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Monday, August 20, 2007


a continuing crisis

equity markets bounced thursday and friday, stabilized today on low volume -- but the crisis is probably not over.

via interest rate roundup, t-bill yields are still crashing, only faster: "Bloomberg just ran a headline saying this is the biggest one-day plunge since the stock market crashed in October 1987." the ^irx dropped 67 basis points to 2.95% just today, indicating an ongoing wholesale flight into the very safest treasury instruments.

some context might be provided by the 1998 chart of the 13-week. rate of change bottomed along with the nasdaq. but it might be noted that this nosedive dwarfs the 1998 move in speed, with a 10-bar rate of change less than half of what we're seeing right now. see also 2h2001. but the strange part is that this huge move is coming without the announcement of a fed funds rate cut.

lee adler, who follows fed policy actions regarding the monetary base:

So far in this crisis, the Fed has NOT injected one cent of liquidity into the system except for that two day bulge on Thursday and Friday August 9-10, which they completely removed by Monday and Tuesday 8/13-14. The Fed remains tight in terms of the SOMA, and making matters worse, foreign central banks are dumping Treasuries to raise cash for injection into their own system in order to try and fix the extreme dollar squeeze in European credit markets. Last week they reduced their custodial holdings at the Fed by a record $17 billion. They actually sold $22 billion of Treasuries, but apparently the Asian central banks are still propping the GSE market as they bought $5 billion in Agencies.

We’ll just have to see if the world’s central banks have the firepower to stop a worldwide credit crunch and liquidity squeeze when some major players are essentially insolvent because dey ain’t no assets backing those ASSet backed securities. Rather than taking decisive action, it looks to me like the Fed is frozen in place like a deer staring into the headlights of an 80 mile per hour downhill runaway tractor trailer, while the ECB is fighting its crisis the only way it can, by selling Treasuries and injecting the cash into their system.

The fact is that the Fed remains shockingly tight in terms of the monetary base, which they have maintained at ZERO growth for the past 8 months, and LESS THAN ZERO in the past week when the sheet was hitting the fan. Sure that can all change next week, but you wouldn’t know it from the actions they took on Friday.

At this point, the cut at the discount window looks like nothing more than throwing a bone to a starving dog. Big freaking deal. Watch what they do, not what they say. It seems to me that they either don’t yet have a handle on the magnitude of the crisis, or they think that smoke and mirrors will fool everyone into thinking that happy days are here again and that the credit markets will “unfreeze” as a result. But so far, they haven’t “done” anything.

the spike in the t-bill would seem to indicate that the markets concur with adler. but it should also be noted that such spikes usually correlate well with market bottoms. the bottom may very well be in, at least for a while, in equities.

the dollar has stabilized near 115 yen, off the low of 112, but backed well off the june high of 124. the dollar/yen is back to a level last seen consistently in 2q2005.


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