Credit Crunch Posts on Forex Blog
US Battles the Credit Crunch
Jul 28, 2008
The dual track of limiting naked short selling and increased government powers to help Fannie and Freddie seems to have worked for at least the short term. Since that fateful Tuesday, both stocks have rebounded nicely.
And now the US wants to keep that momentum going. Today, movement was made in 3 key areas.
1) SEC Expanding Curbs on Shorts
In a Wall Street Journal article today, they indicated that curbs to shorts may in fact expand. Other industries such home builders, insurance, and other financials may now be included.
The temporary limits covering 19 financials was set to expire at 11:59pm est Tuesday July 29.
The SEC held calls with a major fund association over the weekend to discuss the issue. Of great concern to funds was the ability for computer traded programs to adjust their software for the new rules. That would seem like a technical problem for the industry rather than a major hang up for the SEC.
2) FOMC to Improve Inflation Transparency
As of today, Committee officials use core inflation to set a sustainable price target for the next 3 years.
In a speech in Washington today, outgoing Fed Governor Mishkin outlined how that might be improved. He suggested 3 key changes.
a) Set a mandate rate like that used in England and Europe
b) Switch to 5 year forecasts
c) Use headline inflation rather than core inflation.
This speech is notable as Governor Mishkin is sometimes thought of as an inflation dove. The wide divergence between headline and core inflation in recent months makes the third point unlikely for the near term. However, a mandate rate (which he has long supported) and 5 year outlooks are plausible.
I am not convinced mandate targets are really useful. The Bank of England, the Royal Bank of Australia, and the ECB seem to be cornered by their rates. In each case, the bank is willing to exceed their mandate in the short term while they wait for their respective economies to slow enough to justify further rate action.
Had the Fed been similarly handcuffed, it is unlikely they would have cut rates as substantially or as fast as they did in the last year. (Though watching Jim Cramer's head explode on national TV would have been great entertainment).
3) Paulson Pushes Covered Bonds
In what could be a major strike against the credit crunch, US Treasurer Hank Paulson announced best practices for covered bonds.
What are covered bonds and why would they help?
Glad you asked.
Like the mortgage backed securities that got the US into this mess, they are mortgage pools backed by cash flow.
I can hear the groans an snores already, but stay with me.
Unlike the CDOs of recent years - the originating institution MUST keep the security on their own balance sheet. That is, they can not sell them off to others. Perhaps the biggest problem with the recent run in mortgage securities is that they were sold off to other institutions. Forcing them to stay with origination should enforce higher lending standards.
More specifically, covered bonds would have the following limits:
- balance stays on asset sheet of lender
- covered bonds can not exceed 4% of lender liabilities
- loans must have documented income
- mortgages over 60 days delinquent must come out of the pool
- investors in the pool must be updated monthly
Today, Europe's mortgage market largely functions under this model to the tune of $3 trillion. In contrast, their are virtually no covered bonds in the US.
Credit Crunch, housing, Fed, SEC, USD
Is Systemic Risk Over Hyped?
Jul 15, 2008
Certainly systemic risk is a real threat to the US Dollar.
With Fannie Mae and Freddie Mac woes (each down 75% year to date) and other banks encountering credit related problems it is easy to be glum. With record energy and food prices it is easy to be pessimistic about US growth.
But is it really financial Armageddon?
Are traders justified in running up the Euro and Pound in the face of more pessimistic data out of Europe?
In the short term, perhaps yes.
In the medium term, I don't think so.
What the US has going for it
This is not your grandfather's depression.
First, you have a Fed with far fewer constraints vis-a-vis the 1929 Fed. Indeed, the Fed is now run by monetarists who have extensively studied and argued how the Great Depression could have been avoided. Are they wrong? Only the markets can answer that in the long run, but early indications, while sometimes obscured in a sea of negative presidential year rhetoric, are to the contrary.
Consider this, the Fed today has increased expectations for annual GDP growth to 1.0% - 1.6% vs earlier forecasts of 0.3% - 1.2%. In addition, monthly job losses have held below 100k, far below previous recession peaks of 300k+. Q1 GDP was revised upwards from an annual rate of 0.6% to 1.0%. Exports remain a source of growth while inventory is tightening (meaning exporters are only buying what they can move).
And in a great sign for the tech sector, Intel posted prfit gains of a whopping 25% today. I have long suggested the housing recession would end in part with a Web 2.0 / High Def / extreme bandwidth tech cycle.
Second, the US government has bankers in all the right places. Hank Paulson of Goldman Sachs fame runs the US Treasury. And now the US Senate has finally confirmed a banker for the Fed in Elizabeth Duke. These 2 combined can provide an immense amount of insight and necessary guidance in steering the US through the economic storm.
Third, after entering the credit crisis while sitting on their hands, various entities have become innovative and expanded beyond the standard usage of interest rate policies to move markets. This was first demonstrated by the Fed when they negotiated the sale of Bear Sterns to JPMorgan Chase and opened the discount window to investment banks.
And lately, this innovation has gone further. Including a) the Fed opening the discount window to Fanny and Freddy b) the Treasury asking congress to grant emergency powers to expand GSE credit facilities and purchase equity and most recently c) Christopher Cox banning naked shorts on Lehman Brothers, Goldman Sachs, Merill Lynch, Morgan Stanley, Fanny, and Freddy
If the shorts get too bold, and the Treasury is granted permission to buy equity, I trust that Hank Paulosn knows how to coordinate a short squeeze. While perhaps unethical and smacking of market manipulation, it is a possible strategy that Mr. Paulson may use to restore value in Fanny and Freddy, and thus renew investor confidence in the mortgage markets.
As Mr. Paulson said before the Senate today, when you walk down the street with a squirt gun, you are likely to have to use it. When you walk down the street with a bazooka, others are unlikely to test you. So it shall be with the Treasury and GSE shorts.
What the Eurozone has going against them
In short, a crises of false hopes.
Today, some traders are fleeing to the Euro in the mistaken belief it is a safe heaven against a systemic crises in the US.
They could not be more wrong.
Consider the latest data, the ZEW Survey came in at an astoundingly low -63.9, European auto sales are down -8% year over year, Italian GDP has been slashed from 1.0% this year and next to 0.4% in 2008 and 2009, and ECB members now warn of growth risks despite their mandate to keep inflation in check. And that all happened today, when the Euro set fresh new highs.
As things settle down in the US, Euro longs may be in for a rude shock as markets readjust for recent macroeconomic data.
Indeed, ECB Council Member Vito Constancio has sounded rather Greenspanian circa 2004. He warned "Under normal circumstances, a rise in the interest rate by the ECB would have resulted in higher medium-term rates and a higher euro. Well, the exact opposite happened," Sounds like the EU is facing their own conundrum.
With the global economy slowing down, fx traders in late 2008 / early 2009 are likely to see an environment where the US is raising rates while Europe, the UK, Australia, and New Zealand are cutting rates and the Swiss and Canadians at best hold firm. Such an environment will put a smackdown on the current Carry Trades.
Again, don't get me wrong. This is NOT short term advice. I would not put a stop in the EURUSD below 1.5781. But with FX markets currently ignoring macroeconomic data to focus on systemic risk, it is better to keep a clear perspective on the entirety of the big picture.
ZEW Survey, Credit Crunch, Hank Paulson, Bernanke, EUR, USD
Bernanke, Paulson, Cox Take Center Stage
Jul 14, 2008
The US Dollar is likely to see unusually high volume starting at 10am est tomorrow.
At that time, Fed Chairman Ben Bernanke will have the floor to himself when he gives his semi-annual monetary policy report. The discussion will likely center on today's revision to mortgage lending rules and when Mr. Bernanke believes the credit crises will abate.
In an unusual move, Treasurer Henry Paulson and SEC Chairman Christopher Cox will join Mr. Bernanke at at a second hearing. No doubt, the topic of discussion will center around steps taken to prevent the collapse of Fannie Mae and Freddie Mac. This hearing will take place after Mr. Bernanke's monetary policy report.
Senator Chris Dodd, head of the Senate Committee on Banking, Housing, and Urban Affairs has indicated that he is receptive to the proposals put forth by Hank Paulson over the weekend. Senator Dodd stated that "Fannie and Freddie are in sound shape, but fear produces its own results". He further implied that he hopes to add amendments enacting Mr. Paulson's recommendations to last week's housing bill. The bill would then likely pass in time for President Bush to sign by Friday of this week.
US Dollar trades may also see some movement when reports on retail sales, PPI, and the Empire Manufacturing Index are released.
Retail sales are expected to rise 0.5% (1% excluding auto).
Lehman Brothers, the entity responsible for kicking up the Fanny and Freddy storm last week, is looking for 1.3% MoM and 8.5% YoY on the PPI.
The Empire manufacturing index is expected to come in at -5.
The German ZEW Survey will be released at 5am tomorrow, and may surprise to the downside. Industrial production has fallen off dramatically in France and Germany and trade balances shrunk last week.
