bizzXceleration: Performance, Value and Profit

Well we're off to an interesting start to the week, after an absolutely fascinating weekend. One thing that truly fascinates us is that as the fundamental economic, monetary and credit news goes from bad to worse we appear to be enterring a market bounce. The disconnect gap between the markets and these other factors is as wide as it's been in decades and is based on a view of the outlook that is both simple and optimistic, at least in our opinion. And dreadfully wrong. If our assessments are anywhere near correct, which the recent excerpts back up, we'd suggest taking this as an opportunity to re-position yourself accordingly.

UPDATE -let me change things around a bit. Two recent vidclips put some of this in context. The first from Jim Jubak and the 2nd from Mohamed el-Arrian of PIMCO. Any startling coincidence between the seriousness of their assessment and mine is entirely deliberate.

1. Why JPM for BSC (they had no damm choice and no alternatives):
   Bear Stearns deal scary
   JPMorgan Chase is paying just $236 million for Bear Stearns, whose building alone is worth $1 billion plus. Why that’s scary: The Fed was desperate to find someone to take over Bear, and the only bank strong enough to do it was able to cut a great deal, says MSN Money's Jim Jubak.
   
2. Beyond BSC/JPM (earlier in the week the Fed violated ~ 80 years of policy precedent by a) buying securities from b) non-commerical banks; in all the hoorah that's been lost):
   El-Erian on Feds Actions
   Mohamed El-Erian, co-CEO and co-CIO of PIMCO, advises the Fed to purchase outright high-quality mortgage securities.

Continue reading "Credit Meltdown, Economy and Consequences: Putting the Pieces Together" »

Posted by dblwyo at 08:47 AM | Permalink | Comments (2)

The two most interesting strategic stories in the last week were, IMHO, the sad charade in Washington as the "captains of the financial ship" were purportedly called on the carpet about the credit crisis. We'll have more to say on that later because an understanding of the situation will help dissect it. The other most interesting was our salvation thru the Fed's extension of credit facilities to banks by allowing them to use imperiled securities as collateral on temporary loans. But let's set the stage for that action by quoting from Caroline Baum's most recent opinion column on Bloomberg. She "quotes" in-directly from Ayn Rand's hero John Galt, mimicing his suggestion that the best and the brightest withdraw from the world until government stops interferring in our lives and businesses:

Today's economic and financial crisis would resolve itself more quickly and efficiently if the government got out of the way. 

That's as close to the single most irresponsible and mis-informed suggestion I've seen on this topic because it fails to grasp the extent of the breakdown in the credit markets, despite an otherwise complete and able survey of the symptoms. And because it fails to grasp the threat to the operation of the larger economy. It was certainly clever and educated in a liberal arts sense. A better assessment by someone with a much more profound, and we do mean PROFOUND, grasp of the situation comes from Larry Summers and his recent speech at Stamford's SIPR conference on the economy. 

Continue reading "John Galt vs the Fed: Credit, Crisis and Collapse" »

Posted by dblwyo at 11:24 AM | Permalink | Comments (0)

The elephant in the room is the fundamental breakdown in the structure of the credit markets which is leading to wave after wave off cross-instrument and cross-market disruptions. About the time we think that one set of ripples from a single rock toppling into the credit pond has died down or been contained another and bigger rock (or boulder or ...) topples into and the ripples get bigger and bigger. As you may have gathered it's my habit to softclip interesting stories and keep them around to buildup a timeline. In tracking the credit markets it was really only necessary to track a core, usually Treasuries and the yield curve, because the relationship of those markets was the engine that drove everything else. Now every instrument and every market has its' own unique characteristics depending on how much structure, synthesis, leverage and perversity is embodied in that market. While we don't know the size of the problem or the linkages the best we can project is that it will continue, and we don't have any real clues as to all the myriad inter-connects. Tech guys talk about network structure where everything links to everything else  talke about the N-squared problem. In other words it's not just about A <--> B links but A <--> C, C <--> Z, Z <--> who knows.

Continue reading "WRFest 1Mar08(Credit Markets): Credit Contagion, the Fed and Outlook" »

Posted by dblwyo at 10:48 AM | Permalink | Comments (0)

Well the search for the quasi-innocent to punish is underway (if you recall that old description of new project gone awry ?). While the Fed is not entirely blameless we seem to be heaping all the negatives on them and ignoring both the difficulties, the real situation and the malfeasances of many other players. The problem being that if we try and burn the witches to stop the plauge then the rats and fleas will still be with us; and we'll get another outbreak soon enough. There's a very good NYT story today which is well worth your time whose fundamental premise I disagree with. Which is not to say that there's not a lot that coulda/should been done and STILL will need doing. That's where we should be concentrating.

 UPDATE: CNBC has an interesting and useful discussion (not the typical debate) with Martin Meyer, Greg Ip, et.al. discussing what the Fed is trying to accomplish. Partly based on 'inside baseball' interviews with serious players. While you'll need to draw your own interpretations and conclusions this is one of the more realistics and balanced overviews I've seen. Particularly points to pay attention to are the discussion of outlooks, the credit mechanisms, etc. This is the first inkling that some folks are getting the idea of how badly broke the credit mechanisms are and what the constraints on Fed policy are.

Below the line you'll find an exerpt plus the URL's for my two favorite insightful bloggers on this topic. Here are my comments:

Sorry but this is an area where I need to caveat Barry's and the readers normal assessments a bit. Remember the conundrum ? Well with excess global liquidities the Fed and other central banks had limited abilities to raise long-term rates. Nobody's paying attention to that point but it is profound. Nor is anybody giving credence to another couple of critical points. The Fed would have had to start raising rates in '03 - think about what else was going on then and ask yourself if that was the time and place. Another point that Uncle Alan has made is that the Fed shouldn't be bursting bubbles as many have argued. Aside from whether they could or not the risk of inducing a major downturn to deflation, that's Depression, are too high.

The real problem here is that leveraged structured debt created perverse incentives to maximize the deal flow at the expense of rapidly declining asset quality. Instead of the supposed traditional model of making money by investing in sound assets. This was a regulatory problem and where the Fed did fail was in lacking the foresight and imagination to institute new regulatory regimes to a) prevent predatory lending and b)invent new mechanisms to reduce the proportion of bad assets that were re-leveraged. Any suggestions because it still remains to be done.

The final barrier was that these should have been put in in '04 when the possible impacts were first being discussed among central banks. Would there have been any support by anybody in that timeframe ?

Fed policy is actually pretty logical and reasonable within the limits of understanding and tools - not always right but a lot better than it has been among Central bankers. Try this on for size:

Credit Mess & the Fed: Credit Mess and the Fed: Understanding the Strategic Posture

Continue reading "Let's Blame Uncle Alan: Fed Policy and the Credit Crisis" »

Posted by dblwyo at 08:29 AM | Permalink | Comments (0)

Well the flow of news in the last 24 hours is significant - one is tempted to say astounding. After a "disappointing" 1/4-pt cut in the Fed and Fed Funds rates the Fed yesterday announced a whole slew of policy initiatives designed to attack the freeze in the credit markets, especially the short-term and bank lending markets, directly.Make no mistake about it,

this is not only a serious problem in its' own right but thru freezing up the credit markets threatens to trigger a major economic downturn, potentially on a worldwide basis.

The Fed's announcement of upto $40B of short-term lending using these new, or newly applied, policy tools and the massive worldwide coordination efforts (not seen since the 911 crisis) are measures of how seriously they are taking this. Today's WSJ has a great summary article - if you've no subscription we've excerpted key portions below but get a copy however you can. And to add some spice to the sauce check out David Wessel's brief video commentary at right. In fact start there. Meanwhile the WSJ excerpts are below coupled with more readings below the line extending yesterday's post of readings and resources.

(WSJ) Fed Tries to Free Up Credit  The Fed said it will provide banks up to $40 billion in the next eight days as part of a coordinated effort with four other central banks aimed at reviving lending.

Continue reading "The Fed & the Credit Mess: Readings II" »

Posted by dblwyo at 11:20 AM | Permalink | Comments (2)

The other aspect of the credit crisis to understand is the Fed. While we don't pretend to speak for them, or even too them :), we do think that most of their actions are readily understood by a) understanding the deeper structure of the environment and trends and b) how they see the world. More on that later but we believe that they've become increasingly transparent and are being entirely rational and logical in their actions, within the limits of the available data, analysis and human insight of course.

The critical problem is not that the Fed is facing the classic tradeoff between inflation and a slowing economy. No - it's much....much worse. They're between the rock of inflation and dollar problems on the one hand the hard place of an increasingly fragile economy.

The real problem, though, is that there is a tsunami of credit market breakdowns due to structural problems in leveraged debt instruments mounting toward them.

And us. Anyway you'll find an appropriate collection of readings and resources below the line here... 

Continue reading "The Fed and the Credit Crisis: More Readings & Resources" »

Posted by dblwyo at 01:16 PM | Permalink | Comments (0)

To the best of my understanding whinging is the British (English) term for whiners and complainers but it sounds more subtle and sophisticated to say it with an English accent :). BTW - please consider singing Schadenfreude to the tune of Oh Tannenbaum to get a flavor of our perspecive here !

It strikes me as greatly ironic that the Fed (Greenspan) has been blamed for letting rates remain low for too long and the role and impacts of the financial community in substituting credit and leverage on bad...bad diligence - think adult supervision - gets short shrift from the players. So short that as soon as things got a little tight a couple of weeks ago certain parties, as in all of them, where whinging about needing an immediate cut in the policy federal funds target. Fortunately good sense, experience, education and insight led to some short-term functional and operational fixes when the gearbox seized up (and make NO mistake it really seized up and we were all staring into the abyss). The accompanying chart shows target funds rate vs actual and up until that seize it was the normal minor fluctuations. The intervention by Ben & Co. strikes me as brilliant and courageous. If you won't mind me quoting myself let me borrow from an e-mail exchange on the topic that was also a posted comment on another blog. Before that let me mention that what we're seeing in the markets, in discussions of Fed policy and in discussions of the outlook for the economy (see this earlier post ) is a pretty complete lack of reality or the first stage in denial. We'll dig into the Markets and Fed Policy to get a better handle in follow-on posts but let's put it all in context. First, the brief dissection of Fed tactics and strategy:

Let's put ourselves in the Fed's shoes for a minute & recall their jobs are to 1) manage the economy around the speed limit - which gets most of the attention. But also 2) to make sure financial markets are orderly and don't seize up and 3) oversee the regulatory mechanisms that are required to keep the Jay Goulds of the world from taking the rest of us to the cleaners. The last statement indicated really that they're perfectly comfortable with what is essentially a neutral stance while recognizing a widening housing problem AND a liquidity squeeze (not a credit crunch which is when non-price restrictions keep any money from flowing [recall Reg Q and disintermediation ?]). It's funny that not too long ago everybody was complaining that they left rates too low for too long and not everybody's whining :). The Fed can't control the fundamental speed limit of the economy but can try to keep it as close to that potential as possible which means dampening down inflation on one side and demand shortfalls on the other. They're doing a fantastic job in the face of uncertainty. At the same time notice that the $ is very weak AND China is beginning to export inflation. Econ policy targeted rates need to stay up. Meanwhile we have an asset bubble based on bad diligence plus leverage & more bad diligence and discipline. That all needs to work out (recall Moral Hazard).
As it happens though the mechanism for actually managing rates is the same one for ensuring the system doesn't seize - and the discount window is always open but only used when Fed funds rates are lower than inter-bank loans. Given the shortfalls in ready liquidity in this last week the central banks are doing exactly what they're supposed to do and releasing funds into the system to maintain the target rate. The two are separate but highly inter-linked decisions. But don't read - as best I can tell - the injection of liquidity to keep the wheels greased as any change in policy. Which, as BR noted earlier, shouldn't be done or we'll get the buyout, buyback and over-leveraged asset boom driven by bad credit that's been needing to be cleaned out for a while now.

 The key here is whether or not there is adult supervision of financial decision making by all the players. Below is Minyanville's take-off on Jim Cramer's well-known tantrum from several weeks ago. That may have faded from your memory by this time but it shouldn't. The deeper question is, was this a black swan or was it anticipatable. Given that some very smart money, e.g. Wilbur Ross, have positioned themselves to take advantage of the still-to-be-worked-out implosion of the credit markets probably not. One could also point to excellent discussions by Paul McCulley and Bill Gross of PIMCO or a string of Jim Jubak columns (all referenced in various Weekly Readers) to confirm that. So to put it in context we offer up three different video takes. First, from Minyanville and then from WSJ's interview with Mr. Ross, finally concluding with Cramer's (admittedly rather brave) apperance on the Colbert Show where he sorta does and sorta doesn't take credit for the Fed fix.

Here's Hoofy and Boo to put it into perspective:

Continue reading "Schadenfreude, Oh Schadenfreude: the Fed vs the Whingers" »

Posted by dblwyo at 03:52 PM | Permalink | Comments (0)