The End of the Dissonance

Well, we now know who was right, and it wasn't equities or JCT (who seems to have mislaid his compass today.)

The DJ Transport Index is just one of many ugly, ugly charts out there...
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Anonymous
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October 2, 2008 at 8:39 PM ×

What's JCT?

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bernard
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October 2, 2008 at 9:13 PM ×

Sorry, macroman, but JCT is absolutely right in my view not to touch rates. That's because it would have no impact on the problem. Banks are not lending to each other because they are wondering what ugly stuff the other party have in their portfolio that might make them go bust in a second. In this situation the cost of money is irrelevant, quantitative measures are the only ones that have a chance (and it's only a chance) of working. We all, including JCT, know that the European economy is headed towards tough times, let us reserve rate cuts for a time when they might have a chance of being effective on those that matter, namely the real economy guys.

Have Fed rate moves made a major difference (this time) in your view ? No, I didn't think so.

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Anonymous
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October 2, 2008 at 9:18 PM ×

Well this entire week it looked like all of the popular stocks held by the "focus funds" (Janus Twenty/CGM Focus, etc and the hedgies) got hammered down.

If you're bullish, hopefully (with a big hope), that means redemption-mandated selling is drawing to a close.

As an aside, I hope that Palin goes on a bizarre tirade tonight and closes down the McCain campaign. Otherwise, I think I'll make contingency plans to fly down to Sydney on Nov. 5 and become an illegal alien in Australia should McCain win the election.

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Macro Man
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October 2, 2008 at 9:21 PM ×

Bernard, how bad does it actually have to get before the European economy merits a rate cut? Do we really need to wait til all the IG Metall workers are sacked, so they're no longer around to make ludicrous wage demands?

Tempting as it is to see the look on Herr Steinbrueck's face should such an outcome occur, it really isn't ideal.

And insofar as monetary policy works with a lag, recession is already unavoidable in Europe, which will no doubt delight all the economists in the audience. It's really just a question of how speedy the recovery might be.

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gramps
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October 2, 2008 at 10:08 PM ×

MM: Bernard, how bad does it actually have to get before the European economy merits a rate cut?

There is no evidence that a rate cut will help -- 325bp of cuts and an alphabet soup of "emergency" lending programs in the States haven't accomplished anything.

Banks are not lending because there is way too much "creative accounting" going on. Lower rates does nothing to improve transparency

Banks are not borrowing because they are already too levered as it is.

A rate cut is pointless nonsense from Wall Street "analysts" being lazy. The very same analysts who failed to anticipate armagedon even though the source was only a few desks down the trading desk.

If anything, the Fed should be raising rates -- back up to 5% or whatever you think inflation is. Keeping artificially low interest rates is just allowing unscrupulous bank CEOs to delay the day of reckoning at everyone else's expense -- but they are not going to avoid it.

The $700 billion inter-generational theft is now predicted to pass the House (hope not, but...). In spite of that, DJ Transports are plummeting as MM displayed.

That tells me a lot of people in the markets are starting to realize the $700B fraud isn't going to fix anything.

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Anonymous
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October 2, 2008 at 11:37 PM ×

WTF is it with all the Calvinists? Do any of the 4.25ers really think that is anywhere close to the natural rate at this point in the game for the EMU?
Of course inflation is probably a secular global issue, but it’s had the cyclical stake stuck into it and there is now no way the rate should be looking through the risks of what we’re all facing for the next 6-18 months. JCT played his hand right for a time (unlike BB who could have saved himself a ton of hawkish grief had he waited a while for the commod complex to roll over), but now he is threatening even greater harm for the Union with his intransigence as evidenced by the widening spreads of Italy et.al.. vis-a-vis bunds.
RJ

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Anonymous
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October 2, 2008 at 11:49 PM ×

gramps - if the treasury/congress is unable to get their act together to implement a plan to recapitalize American banks.. then the solution will be to globally cut interest rates and let banks recapitalize through a steep yield curve during a time of regulatory forbearance.. what else could be done? i think coordinated rate cuts sans japan will certainly be on the table if things get considerably worse..

