Flight of The Valkyries
We said it before, we say it again...
The Feds twin 50 bps cut was an act of desperation and will foster yen carry trade unwind and higher interest rates as the dollar comes under attack.
The cuts will solve nothing and because of the boldness, could actually backfire, as this is not a liquidity issue, its a solvency crisis.
And the solvency of a system leveraged up to 30X is about to be tested severely by the unraveling of the ABCP debt markets.
More Falling Knives.... hat tip to Bloomberg.
TCW Asset Management, the money manager owned by France's Societe Generale SA, is selling $3.2 billion of mortgage securities backing collateralized debt obligations after the value of the bonds fell.
A decline in the price of securities in the market-value CDO, formally called Westways Funding X, managed by TCW triggered a clause that demands assets be sold so holders of the highest- rated pieces don't incur losses.
Moody's Investors Service, cut the credit ratings on six classes of the Westway CDO.
Moody's downgraded $40 million of notes from the Westways Funding X CDO that were rated A2, four levels above investment- grade, to Caa2, eight levels below.
Fitch Ratings last week said another five Westways Funding CDOs might have to sell assets under the CDOs' rules.
A $200 million CDO in the Enhanced Mortgage-Backed Securities series of market-value CDOs managed by MassMutual Financial Group's Babson Capital Management LLC has finished liquidating after failing a similar test.
While holders of the EMBS CDO's securities originally rated AAA and A+ were paid back in full...
holders of lower-rated securities from the CDO will lose at least half and in some cases all of their principal.
Citigroup managed the sale of the Westways X CDO securities to investors in February.
No one wants to go near these CDO's or ABCP with a ten foot pole. And the liquidations cause a death spiral in the asset values.
Pot Calling Kettle Black, Again... Gyan Sinha, head of asset-backed research at Bear Stearns: "Why catch a falling knife?"
Dollar exodus...
There is now a growing danger that global investors will start to shun the US bond markets. The 10 yr yield has risen from Sept 10th 5.32% to 5.64% today.
TIC data showed that foreign US bond purchases went from $97 billion to $19
billion in July, with outright net sales of US Treasuries.
The Telegraph echoing many of our recent Natterings... Hat tip to Barry Ritholtz at The Big Picture.
"The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
The biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade" or unwind, causing massive flows from the US back to Japan."
The exodus gets worse... from Bloomberg, hat tip to Yve at Naked Capitalist...
"Venezuela moved some of its international reserves into euros last year, along with other oil producers including the United Arab Emirates, Kuwait and Qatar.
Iran in July requested yen rather than dollars for all shipments to Japan, boosting that currency.
Today, Venezuelan President Hugo Chavez instructed Petroleos de Venezuela SA, the state oil company...
to convert its investment accounts from dollars to euros and Asian currencies to reduce risk."
Systemic risk... "foreigners have funded 25% to 30% of America's credit and short-term paper markets over the last two years."
Hans Redeker, currency chief at BNP Paribas: "They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances?
We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008."
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was "playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, thus driving the property market into even deeper crisis."
Mr Rogers: "If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession.
The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems."
In, I love the smell of repos in the morning, Barry Ritholz at The Big Picture comments re: OFHEO loosening Fannie & Freddie...
"The details will come out over the next few weeks -- but there are expectations this will eventually include Jumbo Mortgages, Sub-Primes, etc.
Thus a GSE, originally established to make purchasing homes more affordable for the middle and lower classes, has now become a subsidy for speculators and the purchases of McMansions."
And "as Bill King notes, we cannot answer the question of whether the Fed plays “Ride of the Valkyries” before injecting credit or cutting rates.
But he is hard at work spreading the rumor that Ben ‘loves the smell of repos in the morning.’ He says, “It smells like...victory.”
We made a similar comment repleat with modified soliloquy way back on 05/17/07 in LBO Debt Market Time Bomb:
"Listen, do you hear Flight of The Valkyrie's? Oh no, I'm having another flashforward.... Why, I can see them on the horizon now...
it's a squadron of Fed helicopters with Captain Bennie at the helm screaming... Charlie don't surf!!! The Nattering One queries: Whats that smell???
Bennie answers: "Freshly printed money, son. Nothing else in the world smells like that. I love the smell of printing presses churning out devalued fiat currency in the morning.
You know, one time we had a housing market bomb, for twelve years. When it was all over I walked up. We didn't find one of 'em, not one stinkin' homeowner body.
The smell, you know that M3 17% growth smell, the whole hill. Smelled like... massive debauchery."
On 08/10/07 another reference: "Cry of The Valkries could be heard as Central Bank helicopters circled while Bennie dropped the money, saluted and screamed:
"I love the smell of freshly printed currency in the morning, it smells like debauchery."
