Forgot the link
I'm interested in this kind of analysis. Are there any people reporting from the austrian perspective that don't use dozens of exclamation marks in their articles?
- Steve
I suspect one of the reasons for all the exclamation marks is that WE
ARE ALL FREAKING DOOMED!!!!
:>)
Here's a good one from Lew Rockwell today...cool, calm, collected
Mike
http://www.lewrockwell.com/north/north561.html
A Panic Move to Buy Safety
by Gary North <mailto:garynorth@…>
On August 15, the 90-day T-bill rate was 4.21%. The next day it fell to
3.79%. That was a one-day drop of .42 percentage points. As a
percentage, it was a 10% drop. We rarely see 10% moves in one day. The
next day, Friday, it was down to 3.76%.
On Monday, August 20, it fell to 3.12%. That was another 17% decline.
This was not a merely rush for safety. It was bordering on panic.
This decline was not the result of huge injections of new fiat money
into the system. This was increased demand from investors who were
looking for security. The rates dropped all across the Treasury's yield
curve on the 16th. They fell again on the 20th.
People are buying T-bills because they know they will be paid off in 90
days. They are buying T-bonds because they fear recession's falling
rates more than inflation's rising rates.
The problem facing the Federal Reserve System today is that an increase
of money to lower the federal funds rate will be seen as inflationary.
This would be a major reversal of policy. Why would the FED reverse
policy? Because of panic at the FED regarding the capital markets. It
would also make it look as though Jim "Mad Money" Cramer is calling the
shots for the FED. Its announcement came just ten days after Cramer
threw his tantrum on CNBC. Admittedly, it is worth watching.
<http://www.garynorth.com/public/2344.cfm>
The FED's announcement of the drop in the largely irrelevant discount
rate from 6.25% to 5.75% immediately sent long-term rates back up - not
by much, but opposite to the move in the 90-day rate. That announcement
was perceived as announcing future monetary inflation to lower the
FedFunds rate. Long rates went up because of an inflation premium
demanded by investors.
This was reversed in one day: August 20. Investors feared a liquidity
crisis.
The move to Treasury debt does not bode well for the mortgage market. It
is the perceived lack of safety of the subprime end of this market that
has created a crisis for mortgage-based securities generally.
The bankruptcy or disappearance of over 130 mortgage-lending
institutions since late December is calling into question the equity of
the housing markets generally. (This is tracked by the Implode-O-Meter
site.) This pushes lenders to require 20% down. Borrowers are supposed
to have capital to invest. But where does a borrower get 20% down today,
with the median-price house at $225,000? From the profit from the sale
of his existing home. But the equity from this home is falling because
of the mortgage lending crisis.
Fannie Mae announced on August 20 that it will skip offering any
mortgage-backed debt in August. The spokesman did not say how long this
ban will be in effect. He did not elaborate. But the financial press
understands the reason. Investors have decided not to invest in this
capital market except at rates too high for Fannie Mae to attract
solvent home-buyers.
What went up is now coming down. You had better get out of the way.
MAKING MONEY SLOWLY, AND LOSING IT FAST
Contrary to popular belief, most people do not want to make money. They
want to make money their way.
This preference leads to losses when markets change direction. Investors
stick with portfolios that are becoming defunct. The want the market to
confirm their genius. The market, like Rhett Butler, really doesn't
care.
It takes substantial financial losses to persuade a typical investor to
sell his battered investment portfolio and try to make his money back
with whatever capital he has remaining. He has to abandon his way for
the market's way. This is very costly for most investors. Few do it in
time.
During this expensive process of self-realization, an investment market
becomes volatile. Most people resist selling their positions. So, the
market is pushed and pulled wildly by marginal sellers and marginal
buyers until such time as the new direction of the market is clear. If
it is downward, the last hold-outs finally surrender and sell at the
bottom. In the meantime, they sustain significant losses. In recent
years, the NASDAQ has been a good example of this, from March 2000 to
October 2002. The slow move up to 50% of its high was far less volatile
than the fast move down. See for yourself.
<http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=NASDAQ&
sid=3291&o_symb=NASDAQ&freq=2&time=13>
The world's stock markets have become increasingly volatile ever since
June, 2007. You can see the various U.S. stock markets here.
