Crash

There's no other word for it. Equities are weak, but FX carry is weaker: AUD/JPY is down 11.5% on the day, and EUR/ISK is up FIFTY percent in the offshore market.

Suffice to say that a few more years, and perhaps careers, may be ending today....
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AG
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October 6, 2008 at 4:00 PM ×

Mr. Macro, I am not seeing the ISK/EUR bit on my Bloomie - can you suggest where I can witness such a mighty crash with my own eyes?

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Anonymous
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October 6, 2008 at 4:03 PM ×

Mr. Man,

I'm a bit puzzled about the "off shore market" that you referred to - I don't know much about FX but the only time I've heard of an off shore market in currencies has been when there are strict capital controls in a country (China).

Have Iceland in imposed capital controls?

LFY

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Anonymous
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October 6, 2008 at 4:05 PM ×

I cannot see EUR/ISK. please give a quote... the last quote I see from Saxo Bank is 154.21

Please tell what the current level is!
Many thanks!

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Anonymous
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October 6, 2008 at 4:07 PM ×

And the winner is... JPY!

I'd have bet on CFH for the silver medal, but I've never been able to understand the Swissie...

Anyway, there's some kind of beauty in all this!

AT

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Macro Man
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October 6, 2008 at 4:10 PM ×

Most banks are not dealing with the Icelandic banks because of, ahem, fears of solvency of those institutions.

So the offshore banks are trading with each other; the last quote I saw there was 215/225.

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Anonymous
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October 6, 2008 at 4:11 PM ×

Ah, that makes sense. Thanks.

LFY

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Anonymous
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October 6, 2008 at 4:14 PM ×

Thanks for the quote!

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Anonymous
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October 6, 2008 at 4:20 PM ×

Spreads must be hugely wide in the EURISK as well - my chart is flicking from 155ish to 180 and back again with no in-between levels. Anyone got any ideas of where Iceland's sovereign debt CDSs are trading now?
CT

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October 6, 2008 at 4:31 PM ×

I'm hearing rumors a co-ordinated GLOBAL rate is being considered. Anybody else hear that? As much as 100 basis points across the board. What are the odds?

I'm hearing the rumors out of London UK from some traders there. No way to know how credible this is.

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Macro Man
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October 6, 2008 at 4:34 PM ×

We were talking about it as a possibility for 1.15 today. Instead, we got a TAF extension.

In the near term, this crash-like behaviour will probably continue until we get a coordinated policy easing...after which we get the vicious rally and settle back into a normal bear market.

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Anonymous
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October 6, 2008 at 4:53 PM ×

This may be a tiny addition to the global problems but a new worry getting ink in the US is regarding the solvency and liquidity of states and municipalities. CA, MA and NY have already raised concerns with more to come, I fear. Thanks for giving us insight and courage, MM.

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bernard
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October 6, 2008 at 5:00 PM ×

"Most banks are not dealing with the Icelandic banks because of, ahem, fears of solvency of those institutions."

This is a terribly anti-icelandic biased statement, I fear. The following statement may be closer to reality:

"Most banks are not dealing with banks because of, ahem, fears of solvency of those institutions."

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Anonymous
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October 6, 2008 at 5:05 PM ×

sorry for the pun but well, with a name like EURISK its no wonder that no one wants go long it now.

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Brian
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October 6, 2008 at 5:19 PM ×

You can pull up a live chart of EUR/ISK here:

http://www.global-view.com/forex-trading-tools/usindex_charts.html

1) Click "File"
2) Click "Change Symbol"
3) Click "More"
4) Enter "EUR/ISK"

However, I'm not seeing a 50% move, looks roughly unchanged on the day..

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Brian
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October 6, 2008 at 5:21 PM ×

Disregard the last post, the quote feed on that pair appears dead.

