Guest Post: Keep The Faith….

Tyler Durden's picture

From Maurice Pomery of Strategic Alpha

Keep The Faith….

We need to look at why the funding rates were cut. It is not because everything is better:

Firstly this action, coming in a timely fashion, was certainly warranted and shows a new resolve to act in a banking crisis. However it is the fact it was warranted is the problem and whilst it makes Dollar funding cheaper, it remains to be seen if banks trust each other enough to lend. I am not sure about this and the situation must have been really bad for such action as it was clearly not as pro-active as they may like to suggest. A crisis was very close indeed and whilst this action eases the situation it may not be a cure. The banks still face massive headwinds from here. The RRR cut from China helped risk appetite earlier but again is a clear sign that lower growth and thus easing is on the way in China. Hard or soft landing we don’t yet know but a landing for sure as evidenced in last night’s fall in the PMI data. (China PMI came in at 49 vs 49.8 exp) The steep fall in exports was what caught my eye!

Banks still look set to hoard cash so lending probably will not increase and the appetite for credit is poor. The action is prudent but suggests that the central banks think that the worst of market conditions might be yet to be seen! There is now so much expectation at the December 9th meeting and even EU leaders have ramped up its importance by suggesting it is now or never! Whilst these moves do not fix the underlying problems that are leading to market stress, it does at least mean that European banks can fund their dollar assets cheaper than would otherwise have been the case. This move has seen the 3-month cross-currency basis swap come into to -131bps from -157bps yesterday and -162bps immediately before the action was taken. What worries me is the track record of EU leaders coming up with anything near the expectations of the markets is appalling. Haven’t we been here before? I think Fed’s Fisher put it well when he said "We are not bailing out Europe, we are trying to meet a shortage of dollars." In other words Europe still has all the problems it had two days ago.

This meeting now takes on a more important meaning with many feeling it is time to look at the fiscal unity and ceding of sovereignty. Are the outer Nations really that close to allowing this central government? I am not sure a weekend meeting can produce that! The coordinated action is clearly a short term plaster and possibly an insurance of some sort if failure at this meeting happens. If we come out with little real action, banks will certainly be stressed. Now here is the point in the more macro outlook; European asset disposal (forced or unforced) risks creating a tightening of financial conditions in other economies, and to the extent that this influences global growth expectations, it would affect currencies through changes in risk appetite and capital flows. The US banks are still not going to be keen to increase exposure to European banks and nor will anyone else and the deleveraging that has to take place will matter. (Data from ratings agency Fitch shows that US money markets have slashed funding for French banks by 69pc and German banks by 50pc). European banks will shed assets and they have billions in EM’s and Eastern Europe and will be forced to withdraw and dump these assets and exposures! This WILL matter. Global growth could take a nasty knock and I note with interest another cut in rates from Brazil as the economy weakens.

There may be growing support for the ECB to become the lender of last resort but you can forget this unless the Germans take a massive leap of faith and do a U turn. Surely the fact that there was a coordinated move from central banks suggests the ECB will not budge. We may well get an extension of loan tenures but lender of last resort seems unlikely now. Do people really expect the Germans to give in after suggesting to their voters at home that they won’t? Remember how political these people are as it is all about power. However it is now plainly clear that all this action will be for nothing if the sovereign issue is not sorted out and December the 9th is just next week. The bomb is ticking for Europe.

There was some chatter that it makes sense for the Fed to now cut the discount rate which looks plausible as effectively the OIS+50bp funding rate is offering cash to offshore names at a rate that is below the current 0.75% Discount Rate at which the Fed will provide emergency funding to US domiciled banks. We may then see a reduction to placate domestic banks but it will likely only come after a FOMC meeting to discuss it and is NOT seen as an emergency as they don't expect to see much use of the Discount Window. It will be more of a book keeping issue. The cut in the lending rate is only relevant to those banks that have the collateral required for discounting with the ECB. If the issue is a shortage of collateral then the change in lending rate won’t assist many of the banks that are short USD funding. Yet again it looks as if the EU leadership have been given some time to actually make something happen. I just wonder if they can!

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Ghordius's picture

just two sentences that are really important here:

"whilst it makes Dollar funding cheaper" and

"European asset disposal (forced or unforced) risks creating a tightening of financial conditions in other economies, and to the extent that this influences global growth expectations, it would affect currencies through changes in risk appetite and capital flows"

Now just insert "Dollar" between "European" and "asset disposal (forced or unforced)" and you get the reason for Uncle Ben's intervention... the dear old EuroDollar Market

And everybody and his mother is saying the EuroZone is doomed?

LawsofPhysics's picture

Intersting analysis.  Surely you are not suggesting that the world's reserve paper is going bidless?  LOL! 

Ghordius's picture

LOL, no, not at all.

Here a fuller explanation 1934395

Very short and simplified: MegaBanks in the EuroZone don't want to recapitalize, know they get whacked on their head (nationalized) if they dump EuroBonds and scream loudly to Uncle Ben: help us or we sell our dollar denominated positions. Remember, they are talking of a lack of Dollars. The EuroDollar Market is huge, very important and Has To Be Maintained Whole At All Costs...