<http://www.garynorth.com/public/department105.cfm>
On July 20, the Dow Jones Industrial Average closed above 14,000 for the
first time. The next day, it fell by 150 points. From that point on, the
market lost 1,000 points, but not in a straight line. You can see this
roller coaster ride by clicking through to the following chart
<http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=DJIA&si
d=1643&o_symb=DJIA&freq=1&time=4> .
INVESTORS AT THE MARGIN
Volatility occurs when a relatively small group of investors at the
margin change their minds about the future of a class of assets. They
decide that the market they had invested in now faces risks which they
did not previously perceive. So, they sell.
Then other investors at the margin see what they believe are new profit
opportunities. They have not yet changed their minds. They buy the asset
class because they believe that the previous sellers are incorrect in
their revised assessments. They believe that the forces that propelled
the asset class upward are still dominant. They decide to take advantage
of the sellers, who were overreacting. They buy.
At this point, the future of the market is dependent on whose minds get
changed: the sellers or the buyers.
Understand, this debate takes place at the margin of an investment asset
class. The vast majority of investors are in the market through the
decisions of third parties: managers of funds, banks, insurance
companies, and similar specialty firms in asset allocation. These
managers cannot all sell their asset base at one time. The entire
capital market would collapse if they tried. They can sell only a small
percentage of these assets. The question is: To whom?
The best and brightest of the corporate asset managers trained in the
same two-dozen universities and dozen graduate schools in business. They
received the same worldview. They adopted the same views on capital,
monetary theory, and government intervention. To a person, they are
believers in central banking as the supreme stabilizer of erratic
capital markets.
These people work as the third parties for American investors and also
foreigners who have invested in the United States. They are an
occupational class. But they are more than this. They are a social
class. They read the same magazines, travel in the same circles, and
communicate with each other.
They are a herd.
I recall a column in the Wall Street Journal, "Heard on the Street." It
should have removed the letter "a."
GENIUS
A generation ago, Harvard's left-wing economist John Kenneth Galbraith
made this observation: "Genius is a rising market."
Problem: markets sometimes fall. Geniuses are then exposed as something
less than geniuses.
The problem is, they really are the best and the brightest. They
attended the best graduate schools. They graduated in the top 20% of
their class. They were recruited by the richest multinational banks and
brokerage houses. Then they spent a decade or more competing against
each other in the capital allocations markets. The survivors run the
firms.
Then the market falls.
This produces a crisis of confidence among investors. But what can they
do? They can sell one asset class and buy another. But which one? Where
will they obtain advice? From a different management team. But these
managers are basically clones of the others. They differ only at the
margin.
You can see the problem. This is why asset classes move in the same
direction for years, even decades. The stock market went up from August
16, 1982 to mid-March, 2000. Then it reversed, falling until 2003 and
never recovering to its inflation-adjusted level of 2000.
The geniuses who ran the large institutions have not yet lost the trust
of investors. Investors still allow their retirement portfolios to be
run by the Establishment managers. These people are operationally
cheerleaders of the Federal government. They cheer about the supposed 7%
per annum increase in the stock market, despite the fact that it is down
from 2007. They remain deathly silent about the looming deficit in
Medicare and the smaller one in Social Security. Jointly, the two
programs are in the hole by at least $60 trillion.
These people are geniuses by default.
Now they face a huge public relations problem. The three firms that rate
the risk of corporate debt - Moody's, Standard & Poor's, and Fitch -
failed to see what would happen to an entire asset class:
mortgage-backed securities and the spin-off products. They did not sound
a warning in 2005 and 2006, when the mortgage industry lent close to
half of its loans to subprime borrowers who would not have qualified for
loans in 2000. Worse, they allowed these people to borrow at floating
interest rates: ARM's. At least 80% of the subprime loans in 2005-6 were
ARM's.
I began warning against ARM's in the July 22, 2003 issue of Reality
Check <http://www.garynorth.com/members/login.cfm?hpage=580.cfm> .
In the February 21, 2006 issue, I escalated my warning
<http://www.garynorth.com/members/login.cfm?hpage=1625.cfm> .
