the next time someone asks "why is Yellen so terrified of even the smallest possible rate hike", show them this chart above and explain that the Fed vividly remembers what heppened when LTCM blew up. What the Fed doesn't want, is not one but one thousand LTCMs going off at exactly the same time in what is now the world's most levered trade...
"Perhaps the success that central bankers had in preventing the collapse of the financial system after the crisis secured them the public's trust to go further into the deeper waters of quantitative easing. Could success at rescuing the banks have also mislead some central bankers into thinking they had the Midas touch? So a combination of public confidence, tinged with central-banker hubris could explain the foray into quantitative easing. Yet this too seems only a partial explanation. For few amongst the lay public were happy that the bankers were rescued, and many on Main Street did not understand why the financial system had to be saved when their own employers were laying off workers or closing down." - Raghuram Rajan
Anyone who spends any amount of time on the internet has seen them. They are the moonbats, the wingnuts, the whackjobs, the Conspiratorialists. They are America’s new Lunatic Fringe, and their numbers are growing. To the uninitiated this all seems rather humorous, albeit slightly unsettling. It would be both wrong and unwise just to slough it off as the ramblings of the insane. The reason such beliefs are gaining favor is because many Americans have lost faith and lost trust in the government and in America’s elected leadership. Given what has happened over the last decade, this is not only understandable, it is even, in an odd way, reasonable. A continual drift to the fringe can be expected because of the many very real things that make the foolish things suddenly more believable. The American people are well aware they have been lied to by the leadership. They know that a lobbyist has an infinitely greater chance of getting his way than an entire nation of voters. When trust is gone, everything becomes an affront, a conspiracy, a power grab by the elite.
In what is the first formal speech of Simon "Harry" Potter since taking over the magic ALL-LIFTvander wand from one Brian Sack, and who is best known for launching the Levitatus spell just when the market is about to plunge and end the insolvent S&P500-supported status quo as we know it, as well as hiring such sturdy understudies as Kevin Henry, the former UCLA economist in charge of the S&P discuss the "role of central bank interactions with financial markets." He describes the fed "Desk" of which he is in charge of as follows: "The Markets Group interacts with financial markets in several important capacities... As most of you probably know, in an OMO the central bank purchases or sells securities in the market in order to influence the level of central bank reserves available to the banking system... The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions." In other words: if the SPX plunging, send trade ticket to Citadel to buy tons of SPOOSs, levered ETFs and ES outright. That the Fed manipulates all markets: equities most certainly included, is well-known, and largely priced in by most, especially by the shorts, who have been all but annihilated by the Fed. But where it gets hilarious, is the section titled "Lessons Learned on Market Interactions through Prism of an Economist" and in which he explains why the Efficient Market Hypothesis is applicable to the market. If anyone wanted to know why the US equity, and overall capital markets, are doomed, now that they have a central planning economist in charge of trading, read only that and weep...
When we wrote Part I of this paper in June 2009, the total U.S. public debt was just north of $10 trillion. Since then, that figure has increased by more than 50% to almost $16 trillion, thanks largely to unprecedented levels of government intervention. Once the exclusive domain of central bankers and policy makers, acronyms such as QE, LTRO, SMP, TWIST, TARP, TALF have found their way into the mainstream. With the aim of providing stimulus to the economy, central planners of all stripes have both increased spending and reduced taxes in most rich countries. But do these fiscal and monetary measures really increase economic activity or do they have other perverse effects?... The politically favoured option of financial repression and negative real interest rates has important implications. Negative real interest rates are basically a thinly disguised tax on savers and a subsidy to profligate borrowers. By definition, taxes distort incentives and, as discussed earlier, discourage savings.... The current misconception that our economic salvation lies with more stimulus is both treacherous and self-defeating. As long as we continue down this path, the “solution” will continue to be the problem. There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come.
The Fed does everything it can to keep LIBOR low. The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds. You can see that historically as Fed Funds was changed, LIBOR responded appropriately. That all started to break down in 2007 and re-ignited in the late summer of 2008 and peaked after Lehman and AIG. The Fed was blatantly clear that it wanted borrowing costs to go down. They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn't follow, the Fed took further action. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.