Meanwhile, Mr. King of the Bank of England "prepares" for a Great Storm. Break up of the DollarZone my hat... The Storm is Soon coming over The Isles (a pity, really, I wish this would all stop).

Ghordius's picture

hemm... nobody noticing the little strike that PM Cameron dubbed "a damp squib" in the UK?

akak's picture

First, I would need to know exactly what a "damp squib" is --- would that be like a wet baby pigeon?

And I am still trying to figure out this word "whilst".  Is that a bad abbreviation for "Whil Street", or perhaps some sort of weird contraction of "will have"?

I suggest that future contributors please not write in arcane dialects of English.

Sunset chaser's picture

When the banks no longer trust each other it will be game over and crash time. As Morgan testified before the Pujo Committee

"A man I do not trust could not get money from me on all the bonds in Christendom."

And a forgotten gem can be perused here.

buckethead's picture

Very interesting read from Morgan.

Ghordius's picture

yes, JPM said this 1907 - modern Central Bank Architecture has "developed" to take care of this eventuality

imagine the CB as roof, every bank as pillar and the real economy as fundament: the very picture of an old greek temple

Ghordius's picture

you are really scary when you say that...

Sudden Debt's picture

I also have 2 pittbuls called Hope and Faith!!

Just don't come to close BECAUSE THEY'LL BITE YOUR ARMS OFF

xcehn's picture
Cramer: We‘re ’Two Stages From a Financial Collapse So Huge It‘s Hard to Get Your Mind Around’


Nevermind the stock rally from Monday or the massive sales figures from Black Friday, CNBC’s Jim Cramer had a very grim outlook for the global financial markets going forward. In sum, the European crisis is so bad that the U.S. is grave danger. Business Insider explains:

xcehn's picture

I think it's really defcon 1, but that's probably what Cramer secretly means too.

Random_Robert's picture

Oh for fuck's sake...

Here come all the talking heads with their "the world is going to end if we don't go all print-happy again"...

I suppose next they're going to go drag Hank Paulson off of whatever tropical island he purchased and make him draw up another 3 paragraph term sheet for Congress to authorize TARP 2.0.

Here it comes, bitchez.... long, hard, thick, and aiming straight for your ass.


SheepDog-One's picture

Parasite banksters problem isnt a lack of money, they can print as much of that as they want, the problem is they just cant find anyone to pay them interest on it any longer.


maxmad's picture

so basically the global economy collapsed yesterday, bitchez!

Ahmeexnal's picture

Yes, Credit Agricole went down.
It'll take a few hours for the sheeple to experience the effects.
The power elite already packed up their shit and moved on.
The sheeple are about to be swept by a tsunami.

Iconoclast's picture

Educated guess? Good one, but like to know the source if possible Tia

maxmad's picture

I think Fed’s Fisher put it well when he said "We are not bailing out Europe, we are trying to meet a shortage of dollars." In other words Europe still has all the problems it had two days ago.


Oh noes... there's a shortage of dollars... what do we do?

LawsofPhysics's picture

1971, these are simply aftershocks.  Ben Bernanke is simply providing cover for the next "unforeseen" event.


At this point is looks to me like even the Fed doesn't trust the Fed and event the central banks don't want to lend to each other or trust each other.  The fact that this is becoming more and more a one man show show (oversimplification I know, but more rats abandoning ship every day) should scare the fuck out of everyone.

xcehn's picture

It scares nearly everyone on ZH, for sure, including me.

Irish66's picture

Taylor, which 8 banks?

tliberty's picture

Any talk of whether or not the Fed should adjust interst rates is a band-aid on a gaping wound. In fact, I would say that and Fed action at all will only serve to make eveything worse. In fact, I would say that the Fed is an all aorund evil insitution that is destroying our financial lives. But that's just me.

I am a big advocate of silver and gold, but at this point my interest in gold is as an insurance policy against the nastiness of fiat money. End the Fed, end the State, etc.

xcehn's picture

I have no reservations regarding any of this.  The situation was an emergency and the action was critical to prevent catastrophe.  It clearly is NOT a cure.

...the situation must have been really bad for such action as it was clearly not as pro-active as they may like to suggest. A crisis was very close indeed and whilst this action eases the situation it may not be a cure.


RobotTrader's picture

1994 vs. 2011


Here's what 1994 looked like during a brutal consolidation and chop period, much like today.  When the gloomers said it was the "end of the world" for stocks:

Here's what happened afterwards:

maxmad's picture

Amazing..........  almost like analysis of a 3 year old..

tsx500's picture

why are u insulting 3-year olds like that ?!?!

akak's picture

I wish Tyler, or the Tylers, would stop inflicting this puerile and idiotic RoboTroll momo-chasing, stock-pimping shtick on us already --- it is really getting old.

Come on, Tyler, give it up --- most of us have figured out by now that YOU are RobotTrader, posting egregious bullshit one-liners and mindlessly pro-equities, pro-Establishment flyby posts just to goad and tease us.  Do you REALLY need to resort to such measures?

LawsofPhysics's picture

Sure, now overlay that with information the changes in energy production, tax revenues, and the real and project expenditures of the Federal government for the same time period. Very different situation today.  Can't give home or student loans now to get us out of the slump like we did back in 1994 AND the boomers are tired and ready to retire.  Nice try captain hindsight.

fuu's picture

It's like 1994, again.

Dapper Dan's picture


Do you think there is a financial war going on?

US state dept says Obama administration supports properly designed, targeted sanctions on Iran Central Bank at appropriate time - @Reuters

Targeted indeed!  Who do they think they are fooling?

LawsofPhysics's picture

I didn't think that Iran had a central bank.  That is the problem, their banks are not part of the centrally planned network of central banks under the Federal reserve or IMF, hence the Iranian people will be "liberated" from their horrible tyranny.

Dapper Dan's picture

Up next, sudden aerial bombing syndrome,  we are going to liberate the shit out of them.

Peace bullets, love bombs and friendly fire.

Fighting for freedom is like fucking for chastity!

North Dakota is next  if you use this state department logic.

One bank to rule them all

Italy recalls its ambassador from Iran, foreign minister says - @Reuters

US committed to take steps to freeze Iranian Central Bank assets and to work with allies to take similar action, US official says - @Reuters

NEOSERF's picture

Don't get caught short when the Germans do that U has to happen and will happen as without it there is no euro, no ECB, no one for Germany to export to and banks shut down in will happen...even a "closer fiscal union" does nothing...okay so they allow the ECB to be the Fed...then what...printing because the ONLY other way to deal with debt is to stimulate growth and tax your citizens more which hasn't happened here and won't there...this is a devaluation race to the bottom and wouldn't be surprised to wake up and see that the UK says screw printing which take too long, I am going to pull an overnight devaluation and just drop it to par with the dollar.  God help us if gold starts to waver as a true store of value...

Mark123's picture

"There is now so much expectation at the December 9th meeting and even EU leaders have ramped up its importance by suggesting it is now or never!"

Of for crying out loud....when will this BS end??????????  The Fed (graciously on our behalf) has agreed to provide cheap loans to Eurozone banks, and sure enough they go and support Spanish and French bond auctions today with vigor.  So, really, the US (which is bankrupt) is buying European sovereign debt on margin.  Great...sure sounds like a great long term solution....very similar to how the US govt propped up GM (which will end in tears sooner or later).


ndotken's picture

Banks aren't gonna lend when profitability takes a backseat to survival.

spanish inquisition's picture

If the FED is swapping a shitload of cash around the world....Aren't all currencies being guaraunteed and backed by the dollar.

Seems to me that anyone who is issuing bonds now is actually issuing dollar denominated bonds by proxy and that their currencies have effectively failed.

Or am I missing something?

Mark123's picture is all tied to the US dollar.  In my opinion the US dollar has also failed, but people just don't know it yet.  This supertanker takes a long time to change course.

GS21A's picture

No, you haven't missed anything.  This action is a recognition of looming soveriegn default.

Iconoclast's picture

What I'm finding increasingly disturbing is how a few words and a lame piece of action can suddenly 'soothe' all the capitalist worries..

Incidentally, the Merkozy alliance met 14 times in twenty one months, this sticking plaster applied yesterday 'achieved' more in nano seconds, just goes to show all those meetings, including Cannes at room rates of 30 k a night, weren't worth a damn.. They could have done it all through fukcin Skype ffs...well maybe not, there's the issue of Berlusconi's room service but you get the point..

wisefool's picture

Reminds me of the Al Gore Climate change summits in the old days. The helecopter did a maritime extraction from his houseboat in tenesse, took him back to the mansion to get dressed (meter/rotors still running) then delivered him to the regional airport where a gulfstream was waiting.

Quick lay over in D.C. to freshen up the drinks and get the talking point from K-Street. John Edwards and his hairdresser already on the chartered 747 to Kyoto. 

"We must reduce our carbon emissions!"

Irish66's picture

We now have a collateral problem

LawsofPhysics's picture

Yes, or in other words a solvency problem.  Being solvent means you have something of real value to offer in exchange.  Damn this finite system!

Irish66's picture

In a reverse repo, dealers offer interest rates at which they would lend money to the Fed versus the Fed’s Treasury general collateral, typically Treasury bills.

americanspirit's picture

Those who we call bankers are more appropriately called what they are - slave traders. And I've finally realized that smooth talking Oreo in the White House is a descendant of Kenyan slave traders dedicated to selling US into slavery. For him it's payback - for the cabal of slave traders worldwide its payday. Get ready to be pickin' cotton everybody because that's the plan.

Bansters-in-my- feces's picture

"Firstly. this action,comming in a timely fashion,was certainly waranted"

Fuck you,you fucking boot licking sack of shit.

That sentence alone shows YOU....are part of the problem,fuck for brains