MM - EUR is a crapshoot right now. but one thing to consider is MS cds trading around 1000. the focus right now is on europe being the basket case and not being able to implement their own version of the tarp.. but what happens to EURUSD if MS goes under because there is no decent commercial bank left to merge with in the states and european banks are levered considerably more than US banks.. they are in a very sticky situation and i think it's quite possible you can see the focus coming back to US centric problems... EURJPY or USDJPY seems like a much cleaner play in the current situation.

NY

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Anonymous
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October 2, 2008 at 11:52 PM ×

or long USDKRW, USDBRL, or USDMXN for that matter..

or why not just globally short equities.. worked well for you so far

NY

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Anonymous
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October 3, 2008 at 1:59 AM ×

@ RJ & MM have to agree with you, even as an EU oriented Brit, really don't understand this obsession with the ECB remaining on hold. JCT is a frenchie and as much as the Bundesbank was/is the dominant ECB player the data has surely rolled sufficiently for them to cut soon, esp given the policy lag, and Fed comparisons are irrelevant here. Staying short stocks, curious as to whether any MM followers heard of any HF redemption flows prompting todays action or was it positioning ahead of a hoped for congressional refusal of senate pork (despite liquidity issues)? Happy Friday. JL

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gramps
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October 3, 2008 at 5:05 AM ×

Anon 11:49

Japan lowered rates to effectively zero, and has held rates at effectively zero for more than a decade...

It accomplished absolutely nothing -- exactly what a cut by the Fed or BoE or ECB, or all three would accomplish.

No one wants to lend because we know the books are cooked.

Perhaps more importantly, no one wants to borrow (not even from central banks) because they MUST de-lever... the only people borrowing from the Fed are those for whom delevering would reveal that they are bankrupt.

Keeping zombie banks in business just hurts the remaining banks -- same as bankruptcy courts keeping zombie air carriers in business hurt the few viable carriers

The US already lowered rates 325bp, created a dozen pointless lending programs -- and Libor went **UP**, not down, because everyone knows the books are cooked.

Japan lowered rates to zero and also accomplished nothing.

So the absolutely useless "analysts" of Wall Street have now come up with a lazy solution to fight the previous war -- but completely useless for the current situation.

No one wants to lend because of lack of transparency; no one wants to borrow because they are already over-levered.

This is why Wall Street is failing -- the "smart guys" really don't have any idea what they are doing, so they are suggesting "rate cuts" in hopes the rest of us won't realize how useless the sell side has become

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mikarsky
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October 3, 2008 at 6:54 AM ×

Well JCT is getting all he wants: *relatively* high rate PLUS a lower Euro. The first helps stabilize inflation expectations (the "felt" contraction in Euroland is still low). The second helps Euroland firms more than rate cuts which would do little to ease lending (it's not the rate, it's sentiment).

But I have to thank Bloomberg for distorting JCT's message to suggest a rate cut is imminent, which he didn't. Still, shorting the temporary USD rally was a great way to earn some extra cash for the weekend : )

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normal being
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October 3, 2008 at 7:20 AM ×

In the moment - under the hood - we have deflation, not inflation. These few days after the failed bill really were a replay of what we know from '29.
If that bill doesn't get passed soon, a few rate cuts in Europe won't cut it. Not even to zero.

Even if that bill finally gets through (man, are they still at it or have I missed something? it's middle of the night there...) then I still prefer a smaller packet for Europe instead of rate cuts.

For me 4,25 means a higher chance of a European rescue. That would be needed, really. If it doesn't come, ECB better cut soon and hard or stock up on guns and ammo...

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Anonymous
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October 4, 2008 at 10:35 AM ×

400 bn in dividends and ???bn in bonuses if the new govt employees are paid as to their true status.

There is your steeper yield curve...

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