Global shares tumble on US fears

[Dartzap]

Beeb

Fed slashes rates in shock move
The US Federal Reserve has cut interest rates to 3.5%, a shock three-quarters of a percentage point reduction.

Fighting to stave off a US recession, the move failed to calm investors, with US shares continuing sharp falls as Wall Street opened for Tuesday trading.

The Fed, the US central bank, said latest figures indicated a deepening of the US housing market slump and increased unemployment levels.

One analyst said the Fed was "obviously panicked" by the threat of recession.

"Unfortunately they have no power to reverse what in my opinion is the worst post-war recession," said Michael Metz, chief investment strategist at Oppenheimer in New York.

'This is huge'

The Fed's interest move came as a complete surprise, as it was taken outside its timetabled rate-setting Open Market Committee meetings.

The last two such emergency cuts were on 17 September 2001, shortly after the attacks of 11 September, and on 3 January 2001, in the wake of the dotcom bust.

The last time the Fed cut rates as much as three-quarters of a percentage point was in August 1982, almost 26 years ago.

"This is huge," said the BBC's business editor Robert Peston.

"And it is a big risk. If this doesn't work, then people will say they have nothing left in their locker."

Analyst Jeremy Stretch of Rabobank, described the Fed's move as "a sign of panic".

"But it certainly indicates that the Federal Reserve wants to be seen as taken action over the concerns of an economic downturn," he said.

Yet despite the Fed's extensive cut in rates, US investment bank Merrill Lynch said at the start of this month that, in its opinion, the American economy was already in recession.

Another investment bank, Goldman Sachs, has also warned that recession is now likely.

Sub-prime woes

The sharp downturn in the US economy has centred on the slump in the American housing market over the past year.

Against a backdrop of higher US mortgage rates, home loan defaults and repossessions hit record levels last year, specifically in the sub-prime sector.

This industry specialises in higher risk loans to people on low incomes or those with poor credit histories.

As the sub-prime mortgage sector hit crisis point, it triggered record losses at some of America's largest banks.

It also caused the global credit squeeze, as much of this sub-prime debt was repackaged into wider debt offerings that were bought by banks and other investors around the world.

As a result, global banks are now much less willing to lend to each other, or to homes and businesses, until the full extent of the sub-prime exposure is known.

[Dartzap]

It did nae work

US shares have opened sharply lower despite the US central bank's shock decision to cut interest rates to 3.5% from 4.25%.

The Dow Jones Industrial Average fell 3.7% in early trading while the technology-based Nasdaq fell 5.0%.

European share indexes shot up on news of the cut, but then fell back again, with the FTSE down 0.3%, the Dax down 2.3% and the Cac 40 in Paris down 1.2%.

There is concern that the dramatic rate cut may be seen as a sign of panic.

"If it looks like panic at the Fed, smells like panic at the Fed, and quacks like panic at the Fed, well many will say it is panic at the Fed," said BBC business editor Robert Peston.

[Ace Pace]

What the fuck made you think that? The chinese and Indian economy are dependent on alot of exports and infusions of foreign cash to fund investments inside their economy.

There was a lot of emerging markets "decoupling" the past year, where they largely remained immune to the events that buffered the developed markets. The thesis is that the emerging middle class in those countries is creating a substantial enough domestic market to distance those countries from what happens in the developed world. Of course, that's only true to a point; eventually EM countries can't ignore what's going on in the rest of the world. It looks like we're there.

And on that score.

Global Decoupling Myth Shattered In Equity Selloff

The world did not wait for the US markets to open on Tuesday. A Global Bloodbath took place on Monday without us. What's happening is a forced unwind of leverage, especially in various anti-dollar and Yen carry trade plays. The credit bubble is clearly unwinding and it has much further to go.

As the Asymmetrical Unwind of the Credit Bubble continues, please think about how pervasive anti-dollar sentiment is in context of Things That "Can't" Happen.

With that sentiment in mind, let's take a look at things from the perspective of various currencies and the carry trade.