Credit Crunch, Bernanke, Fed, USD
Fed, US to Bail Out Fanny and Freddy
Jul 13, 2008
On Sunday, US Treasurer Hank Paulson and the Fed announced 4 steps to secure the future of Fannie Mae and Freddie Mac.
1. The 2 entities can now borrow from the NY federal reserve. This is the same emergency lending facility granted to investment banks earlier this year.
2. The Federal Reserve will play a greater role in any future changes to their regulations
3. The US will expand the lines of credit (currently $2.5 billion) provided by the federal government
4. The US government will be able to buy equity of the 2 giants.
Steps 3 and 4 still need congressional approval. In an election year, they seem likely to pass. Chances are further improved by the perception that Senator Chuck Schumer (D - NY) may have had a role in the collapse of IndyMac.
One has to wonder why step 1 (access to the Fed discount window) was not done earlier this year when the privilege was extended to investment banks.
Shoring up the giants is mission critical for the US. Between the 2, they hold $5 trillion in mortgage debt. Just 2 years ago, they were underwriting roughly 30% of all mortgages. Today, that number number has grown to 70%.
With all the attention drawn to Fanny and Freddy, one has to ponder the fate of Lehman Brothers.
Credit Crunch, Hank Paulson, Fed
FX Preview July 13 - July 18
Jul 12, 2008
The economic calendar is chokingly full of events this week,
The early part of the week will be dominated by CPI reports, with data coming out from New Zealand (Mon) Italy, UK (Tue), Germany, France, the Eurozone, and US (Wed).
The back half of the week will be dominated by US bank earnings reports from JPMorgan Chase, Merrill Lynch (Thu), and Citigroup (Fri).
Monday night may see some big movement in the AUDNZD, with New Zealand's Consumer Prices and the RBOA minutes reported 15 minutes apart.
Sunday July 13
6:45pm New Zealand Retail Sales (expect -0.1% MoM, 0.5% MoM excluding auto)
11pm Bank of Japan Rate decision (expect hold at 0.5%)
Monday July 14
4:30am UK PPI (expect 2.6% MoM, 29% YoY)
10:00am Fed Governors Vote on Mortgage Rules in Open Meeting (this is a set of new rules crafted by the Fed. The policy is for lending hundreds of billions of dollars to banks and other financial entities to ease a severe credit crunch. It is unclear how big a role the recently confirmed Elizabeth Duke, a Virginia banker with an insider perspective, played in crafting this policy.)
8:45pm New Zealand Consumer Prices
9:30pm Bank of Australia Minutes from July Meeting
Tuesday July 15
4:00am Italy CPI (expect 0.4% MoM, 3.8% YoY)
4:30am UK CPI (expect 0.4% MoM, 3.6% YoY)
5:00am German ZEW Survey (expect -55)
8:30am US PPI (expect 1.3% MoM, 8.7% YoY)
8:30am US Empire Manufacturing Index (expect -5)
8:30am Retail Sales (expect 0.5%, 1.0% excluding auto)
10:00am Fed Chairman Ben Bernanke testifies before the Senate
11:00pm Reserve Bank of Australia Governor Stevens Speaks
unknown time First Mariner Bank (FMAR) reports earnings (expect -0.21 a share, stock has plunged since Chuck Schumer's infamous letter)
Wednesday July 16
2:00am Germany CPI (expect 0.3% MoM, 3.3% YoY)
2:45am France CPI (expect 0.4% MoM, 3.6% YoY)
5:00am Eurozone CPI (expect 0.4% MoM, 4.0% YoY)
before 8:30am, Wells Fargo (WFC) reports 9expect 0.50 a share)
8:30am US CPI (expect 0.7% MoM, 4.5% YoY)
8:30am US CPI ex food and energy (expect 0.2% MoM, 2.3% YoY)
10:30am Crude Inventories
10:00am Fed Chairman Ben Bernanke testifies before the House
Thursday July 17
6:30 am JPMorgan Chase (JPM announces earnings (expect 0.47 a share)
before 8:30am MGIC Investment Corp (MTG) reports earnings (expect -0.61 a share)
10:00am US Philly Fed Index (expect -15.0)
4:00pm Merrill Lynch (MER) reports earnings (expect -1.91 a share,
Friday July 18
5:00am Eurozone Trade Balance (expect -€1.0 billion)
before 8:30am Citigroup (C) reports earnings (expect -0.59 a share)
ZEW Survey, CPI, Credit Crunch, upcoming reports
Return of the Credit Crunch?
