Posted 2007-08-10 07:40
by Karl Denninger
by Karl Denninger
I didn't get much sleep.
Had the alarm set at 3:00 AM to see what Europe's open did to the futures. Went back to sleep, woke up at 5:00 and stuffed myself full of coffee, then put that futures short back on.
It was an interesting morning.
Chief among the data this morning was the import prices paid number, which came in at 1.5% up, 50% over consensus of 1%! Not good guys! That's inflation which is what you have happen (eventually) when you fail to defend your currency via appropriate interest rates and liquidity injections (yes, guys, they're too low on the rates and too high on the injections!)
The Fed (and every other Central Bank you can name) is shooting wads of cash at the markets trying to calm them down. The problem here is that banks are not willing to trust one another and are jacking up their own interbank overnight loan rates, fearing that their counterparties have debt bombs on their balance sheets that might buttrape them at any sort of inopportune moment. So they pull back and suddenly - voila!
The cute part of this today is that the Fed took only mortgage-backed securities in today's repo action. The problem of course is that these are only good for 3 days (due to the weekend) and what's even more serious about it is that this is acknowledgement that this is not contained and in fact is CONTAGIOUS INSTEAD!
The Fed has NEVER taken only MBS' before on a Repo! Repos are a totally normal thing and happen every day, but usually what gets offered are treasuries and the like. This makes today's action unique, but be careful because this action is proof and a raw admission that there is no containment of anything!
Now here's the not-so-amusing part of this, and you guys had better listen up on it, because if you don't, you're fixing to get a nasty surprise.....
Fed Repo/TOMO operations are the proper response to illiquidity. That is, you've got a bunch of people who want money, but you don't happen to have any at the moment in your wallet. In personal terms you're at the restaurant and want to buy some food, but have no money.
But you're not insolvent - you have plenty of money in your bank, you have a house that is paid off, and in general your personal balance sheet is great. You could run to the ATM and get some cash... but its more convenient not to.
This situation is very different.
Many of these organizations are in fact insolvent. That is, they have tens if not hundreds of billions of dollars of paper that is in fact worth zero! These CDOs in particular are worth zero according to the market - there is no bid!
That is the definition of a zero!
So these "liquidity injections" will not solve the problem and in fact won't even hold it off for very long! Why? Because giving liquidity to an insolvent organization is like giving an alcoholic a bottle of Jack Daniels!
What ends up happening here ultimately is an even bigger blast and it will not take long.
Why not? Because if you have a "no bid" situation than taking that paper today which must be paid back tomorrow means that the amount you have to do push out in a REPO tomorrow actually becomes larger as your sheet gets larger - you can't poop any out into the market!
There is no solution for insolvency other than a bankruptcy when your collateral becomes toilet paper!
This isn't a TEMPORARY problem.
Fact is, these Wall Street folks and mortgage lenders went too far. They are now sitting on a bunch of used toilet paper and trying to price it as if it had value beyond being flushed down the head.
WRONG ANSWER.
What's worse is that the Fed did this three times because the Banks have wised up and won't loan the money between themselves at Fed Funds! THEY are pricing in the possibility of a bankruptcy - OVERNIGHT!
This was and is a big deal......
If you're an investor in this environment you had damn well better be paying attention because this whole game is going to come apart, and very soon. What you've seen up until now is a PRELUDE, as these "temporary" operations must be repaid and as the overhang grows they will have less and less effect until finally they do nothing at all.
That is the point when you suddenly get to play Coyote and see this:
Exactly how many of these exploding debt bombs do we need to have go off? The obvious and correct answer is "all of them", and what's even more obvious is that we need to have people stop lying to the markets and investors.
As I pointed out last night the apparent misdirection - or ineptitude - is coming hard and fast right now. I always hate to call people liars without proof, but really there are only two possible explanations here - one is intentional falsehood, the other is flat-out stupidity.
"Unexpected" market changes? Not unexpected by me! Nor others. Peter Schiff has been warning about this for months, I've been warning about it for months, and so have others.
We may have been ignored but that doesn't make what we have been forecasting unexpected - just DENIED.
Oh, Countrywide? Their credit default swap prices doubled AGAIN this morning!