Canadian Decoupling Theory Frays

The Globe & Mail is reporting Loonie at September lows as decoupling theory frays:

The loonie tumbled to a four-month low as traders looked past tomorrow's widely-expected interest rate cut to how a pronounced U.S. economic slowdown would impact Canada.

“The idea that the global economy is decoupling from the U.S. slowdown is lying in ashes as you watch what is going on in global equity markets,” David Watt, senior currency analyst for RBC Dominion Securities, said in an interview.

“The decoupling story is fraying at the edges,” Mr. Watt said. “People did not want to give up the bullish Canada view, whereas now it is becoming clearer that story just does not hold water. The U.S. economy still carries a lot of weight and the global economy is showing the strain.”

Loonie vs. US Dollar Weekly


Trying the link



If the test of the 50 EMA fails, and I expect it to, look for the Loonie to test the 200 EMA at 87.5. Such a move would completely unwind nearly the entire 2007 liftoff.

Eurozone Credit Squeeze

The Financial Times is reporting Eurozone borrowing hit severely by credit squeeze:

The ECB reported a "sharp tightening" of standards applied to lending to business, largely because of the changing economic outlook. The net percentage of banks reporting that they had tightened credit conditions in the final quarter of 2007 on loans to business rose to 41 per cent, from 31 per cent in October's survey - which was already the highest since the survey began in early 2003.

Demand in corporate loans also deteriorated further compared with October's results - largely because of the decline in financing needed for mergers and acquisitions and corporate restructuring. At the same time, banks reported that "securitisation activity was severely hampered" at the end of last year.

Banks also reported a further significant tightening of credit standards for people borrowing to buy houses and a sharp drop in demand for such loans. Net demand was "significantly negative," the ECB reported.


The ECB hawks have been stressing concerns over inflation for months but those concerns are misguided. Tightening lending standards and a demand for loans that are "significantly negative", do not provide an inflationary backdrop. Nor do housing prices crashes in places like Spain.

Kiss goodbye the idea that the Eurozone will decouple from the US credit crunch. The next move by the ECB will be a rate cut. Are currency traders prepared for that move?

[Edi]

If the bottom is going to fall out I say let it happen and get it over with. Delaying the inevitable will not lessen the eventual pain, it will most likely only make it worse.

I can verify that that is precisely what happened here some 15 years ago. Things became worse and there's still fallout from that on the individual level and some of the court cases have only now closed.

[Broomstick]

This sort of thing is precisely why I resisted investing in a 401(k) retirement plan with emphasis on stock - granted the route I did take also has some risk and I could still wind up screwed but that's a risk of being alive. I remember people getting fucked over retirement-savings-wise during the dot.com bust and I knew that sooner or later the real estate market was going to collapse like a house of cards.

Right now I'm unemployed but because of frugal lifestyle my unemployment check actually IS covering the bills, my debt is minimal (and to be honest I could wipe it out at the cost of draining my rainy-day fund yet again) and I have some modest savings not tied to the stock market that I can access easily as I deem fit. Is that the best way to ride out the current situation? Truthfully, I don't know. I did what I thought best for me in my circumstances. I do know that I'm in a much, much better situation than people facing foreclosure with tens of thousands in credit card debt.

The other thing I've done is try to keep as healthy as possible. I am able to do physical labor as well as sit at a desk, which increases my options considerably.

[J]

Markets are starting to pull back up after the rate cut, the DOW is down only ~160 or so right now which is a lot better than the -350 points it was at just an hour ago. TSX is up 325 points (just under 3%) and it looks like the rest of the markets are following. For now.

[Beowulf]

Moral: The closer you are to retirement, the less you want your retirement funds invested in stocks. I'm 23. I can't lose tens of thousands of dollars in savings, because I don't have that much invested. I don't think I have even $10k invested.

Also, if the US economy goes down the shitter, everyone else's economy will follow suit. Therefore, investing in foreign markets won't help much.