There is another looming disaster facing the banks: the end of the
housing boom. The last three years of the housing boom have been funded
by ARMs: adjustable rate mortgages. Marginal home buyers have taken
advantage of super-low mortgage rates. Now the days of wine and roses
are ending. As short-term rates climb ever-higher, home owners' monthly
mortgage bills threaten to double. Conclusion: There will be a rising
tide of defaults by ARM home buyers.
The FED wants an orderly real estate market. It wants lower long-term
mortgage rates, so that there will be buyers of the distressed
properties that are put on the market by ARM buyers who cannot afford to
make their mortgage payments. You might call these sellers ARMed and
dangerous - dangerous to the banking system.
The crisis is now here. The subprime mortgage market has now begun to
unravel. These loans have become unsalable. The professional ratings
agencies did not sound an alarm. No one knows what these loans are
worth, so institutions holding them are unable to sell them to other
institutions.
Who owns these mortgages? I asked my former partner John Mauldin if he
had any figures, since he had just written a report on it. He sent me
Chart 44 from A. Gary Schilling's Insight for January, 2007. The chart
is for "Mortgage-Related Securities Holdings by Investor Type." The
numbers are in trillions of dollars. The total was $5.4 trillion in
2006. Here is the breakdown.
* 18%: FDIC-insured banks
* 4.5%: thrifts
* 1.3%: Federal credit unions
* 21.7%: FNMA ("Fannie Mae") and FHLMC ("Freddie Mac")
* 15.5%: foreign investors
* 7.8%: mutual funds
* 6.8%: personal sector
* 5.5%: insurance companies
* 3.5%: public pension funds
* 3.1%: private pension funds
* 2.7%: real estate investment trusts
* 2.4%: Federal home loan banks
* 1.8%: securities brokers
* 6.9%: miscellaneous
This is a cross-section of the investment community, with
Fannie/Freddie, banks, and foreign investors being the three most
committed groups: over half.
The mania affected all of these groups. They all saw tremendous
opportunities for profit here. This is what happens when the Federal
Reserve System inflates. It creates booms that become self-reinforcing.
But eventually bubbles pop. When all members of the class of geniuses
discover that the assets at the margin are no longer salable, this calls
into question the genius of the asset managers regarding the portfolio
as a whole.
HOME EQUITY
There is a basic law of equity: "When liquidity falls, equity falls."
Liquidity is falling, though not yet collapsing, as a result of the
subprime loans, which are at the margin of the mortgage-based securities
market.
This reduction of liquidity keeps entry-level buyers from buying. It
therefore keeps recent purchasers from selling at anything like the debt
obligation they incurred. They have no equity.
The problem comes if one of them loses his or her job. There will be a
default. When interest rates rise next year because of the re-set
provision of their mortgages, they will find that they cannot meet the
monthly mortgage payment.
This does not bankrupt every home owner, by any means. But when the glut
of unsold foreclosed houses hits in 2008, the price of entry-level homes
will fall. This new, lower price structure will be applied to all homes
in the price class. Everyone's equity will fall in this price class.
This will create a reverse bubble effect.
If genius is a rising market, what is a falling market?
There is nothing like a forest of "For Sale" signs to create a
batten-down-the-hatches mentality among home owners. These home owners
are consumers.
This raises the question of reduced consumer spending. This is well
known now. It was not discussed by the mainstream media a year ago. A
year ago, the geniuses were in the saddle.
THE STOCK MARKET
In response to the FED's announcement of a lowering of the
inconsequential discount window rate, the Dow shot up by 300 points at
the opening on August 17. Then it surrendered over 200 points before
noon. Then it climbed back for a gain of 223 by the end of the day.
This is volatility. The geniuses who run the funds are still bullish,
but enough of their investors have redeemed shares and moved to Treasury
debt and money market funds that fund managers have had to sell.
In a time of spreading uncertainty, volatility precedes a decline in the
stock market. We have seen great uncertainty regarding the subprime
mortgage market. This might have been taken in stride except for the
fact that the ratings agencies did not sound the alarm years ago. They
kept giving high ratings to firms that have gone belly-up. An entire
industry sector was overpriced because of this. Now, the investing
public has seen the truth: the ratings agencies are part of the herd.
Investors think: "What else have they overlooked?"