And now the real ****storm is starting to fly as this morning we found out that an AXA money market fund actually bought CDOs! Well, guess what - they're not worth DICK and suddenly that so-called "safe" money market fund is anything but - and has magically lost 26% of its value! A money market fund! Do you know what's in yours? How'd you like to lose twenty six percent in a money market fund?
That damn well better get your attention right damn now and if you have a money market you had best get on the phone to whoever you have it with and find out exactly what sort of paper it holds. If the answer is anything other than US Treasuries and perhaps Munis you now know that it is unsafe.
GET OUT NOW.
Oh, and next up we have Barclays perhaps pulling out of the ABN/AMRO bid. Why? Guess - financing. Can't syndicate the crap, can't close. That's the beginning and end of it and this is a huge LBO deal - can you say "disappearing LBO PUT?"
Discipline kicked my ass today. I refuse to leave futures trades on over the weekend, and after a set of whipsaws today (which were working out ok for me swing-trading them) I pulled the last short right near the close. Bad move - the futures rolled over immediately after the close and roached hard. That cost me $7500 in profits I didn't make. Grrrrrr.... but rules are rules; for the weekend I went out flat save for a few builder shorts that I was quite comfortable holding; the broker got all the money today (well, ok, I've got beer and food cash - a few hundred bucks net) instead of me. And today was work.
Oh, those mortgage bonds? Are they going up or down in value, based on this chart?
That doesn't look so good does it? Would YOU loan someone money based on their alleged "collateral" if that was what they offered you? Not me!
On the technicals we have no answer today. Everything is sitting right in the middle of the ranges; we're back to being rangebound after threatening to break it all down earlier today. And by the way, the VIX was way up.
As a result I'm mostly flat with a few direct shorts still on. Cash is either in Munis, Raw Cash or short-term Treasuries (SHY ETF, which by the way sure looks to be a decent place to park money, and if bonds rally hard - that is, the Fed DOES cut rates - the NAV on that one should do a moonshot even as the market goes directly to ****.)
Fannie and Freddie got formally told to go to hell this afternoon:
Told 'ya.
More later if anything good shows up... otherwise, see me on the forum!
Had the alarm set at 3:00 AM to see what Europe's open did to the futures. Went back to sleep, woke up at 5:00 and stuffed myself full of coffee, then put that futures short back on.
It was an interesting morning.
Chief among the data this morning was the import prices paid number, which came in at 1.5% up, 50% over consensus of 1%! Not good guys! That's inflation which is what you have happen (eventually) when you fail to defend your currency via appropriate interest rates and liquidity injections (yes, guys, they're too low on the rates and too high on the injections!)
The Fed (and every other Central Bank you can name) is shooting wads of cash at the markets trying to calm them down. The problem here is that banks are not willing to trust one another and are jacking up their own interbank overnight loan rates, fearing that their counterparties have debt bombs on their balance sheets that might buttrape them at any sort of inopportune moment. So they pull back and suddenly - voila!
The cute part of this today is that the Fed took only mortgage-backed securities in today's repo action. The problem of course is that these are only good for 3 days (due to the weekend) and what's even more serious about it is that this is acknowledgement that this is not contained and in fact is CONTAGIOUS INSTEAD!
The Fed has NEVER taken only MBS' before on a Repo! Repos are a totally normal thing and happen every day, but usually what gets offered are treasuries and the like. This makes today's action unique, but be careful because this action is proof and a raw admission that there is no containment of anything!
Now here's the not-so-amusing part of this, and you guys had better listen up on it, because if you don't, you're fixing to get a nasty surprise.....
Fed Repo/TOMO operations are the proper response to illiquidity. That is, you've got a bunch of people who want money, but you don't happen to have any at the moment in your wallet. In personal terms you're at the restaurant and want to buy some food, but have no money.
But you're not insolvent - you have plenty of money in your bank, you have a house that is paid off, and in general your personal balance sheet is great. You could run to the ATM and get some cash... but its more convenient not to.
This situation is very different.
Many of these organizations are in fact insolvent. That is, they have tens if not hundreds of billions of dollars of paper that is in fact worth zero! These CDOs in particular are worth zero according to the market - there is no bid!
That is the definition of a zero!
So these "liquidity injections" will not solve the problem and in fact won't even hold it off for very long! Why? Because giving liquidity to an insolvent organization is like giving an alcoholic a bottle of Jack Daniels!
What ends up happening here ultimately is an even bigger blast and it will not take long.
Why not? Because if you have a "no bid" situation than taking that paper today which must be paid back tomorrow means that the amount you have to do push out in a REPO tomorrow actually becomes larger as your sheet gets larger - you can't poop any out into the market!
There is no solution for insolvency other than a bankruptcy when your collateral becomes toilet paper!
This isn't a TEMPORARY problem.
Fact is, these Wall Street folks and mortgage lenders went too far. They are now sitting on a bunch of used toilet paper and trying to price it as if it had value beyond being flushed down the head.
WRONG ANSWER.
What's worse is that the Fed did this three times because the Banks have wised up and won't loan the money between themselves at Fed Funds! THEY are pricing in the possibility of a bankruptcy - OVERNIGHT!
This was and is a big deal......
If you're an investor in this environment you had damn well better be paying attention because this whole game is going to come apart, and very soon. What you've seen up until now is a PRELUDE, as these "temporary" operations must be repaid and as the overhang grows they will have less and less effect until finally they do nothing at all.
That is the point when you suddenly get to play Coyote and see this:
Exactly how many of these exploding debt bombs do we need to have go off? The obvious and correct answer is "all of them", and what's even more obvious is that we need to have people stop lying to the markets and investors.
As I pointed out last night the apparent misdirection - or ineptitude - is coming hard and fast right now. I always hate to call people liars without proof, but really there are only two possible explanations here - one is intentional falsehood, the other is flat-out stupidity.
"Unexpected" market changes? Not unexpected by me! Nor others. Peter Schiff has been warning about this for months, I've been warning about it for months, and so have others.
We may have been ignored but that doesn't make what we have been forecasting unexpected - just DENIED.
Oh, Countrywide? Their credit default swap prices doubled AGAIN this morning!
And now the real ****storm is starting to fly as this morning we found out that an AXA money market fund actually bought CDOs! Well, guess what - they're not worth DICK and suddenly that so-called "safe" money market fund is anything but - and has magically lost 26% of its value! A money market fund! Do you know what's in yours? How'd you like to lose twenty six percent in a money market fund?
That damn well better get your attention right damn now and if you have a money market you had best get on the phone to whoever you have it with and find out exactly what sort of paper it holds. If the answer is anything other than US Treasuries and perhaps Munis you now know that it is unsafe.
GET OUT NOW.
Oh, and next up we have Barclays perhaps pulling out of the ABN/AMRO bid. Why? Guess - financing. Can't syndicate the crap, can't close. That's the beginning and end of it and this is a huge LBO deal - can you say "disappearing LBO PUT?"
Discipline kicked my ass today. I refuse to leave futures trades on over the weekend, and after a set of whipsaws today (which were working out ok for me swing-trading them) I pulled the last short right near the close. Bad move - the futures rolled over immediately after the close and roached hard. That cost me $7500 in profits I didn't make. Grrrrrr.... but rules are rules; for the weekend I went out flat save for a few builder shorts that I was quite comfortable holding; the broker got all the money today (well, ok, I've got beer and food cash - a few hundred bucks net) instead of me. And today was work.
Oh, those mortgage bonds? Are they going up or down in value, based on this chart?
That doesn't look so good does it? Would YOU loan someone money based on their alleged "collateral" if that was what they offered you? Not me!
On the technicals we have no answer today. Everything is sitting right in the middle of the ranges; we're back to being rangebound after threatening to break it all down earlier today. And by the way, the VIX was way up.
As a result I'm mostly flat with a few direct shorts still on. Cash is either in Munis, Raw Cash or short-term Treasuries (SHY ETF, which by the way sure looks to be a decent place to park money, and if bonds rally hard - that is, the Fed DOES cut rates - the NAV on that one should do a moonshot even as the market goes directly to ****.)
Fannie and Freddie got formally told to go to hell this afternoon:
"The Office of Federal Housing Enterprise Oversight said late Friday it would not allow Fannie Mae to increase its portfolio beyond the $727 billion limit created in May 2006, despite arguments by the company and senior Democrats that a change would provide much-needed stability to the shaky mortgage market."
Told 'ya.
More later if anything good shows up... otherwise, see me on the forum!
Discuss this entry (registration required to post)