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Hroi
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October 6, 2008 at 5:40 PM ×

The EUR/ISK at 195 according to ECB:

http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-isk.en.html

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Duh
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October 6, 2008 at 6:28 PM ×

yeah! lets fix too much irresponsible lending by lowering rates even more!

If we are going to survive this, we need to stop taking advice from failed traders and failed central bankers

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Macro Man
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October 6, 2008 at 6:34 PM ×

Hope you like soup, Duh.

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Duh
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October 6, 2008 at 7:12 PM ×

MM: Thanks to stupid bailouts of insolvent banks at sub-market rates, Uncle Sam can no longer afford to operate soup lines

There are too many houses financed with too much leverage -- a rate cut isn't going to solve either one, it will just bankrupt the country

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Anonymous
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October 6, 2008 at 7:20 PM ×

If I were part of the Federal Reserve/Treasury and not a GS alumnus, I'd imagine that making sure that the non-financial commercial and municipal market doesn't freeze is more important than saving all the banks.

For example, guarantee "lender of last resort" to all commercial & muni paper starting 75 bp above fed funds (AAA) and going from there. Make sure the payrolls get paid, and the cops too.

It's also a matter of justice, and that matters too.

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Anonymous
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October 6, 2008 at 8:20 PM ×

"flow5 Says:
The FED may be able to bailout many banks but the FED cannot bailout the SYSTEM."

soup for you too MM

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Macro Man
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October 6, 2008 at 8:23 PM ×

I am long tureens, short caviar spoons, to be sure.

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zanon
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October 6, 2008 at 8:23 PM ×

MM: I hear what you're saying about no one benefiting from a general Depression.

That said, I think it's pretty clear that the financial system (particularly the $ parts) needs to delever.

It's like house prices need to fall to align with incomes

Do you have another mechanism for this?

-zanon

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HoosierDaddy
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October 6, 2008 at 8:28 PM ×

A global rate cut might be a nice headline, but unless the Committee of Central Banks to Save the World can find a way to get the liquidity they are soaking the money center banks with to trickle down to borrowers then I don't see what this does that other liquidity injections haven't. Maybe a coordinated intervention in the Commercial Paper markets might actually do something. Maybe winding down all the massive bank lending facilities and letting the weak fail, then nationalizing/recapitalizing the survivors would work. I don't know if anything is going to resolve this in a politically acceptable manner or timeframe.

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Macro Man
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October 6, 2008 at 8:46 PM ×

Zanon, I hate to say it, but I think we're at the point where developed market authorities need to inject capital into banks and, after having done so, aggressively lend to them...either through interbank deposits or CP, or something of that nature.

Deleveraging can come from reducing assets or increasing capital....while the former will need to be done in the long run, in the short term the latter is easier to accomplish.

I think it is safe to assume that most people who made mistakes in the last few years (and plenty who didn't) have been punished, so I think the time for hair-shirt financial Calvinism is over. And I say this as someone who opposed Fed rate cuts last year, pretty much for all the reasons that materialized...the run on the dollar and concomitant inflation shock.

Let's just say that I have changed my view in the ensuing 12 months.

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gramps
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October 6, 2008 at 8:59 PM ×

MM: We have to restore confidence in "the system". Two things must happen:

(1) everyone has to delever (already mentioned)

(2) The guilty need to be held accountable

As for #2... there is absolutely nothing you, Hank Paulson or either Presidential candidate can say about tax payer funded lending or capital injection while Wall Street CEOs sit around with millions in ill gotten gains.

I have met several of these men, and they are not dumb. I think they knew what was happening-- at least the big picture.

To be paying multi-million dollar bonuses one day and then asking for a taxpayer bailout a few days later just doesn't make sense. Clearly, the P&L to justify those bonuses was not there (or they wouldn't need a bailout).

Every single American needs to ask -- no demand-- where is my multi-million dollar mansion in the Hamptons?

If you don't have a Hamptons mansion, and the folks that ran Bear, Lehman, AIG, etc into the side of a mountain do -- its just going to cut it.