THE WOULD-BE GENIUSES AT THE FED
The Federal Reserve System has steadfastly maintained that
inflation-fighting is its number-one priority. This has been true since
approximately 1933. Bernanke has been adamant about this.
Then the Dow lost 1,000 points. Lo and behold, this drop of less than
10% brought new insight to the Federal Open Market Committee (FOMC),
which decides how much debt to buy and therefore how much fiat money to
inject. In the announcement accompanying the discount rate drop, the
FOMC released a jargon-filled PR statement
<http://www.federalreserve.gov/boarddocs/press/monetary/2007/200708172/d
efault.htm> . It was one paragraph. Let me translate out it from the
original FedSpeak.
To promote the restoration of orderly conditions in financial markets,
"Markets are disorderly. They have been disorderly. We are beginning to
worry about a stock market crash."
the Federal Reserve Board approved temporary changes to its primary
credit discount window facility. The Board approved a 50 basis point
reduction in the primary credit rate to 5-3/4 percent, to narrow the
spread between the primary credit rate and the Federal Open Market
Committee's target federal funds rate to 50 basis points.
"Usually, we keep a one-point spread. By lowering this to half a point,
we are letting troubled banks know that they can get money from us when
they can't get it from other banks, which smell trouble and refuse to
lend to them."
The Board is also announcing a change to the Reserve Banks' usual
practices to allow the provision of term financing for as long as 30
days, renewable by the borrower. These changes will remain in place
until the Federal Reserve determines that market liquidity has improved
materially.
"Market liquidity is in the pits. And why not? The FOMC cut the
expansion of the monetary base in the month Bernanke took over:
February, 2006. We have been fighting price inflation, sort of. Now we
are going to fight a credit crunch. We did not see this coming."
These changes are designed to provide depositories with greater
assurance about the cost and availability of funding.
"This is merely a symbolic gesture, of course. Hardly anyone ever
borrows at the discount window. But depositories - read: banks - need
reassuring that we are not pigheaded about inflation-fighting. We are
willing to reverse course. Maybe. We aren't making any promises."
The Federal Reserve will continue to accept a broad range of collateral
for discount window loans, including home mortgages and related assets.
"Nobody wants this junk, so there is a liquidity problem facing the
mortgage industry. Bankers made these foolhardy loans, and now they are
facing losses. The FED's number-one reason for existence is to bail out
really bonehead moves by bankers. This is a whopper."
Existing collateral margins will be maintained. In taking this action,
the Board approved the requests submitted by the Boards of Directors of
the Federal Reserve Banks of New York and San Francisco.
"The housing bubble has been huge in California and New York City, so we
are not surprised that panic is hitting bankers in these regions."
CONCLUSION
Expect to see continuing stock market volatility. The post-2003
geniuses are facing a challenge by investors who see what a mortgage
credit crunch can do to the economy. There is a tug-of-war going on.
If you own stocks, you're in the middle of this tug-of-war. You had
better decide soon who is going to win it, and why. If you wait for the
market to confirm your assessment, you risk losing a bundle or else
failing to make a bundle.
August 24, 2007
Gary North [send him mail <mailto:garynorth@…> ] is the
author of Mises on Money <http://www.lewrockwell.com/north/mom.html> .
Visit http://www.garynorth.com/> . He is also
the author of a free 19-volume series, An Economic Commentary on the
Bible <http://www.garynorth.com/public/department57.cfm> .
Copyright (c) 2007 LewRockwell.com
Not to mention the mixed metaphors. It's not clear how you can be
painted into a corner, lashed to the mast, and bouncing off the rails
all at the same time. Is this the clear, critical thinking you want
from your broker?
[ Attachment content not displayed ]
Ah, Michael, obviously you've not spent much time in London's SoHo district! 
Cheers,
Brian
"Acree, Michael" <acreem@...> wrote:
Not to mention the mixed metaphors. It�s not clear how you can be painted into a corner, lashed to the mast, and bouncing off the rails all at the same time. Is this the clear, critical thinking you want from your broker?
"Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco"
I
Could it be possible that Doug Shorenstein had any part in the federal Reservee's decision to lower rates and start counterfeiting new money in exchange for worthless mortgage toxic waste.
(Attachment image001.jpg is missing)