult because of global factors, I don't know. I do know that it ain't over yet and it will likely get worse.
I've seen many cycles since the end of W.W.II. We all survived. Today we have for the first time trillionaire enemies, Middle East fanatics and the Chi-coms. We had enough sense not to build the Soviet economy.
GREENSPAN: FINANCIAL MESS WORST SINCE WWII...
No, we only built a soviet-style economy here. That’s the problem!
The rate was about 16% but the cost of a house that would go for $400,000 today was $70,000.
You raise a point. I had been wondering what machinations might be at work that have escaped public notice. I have to wonder if this isn't a case of someone flying too close to the sun.
ping for later read - the Fed.
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