There is NOTHING Paulson can say to change that.

I am not saying we should turn all socialist and ban million dollar pay packages... I am just saying the pay packages need to be earned. And these were not.

To restore faith in the markets, Wall Street needs to be a meritocracy, not a kleptocracy


BTW -- Paulson appointing a Goldman employee to run his super-SIV is just making things worse. Even if this guy is qualified, he is ex-Goldman. You cannot have even the appearance of impropriety, never mind actual impropriety

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Anonymous
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October 6, 2008 at 9:08 PM ×

My problem with concentrating on banks only is that if they are so fscked, they won't bother to lend to anybody else, even if they are good borrowers. Why should the liquidity and normal operations go to them first? Why must they hold the rest of the economy hostage?

The Federal Reserve Banks are indeed banks, and it may be time to allow them to bypass the rabid and raving commercial banks if necessary to save the physical economy.

Since government is a bad capital allocator, how about a "matching funds" program? E.g. if a company gets $X from meager commercial paper rollover from banks, then Feddie Pae sticks in beta*X at similar terms, capped by FF + 300bp (or whatever), for some time-dependent beta.

The banks will take years to fix, let's not let that problem asphyxiate the rest of us.

as for the SuperSIV executor: What do you mean "ex"-Goldman?

It appears that U.S. Treasury is just another trading desk of theirs.

Except bonuses are awarded based on how much they lose with every trade.

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Anonymous
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October 6, 2008 at 9:21 PM ×

Reuters: Lehman's Fuld: Where was our bailout?

Taxpayers to Fuld: Where was our $30 million pay package for screwing up?

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Anonymous
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October 6, 2008 at 10:46 PM ×

"As much as 100 basis points across the board. What are the odds?"

I will wager that Japan does not cut interest rates by a hundred basis points. :)

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CV
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October 6, 2008 at 11:02 PM ×

Hmm ...

This is definitely crunch time ... I think the ECB might cut rates this week (50-75 basis points). Whether it will be a sole play is debatable, but if the rout continues tomorrow they have no choice.

Basically, there are too many macro implications of not doing anything.

JCT et al. will now have to face the music ... let us see whether they can dance.

What is this talk about a coordinated G3 response (i.e. this would take Japan back into ZIRP no?. Anyway, I am sure MM will be there with some thoughts if and when it happens.

Claus

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Anonymous
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October 6, 2008 at 11:10 PM ×

I see some numbers on Bloomberg (about 173) for EURISK Curncy (function). The spread seems a lot tighter than I would expect, though.

"I think it is safe to assume that most people who made mistakes in the last few years (and plenty who didn't) have been punished,..."

I don't agree with that at all (at least with the first part of that statement). I don't consider going from a $500 million fortune to a $50 million fortune "punishment."

"Let's just say that I have changed my view in the ensuing 12 months."

Always a good thing for a trader to do when the situation changes.

I don't think a rate cut will help much as a practical matter, but it does offer a feel good factor, so bring it on (especially since I have big long positions in Fed Funds and Eurodollar futures).

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Anonymous
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October 7, 2008 at 12:46 AM ×

What the CBs need right now is for the market to give them some time to draft sensible, long-term solutions to deleverage the financial system in an orderly fashion. To buy time however, the inter-bank and other money markets need to be resuscitated, and a rate cut is certainly not going to do that. The only thing that is going to work at this point is a near blanket guarantee, subject to a limited set of conditions, on lending in these markets. This is key to avoiding further damage to the real economy and in particular preventing the spread of illiquidity to NFN corporates and munis. Once this guarantee is in place, then the plan to delever can be crafted. I'm not sure what form it will ultimately take, but given private investors are pretty fed up with sticking money into increasingly large black holes, the cash required to delever is ultimately going to have to come from government.

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Anonymous
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October 7, 2008 at 3:57 AM ×

What we need is a coordinated sale!! Only 79 days to Xmas

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