[Ace Pace]

Markets are starting to pull back up after the rate cut, the DOW is down only ~160 or so right now which is a lot better than the -350 points it was at just an hour ago. TSX is up 325 points (just under 3%) and it looks like the rest of the markets are following. For now.

The FTSE seemed to close up. Dow is going up and down like a thai whore. I'm not sure this means anything about an overall trend, maybe stablising on a specific downwards trend?

[Fingolfin_Noldor]

Moral: The closer you are to retirement, the less you want your retirement funds invested in stocks. I'm 23. I can't lose tens of thousands of dollars in savings, because I don't have that much invested. I don't think I have even $10k invested.

Also, if the US economy goes down the shitter, everyone else's economy will follow suit. Therefore, investing in foreign markets won't help much.

Most of the talk about Asia decoupling from the US market is more nationalistic/patriotic hot air anyway. I would like those fools to reason out who's going to buy Asian products when their main market is imploding.

[J]

This was just brought up by one of my co-workers.

http://www.federalreserve.gov/releases/h3/Current/

Note how the non-borrowed reserves have gone to practically zero, or even negative if using the unadjusted figures.

For a brief primer on currency reserves, see here

[J]

I'm not an economics expert, but as my co-worker explained to me, it seems there's no money reserve left in the US banking system, other than what they've borrowed from the Federal Reserve. If I understand him correctly, it means the Fed is now acting as the lender of last resort for the entire US banking system.

[Dartzap]

Is this similar to the Northern Rock situation then? Where the Bank Of England had to prop it up because the lending between banks was becoming so expensive?

They said in the last days the payments back to the BoE won't be finished for 30 odd years once it gets bought out by someone.

[Adrian Laguna]

Moral: The closer you are to retirement, the less you want your retirement funds invested in stocks. I'm 23. I can't lose tens of thousands of dollars in savings, because I don't have that much invested. I don't think I have even $10k invested.

There's also the issue that if you lose everything at 23, you have the rest of your life to make it back. If you lose everything at 63, then you're up Shit Creek without a paddle.

[J]

Is this similar to the Northern Rock situation then? Where the Bank Of England had to prop it up because the lending between banks was becoming so expensive?

Similar, but on a much larger scale as I understand it. The only difference is the panic has yet to set in and the bank runs haven't started yet. If the media can keep the news buried, and so far they've succeeded, then there's a chance the precarious balance can be resolved. If not, it could make Northern Rock look like a picnic.

[acesand8s]

I'm not an economics expert, but as my co-worker explained to me, it seems there's no money reserve left in the US banking system, other than what they've borrowed from the Federal Reserve. If I understand him correctly, it means the Fed is now acting as the lender of last resort for the entire US banking system.

That's my understanding of it as well. Essentially the banks have deployed all their reserves and are borrowing from the Fed to meet reserve requirements. There are a few potential explanations. One is that the banks are completely out of capital. If that's the case, then this is completely unprecedented and the system is about to collapse. Reserves have not been this low since the Fed started publishing historical numbers (1975). Even during major crises like the 1998 Russian default/LTCM collapse, nonborrowed reserves have been fairly constant at $30-40B. Perhaps things got this bad during the Depression, but that's not entirely an encouraging comment.

The other possible explanation is that the nonborrowed reserves does not include reserves borrowed from sources besides the Fed. The rate at which you typically borrow from the Fed, the discount rate, is higher than the market rate. This is to punish banks for dwindling reserves to the point where they can't borrow from one another. Before today, the discount rate was 4.75% and the market rate was 4.25%. If a bank wanted to borrow money, it would clearly borrow at 4.25% rather than 4.75%. However, the Fed (along with the ECB and a few other central banks) recently started offering Term Auction Facility loans. Essentially this is a 30-day note from the bank. In the most recent auction, the rate was 3.95%. In other words, you could borrow from the Fed below the market rate. The drop in interest rates today should bring things back in sync. We'll be able to confirm the hypothesis when the Fed publishes its January numbers - they break out borrowed reserves to include the TAF.