The Feds twin 50 bps cut was an act of desperation and will foster yen carry trade unwind and higher interest rates as the dollar comes under attack.
The cuts will solve nothing and because of the boldness, could actually backfire, as this is not a liquidity issue, its a solvency crisis.
And the solvency of a system leveraged up to 30X is about to be tested severely by the unraveling of the ABCP debt markets.
More Falling Knives.... hat tip to Bloomberg.
TCW Asset Management, the money manager owned by France's Societe Generale SA, is selling $3.2 billion of mortgage securities backing collateralized debt obligations after the value of the bonds fell.
A decline in the price of securities in the market-value CDO, formally called Westways Funding X, managed by TCW triggered a clause that demands assets be sold so holders of the highest- rated pieces don't incur losses.
Moody's Investors Service, cut the credit ratings on six classes of the Westway CDO.
Moody's downgraded $40 million of notes from the Westways Funding X CDO that were rated A2, four levels above investment- grade, to Caa2, eight levels below.
Fitch Ratings last week said another five Westways Funding CDOs might have to sell assets under the CDOs' rules.
A $200 million CDO in the Enhanced Mortgage-Backed Securities series of market-value CDOs managed by MassMutual Financial Group's Babson Capital Management LLC has finished liquidating after failing a similar test.
While holders of the EMBS CDO's securities originally rated AAA and A+ were paid back in full...
holders of lower-rated securities from the CDO will lose at least half and in some cases all of their principal.
Citigroup managed the sale of the Westways X CDO securities to investors in February.
No one wants to go near these CDO's or ABCP with a ten foot pole. And the liquidations cause a death spiral in the asset values.
Pot Calling Kettle Black, Again... Gyan Sinha, head of asset-backed research at Bear Stearns: "Why catch a falling knife?"
Dollar exodus...
There is now a growing danger that global investors will start to shun the US bond markets. The 10 yr yield has risen from Sept 10th 5.32% to 5.64% today.
TIC data showed that foreign US bond purchases went from $97 billion to $19
billion in July, with outright net sales of US Treasuries.
The Telegraph echoing many of our recent Natterings... Hat tip to Barry Ritholtz at The Big Picture.
"The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
The biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade" or unwind, causing massive flows from the US back to Japan."
The exodus gets worse... from Bloomberg, hat tip to Yve at Naked Capitalist...
"Venezuela moved some of its international reserves into euros last year, along with other oil producers including the United Arab Emirates, Kuwait and Qatar.
Iran in July requested yen rather than dollars for all shipments to Japan, boosting that currency.
Today, Venezuelan President Hugo Chavez instructed Petroleos de Venezuela SA, the state oil company...
to convert its investment accounts from dollars to euros and Asian currencies to reduce risk."
Systemic risk... "foreigners have funded 25% to 30% of America's credit and short-term paper markets over the last two years."
Hans Redeker, currency chief at BNP Paribas: "They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances?
We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008."
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was "playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, thus driving the property market into even deeper crisis."
Mr Rogers: "If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession.
The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems."
In, I love the smell of repos in the morning, Barry Ritholz at The Big Picture comments re: OFHEO loosening Fannie & Freddie...
"The details will come out over the next few weeks -- but there are expectations this will eventually include Jumbo Mortgages, Sub-Primes, etc.
Thus a GSE, originally established to make purchasing homes more affordable for the middle and lower classes, has now become a subsidy for speculators and the purchases of McMansions."
And "as Bill King notes, we cannot answer the question of whether the Fed plays “Ride of the Valkyries” before injecting credit or cutting rates.
But he is hard at work spreading the rumor that Ben ‘loves the smell of repos in the morning.’ He says, “It smells like...victory.”
We made a similar comment repleat with modified soliloquy way back on 05/17/07 in LBO Debt Market Time Bomb:
"Listen, do you hear Flight of The Valkyrie's? Oh no, I'm having another flashforward.... Why, I can see them on the horizon now...
it's a squadron of Fed helicopters with Captain Bennie at the helm screaming... Charlie don't surf!!! The Nattering One queries: Whats that smell???
Bennie answers: "Freshly printed money, son. Nothing else in the world smells like that. I love the smell of printing presses churning out devalued fiat currency in the morning.
You know, one time we had a housing market bomb, for twelve years. When it was all over I walked up. We didn't find one of 'em, not one stinkin' homeowner body.
The smell, you know that M3 17% growth smell, the whole hill. Smelled like... massive debauchery."
On 08/10/07 another reference: "Cry of The Valkries could be heard as Central Bank helicopters circled while Bennie dropped the money, saluted and screamed:
"I love the smell of freshly printed currency in the morning, it smells like debauchery."
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