Jun 2, 2008
Just as invesstors thought it was safe to come out and play - the credit crunch returns.
Reverberations from last year's financial market crises awoke the sleeping giant US today. The S&P cut ratings of 3 major investment banks (Lehamn, Merrill Lynch, and Morgan Stanley), warned of a cut to another (Wachovia) and changed the outlook to negative on 2 others (JPMorgan Chase and Bank of America). The lone silver lining from the S&P was kind of a slap and a kiss as they stated that Citigroup was no longer on the verge of a downgrade, but one may still happen over the next 2 years.
In other crunch related moves, Wachovia fired CEO Ken Thompson Sunday - 1 month after stripping him of his position as chairman. Acting chairman Lanty Smith will take over as CEO at a time when losses are expected to grow for Wachovia.
Washington Mutual also joined the fire the headfigure train. WaMu announced that Kerry Killinger will end his reign as chairman starting next month.
But those issues are all lingering effects from the US credit crunch last year.
The real problem may now stem from a crises in the UK.
UK mortgage approvals fell to 58k in April, 7k lower than expected. That is the lowest reading since they started tracking approval numbers in 1999.
With echoes of Bear Sterns still in the minds of many, Bradford ' Bingley closed down a whopping 24%. Shares had fallen as far as 32%. Shares stumbled after a series of bad news - profit will likely fall, the CEO will retire, and rights will be sold at a steep discount. They are the UK's largest buy-to-let lender and 8th largest bank. Profits will likely come in at £150m a whopping £100m short of forecasts. Chairman Steven Crawshaw will retire due to a cardiovascular condition known as angina. (Note angina itself is not a disease, rather a symptom of other diseases such as coronary artery disease). Chairman Rod Kent will take over for Mr. Crawshaw.
But the most stunning news coming from Bradford 'Bingley was a drastic slash in the pricing for rights. TPG (aka Texas Pacific) will buy a 23% stake for $353 million, at a rate of £. That is far below the initial price of £82. The whopping last minute discount helped Citigroup and UBS - 2 banks already suffering terribly during the credit crunch - as both would have been stuck with extra shares from the offering. In April, TPG also injected cash into Washington Mutual.
Since March 2006, Bradford and Bingley has fallen from a market cap of £ 3.3 billion to £405 million. Yikes!
Despite the heavy bout of negativity, signs of a US recovery from the crunch were still to be found. ISM manufacturing rose to 49.6 - 1.1 above expectations. While this is till technically a contraction (above 50 is growth), their is reason to be optimistic as exports hit a 4 year high. In addition, construction fell 0.4%, beating expectations for -0.6 reading. And March was revised up from -1.1% to -0.6%.
The GBPUSD fell 200 points, briefly touching 1.96 before recovering to 1.9640 late in the day. The Yen was the strongest performer of the day - as forex traders fled the carry trade in the wake of credit crunch fears.
Credit Crunch, housing, GBP, USD
Worst of Credit Crisis Over - US Sec Treasury Paulson, Merril CEO Thain
May 7, 2008
Both the US Secretary Hank Paulson and Merril Lynch CEO John Thain came out with a positive outlook on the credit crisis Wednesday.
In an interview with the AP, Hank Paulson remarked "we're closer to the end of this than the beginning." However, he cautioned that rising fuel prices will reduce the effect of the stimulus package. The first batch of stimulus checks went out last week - some via direct deposit, others via mail.
CEO Thain indicated that investment banks are likely to reduce the massive losses reported over the last year. He cautioned that banks with large consumer exposure were likely to see some more pain. Specifically, credit cards and home loans are likely to see more delinquencies going forward. On a positive note, Mr. Thain indicated Merrill was unlikely to seek more capital.
It is important to note that Mr. Thain worked at Goldman Sachs while Hank Paulson was the CEO. This 1-2 punch of optimism is almost certainly coordinated.
Read more at MSNBC and CNBC
Credit Crunch, Hank Paulson, USD
Loonie Trouble Ahead?
Mar 22, 2008
David Olive suggests their are 5 reasons the Loonie may be in trouble.
1. Commodity prices are expected to fall. So far, high prices for Canadian oil, natural gas, wheat and other commodities has spared Canada. As the US slow down continues, commodity prices are expected to fall.
2. The Credit Crunch. Since January 07, the world's largest banks have written off 81 billion. As a result, banks are holding onto cash, distrust of collateral, and reluctant to loan. A credit crunch crimps global economic growth, including Canada.
Read more at thestar
Loonie, CAD, Credit Crunch
