I maintain the next move by the Fed is to massively open up the dollar swap lines with European central banks. I don’t think Bernanke wants to announce this significant step at Jackson Hole. It is an EU issue and the Fed can’t take the lead on this. Opening the swap lines will prove to be very unpopular in the US. Politicians will jump on it as a bailout of Europe while America is struggling.
Bernanke is going to take some heat, when this happens (I think this is now a certainty, just not sure of the timing).
The folks at Zero Hedge and FTAlphaville (and others) were of a similar mind.
I would love to convince you that we were just smart. Actually the evidence was everywhere you looked that something like what was announced this A.M. was in the works.
My point. People who actually move money around (versus writing about it) were also aware that this was pending.
Even more to the point:
This could not have happened without substantial discussion amongst all of the CB’s involved. Dozen of folks knew that this was coming a week ago. That means that dozens more got the tip.
The market action (buy Euro sell gold) the past few days smelled of something. I think this was it.
My conclusion:
Sell on the news. I don’t think the positive reaction will be long lived. There is a flip side to the swap announcement.
This is an acknowledgment of profound weakness in the funding markets in Europe.
The swaps may mask the problem for a few months. But it's going to come back with a vengeance. How could it not?
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10 an 5 yr note futures were broadcasting as well.
ReplyDeleteWhy not let swaps mask it for many more months, even years?
ReplyDeleteLetting the Fed lend dollars to the ECB, with a good interest, provides Europe with money that they doesn't dare to print themselves.
Bruce--could you give me your 2 cents on what you see with the gold price going forward.the central banks of many countries joined hands and will provide Europe another bailout of DOLLARS to avoid a collapse. With this type of news one would think that gold would be going through the roof ---- instead it has sold off as the price lows in spot Forex reached 1778 this morning.
ReplyDeleteJust makes no sense --why the big sell-off
thanks
Robert, There are massive positions sloshing around. The trade of late was to sell Euro buy gold. Some of this is getting unwound.
ReplyDeleteThe liquidity across all markets stinks. So this results in big moves as the money goes from hand to hand.
I see today's developments as a sign of weakness. Wait a few days to see what the lasting opinions are.
Bruce,
ReplyDeleteMacroMan is a macro trader with the opposite thought:
http://macro-man.blogspot.com/2011/09/what-euro-dollar-funding-crisis.html
He makes an interesting argument, what are your thoughts??
Anon @9:58
ReplyDeleteMacroMan says there is no problem. I disagree. We would not have the CB swap announced this am unless there were a problem.
MM says, Look at 1m CP for a Euro bank. Only 45 basis points. No sign of trouble. Bullshit. The rat is not higher because the issuance has stopped. You issue CP when it is cheap vs alternatives. This is not a goo benchmark to measure stress.
Question for MM. How much CP for EU banks is outstanding in CP market for maturity greater than 1 mo. What was it a year ago?
Answer: Term CP for EU banks has dried up.
Kudos to you. I read it back in August and knew you would comment on it.
ReplyDeleteRik
Can you elaborate a little more on why these dollar swaps are so important to European banks. Are US banks in so much better shape then ?
ReplyDeleteRik (again)
"This is an acknowledgement of profound weakness in the funding markets in Europe"
ReplyDeleteDave says, it's really just a 'Breakfast Of Champions' http://goo.gl/38kvi
On “The liquidity across all markets stinks. So this results in big moves as the money goes from hand to hand.”
ReplyDeleteLet’s do evil that good may come. Never has worked. