Wednesday, January 28, 2009

Will They or Won't They?

Will they or won't they? That's the question du jour, at least with respect to today's FOMC announcement. There's obviously nothing they can do on rates, so the big issue is whether the Fed takes the leap and announces a program to buy longer-dated Treasuries.

Such an outcome would hardly be unprecedented; the BOJ, for example, has purchased JGBs in the secondary market for more than a decade via its rinban program. For the Fed, it would seem to be more a matter of "when", rather than "if", they pursue such a policy; after all, buying government duration is part of the "Bernanke QE playbook" that he's been following to a tee so far.

Regardless, the Fed will probably not be best pleased to see 30 year Treasury yields some 50 bps higher than at the time of their last meeting. More to the point, the uptick in 30 year mortgage rates is an unwelcome development for BB and co., given the perceived target of 4.5% and the recent signs that refinancing demand was responding to lower rates.Regardless, equities are once again threatening a more interesting bounce, helped on by the mooted meeting between Obama and the bank CEOs. Good bank/bad bank is swiftly materializing as the preferred next attempt at a solution, thus validating Macro Man's long-held view that a "turd-buying repository" would be created before all is said and done.

Of course, an exact replica of RTC is not on the cards; that agency took assets off of bankrupt institutions, whereas today the object is to stop everyone from going bankrupt. How the bad bank would work is currently uncertain; what price would they pay, what incentive would banks have to offload their turds, etc. Simply having the FDIC standing on a street corner, Salvation Army-style, with a big bucket marked "turds" wouldn't appear to be an ideal solution.

Whatever the solution, it seems likely to originate from someone with connections to Goldman Sachs. Yesterday's scuttlebutt was that yet another GS alum, Bill Dudley, is the front-runner to replace Geithner at the New York Fed. This provides further fodder for the chattering classes to mutter about GS in the same terms as the Rosicrucians et, al.

It would be refreshing if the Adminsitration appointed someone to a position of economic responsibility who has demonstrated an ability to anticipate economic developments and to accurately forecast the market impact. Someone like Mr. Paulson. (That's John, not Hank.)

Somehow, however, Macro Man thinks this one probably won't happen.


John East said...

I must admit to becoming increasingly worried. It goes without saying these days that one should ignore much of what any modern politician says and only focus on what they actually do.

The Messiah has surrounded himself with Wall St insiders, and with the possible exception of Volker, the transition from the previous regime appears to have been seamless.

The details may be a little different but the song remains the same.

I suppose this is fine with anyone who might believe that we can borrow ourselves out of debt, stop the housing crash before prices reach equilibrium, and continue living off the labour of the Chinese working man, but as I can't bring myself to subscribe to this groupthink I think I'll continue shorting the S&P on every bounce.

Yohay said...

I think that whatever they'll say, it'll still remain a non-event.

D said...

The US treasury is one big arb fund...

D said...

"LTCD" Long Term Capital Destruction, LLC

Anonymous said...

SPX still inside november 741-1007 range, so do we call it a 'double inside monthly chart' thus far.. the 50% of nov. range is at 875

strong treasuries are needed to jump start the housing market, i like a weekly chart 'holy grail' long try off a touch of 20 week ema, let's see if boom boom gets the rhetoric headed this way today

interestingly gold and us dollar are running together lately, risk aversion they go up, or risk taking days they go down

Bob said...

In the history of human kind, no one has ever borrowed and spent themselves into prosperity.

Now that Bush/Paulson are out, Bernanke really had no excuse for going off and appointing yet another Goldman exec into the NY Fed.

It makes no difference what Dudley's credentials are. At this point, regulators need desperately to reestablish trust

Putting yet another Goldman insider into office is further proof (as if we needed it) that Bernanke doesn't understand how real markets work. If the perception is that the markets are rigged for the political elite, well connected banks are "saved" at taxpayer expense while functionally equivalent (but not connected) banks are "allowed" to fail -- the last thing Bernanke should be doing is reinforcing the perception

The man is an academic who is an expert on how the world "should be" according to his models, but absolutely clueless on how the world actually "is" outside the classroom.

If Bernanke goes and buys long dated Treasuries, he will destroy the market for Treasuries. Check out what happened in Japan if you aren't sure

D said... make it sound like Bernanke actually calls the shots.

You think a guy with a $192k annual salary is making all these decisions? The boy with the beard is a character in the play my friend!


Anonymous said...

The government will have to accept that a bad bank is a loss-making proposition. That's the price to be paid for rescuing the financial system (on top of all the other costs since September). The sooner they acknowledge it won't make money the faster we'll get to an honest debate.

MW said...

If they're worried about 30y mortgage rates, why buy Treasuries? The issue is spreads, not levels.

Bob said...

D-- I don't know how much influence Bernanke has, but all of his comments (starting with "The subprime contagion is well contained" two years ago) tell me he has no clue what is going on outside his little academic world

Is he a mere actor in a play? More like the actor that is ruining the play.

A gang from Goldman Sachs are the authors and directors of this disastrous play. They are also the ones who appointed Bernanke to his role.

This is not the first time the smartest guys in the room turned out to be anything but.

Lets be honest here: exactly how much talent does one need to make lots of money by levering up 50-1 in a bull market?

This same talentless group has bought enough members of Congress (both parties) to pour literally trillions at this mess ... and they have nothing to show for it.

Homeowners continue to lose their houses -- but seriously who cares about them?

More importantly for the gang of thieves: they have been unable to save themselves and their cushy lifestyles. Bear Stearns was one thing; Bear refused to help the gang bail out LTCM years ago. But Lehman? AIG? Merrill?

These guys don't know what they are doing, and they are terrified that more and more Americans are realizing this

Anonymous said...

MW -- the Fed is way ahead of you. The problem is that there is a growing spread now between the coupons on new mortgage pools and the rates actually charged to home owners. Of course, the banks are pocketing the spread.

Lets stop pretending here: there is no way an economically motivated bank wants to lend to insolvent home owners at artificial Fed rates.

If you put no money down, and you were counting on continued home price appreciation (and a later refi) to make your mortgage work -- there is no mortgage rate that is going to save you.

Option ARMs were created to allow people to "pick" their own payment, but everyone knew the debtors were going to pick the smallest payment -- the one that didn't amortize any of the loan.

The facts are that the majority of the mortgages issued in the year or two before the credit collapse fit that description. The banks had long run out of borrowers who could afford to buy houses based on traditional lending standards.

People need sufficient income to be able to service a loan. The interest rate charged isn't irrelevant, but its a secondary concern to having sufficient income. Many of the recent borrowers did not and do not.

And for those who lost their jobs in the year or two since -- obviously they have even less income.

There is no mortgage rate that will make these loans work. The banks are mostly insolvent already, and cannot afford to forgive the loans.

D said...

I agree Goldman voices in the decision circle, but I disagree that they haven't known what was coming. They IPOed the firm...again. Paulson got a tax waiver to "save the financial system."

Paulson left
Rubin left
Steele left
Thain left

...not to mention the former gem of the firm Mark "The Goldfinger."

The goofball left managing the bag is Lloyd... They needed a geeky-looking academic from the school of GD1, who better than a bearded-man from Princeton with a stutter? As for the remaining players in the room, they probably think the system can be saved and you are absolutely correct that the don't know WTF they are doing. One needs to look no further then Kenny Lewis to realize that!


PS - Anyone seen Mozillo lately? I wonder where he's hiding out these days...

Cortex said...

MM: I, for one, would find it refreshing if you would occassionally dilute your critisism towards central bankers and governments. Why not every other month or so admit if a measure has been the right one at the time, possibly suggesting how you would go about making a stimulus package that would endure the scrutiny of our peers.

We live in a time when it takes proper balls to agree with those in power while it is totally safe to claim that politicians are incompetent.

I will allways enjoy your occassional stab at Trichet and Bernanke, but variation has an attraction in its own right.

Macro Man said...

I think I have done that with Merve the Swerve, more or less, for his better-late-than-never conversion.

You probably won't like today's post, is my guess....