As we look forward to tomorrow's scorched-earth policy-fest from Draghi-et-al., Jefferies' David Zervos, in his typically understated manner, notes "I love the smell of napalm in the morning. We are back in the kill zone - Apocalypse Europe." There will be no more strategizing, no more war games, no more speeches imploring the politicians to act. This is the real deal - a full scale European led global financial crisis that requires immediate and aggressive response from the only entities with the authority to act in the world financial "theatre". We should all keep in mind that the Europeans have not been able to generate an effective response to their debt/deflation crisis as of yet, and of course it is having global consequences. This is why we are here again looking into the deflationary abyss. The ECB was only set up with a price stability mandate, and its leaders are hence much more constrained than Federal Reserve officials. Simply put, the European armies were not set up with effective weapons.
When one has $2.9 trillion in costless AUM (because if the cost is breached, one just doubles down, especially if one prints the money), it is not all that surprising to generate $77 billion in profits in one year (think of the hubris emanating from that particular year end letter), or even $385 billion in profits in the past 10 years. Yet it is still a stunning number considering the rest of the $2 trillion hedge fund industry lost about 10% in 2011. Which is why we all bow down to what is without doubt the world's most lucrative and profitable generator of P&L in history: the Federal Reserve, which for the second year in a row has printed (pun intended) over $70 billion in profits. And who is the lucky LP? Why the US Treasury of course, which for the second year in a row will pocket all the proceeds from PM Ben's immaculate trading perfection. Of course, there is one caveat for this spotless performance sheet: what happens when Fed interest expense surpasses interest income? But why worry - everyone tells us this can never happen, so it obviously can never happen...
"The New York Fed continuously reviews the stress value estimates and recently identified and corrected a methodological error. The New York Fed has determined that as a result of this error, one legacy CMBS — CUSIP 059497AX5 — was accepted as collateral that would not have been accepted using the current methodology. However, the New York Fed continues to expect no losses on the loans backed by this CMBS because the stress value is based on extremely unlikely economic circumstances, and because the market value of this CMBS is well above the TALF loan amounts." - New York Fed
The Federal Reserves is doing what they always do, bailing out their pals on Wall Street. My findings have strengthened my bullish outlook on the stock market even more, and they offer undisputable proof that the Federal Reserve is involved in illiquid CMS excepting activities via TALF. I do not think commercial real estate will be a problem. Remember, the commercial mortgage bond market is only $700 billion. The
residential mortgage bond market is $8.95 trillion.
The New York Fed, concerned about what happens when it can no longer monetize treasuries, has decided to adjust its TALF fall back plan which so far has seen virtually no use, compliments of a free-liquidity guzzling equity market. So Messrs Bill Dudley et al are taking appropriate steps for the next part of the move higher, and have just issued an announcement, changing the "procedures for evaluating asset-backed securities pledged to the TALF." The reason: to "enhance the Federal Reserve's ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure." It is refreshing that the NY Fed actually cares about lending taxpayer money where the collateral will presumably cover losses, courtesy of the upcoming CRE crunch.
PIMCO Now Added As TALF Collateral Monitor By NY Fed, Will Dispense Objective, Unbiased Praise Of Any And All CollateralSubmitted by Tyler Durden on 08/04/2009 16:28 -0400
"Trepp will focus solely on CMBS. PIMCO will perform a broader role which encompasses the entire TALF portfolio, including both mortgage-backed and non-mortgage-backed ABS. The collateral monitors will not establish policies or make decisions for the New York Fed, including decisions whether to reject a CMBS as collateral for a TALF loan or exclude loans from mortgage pools."
The Federal Reserve of New York is apparently just now realizing that Commercial Real Estate collateral is more than just wishful thinking. In a press release issued earlier, the NY Fed announced that it had picked TREPP to serve as a collateral monitor for the CRE Hail Mary pass better known as TALF.
The following is a speech "A Preliminary Assessment Of The TALF" presented by NY Fed President William Dudley to a SIFMA PPIP summit today. Overall, not too exciting, but Bill is either being disingenuous, patronizing or flat out stupid with this line of thought: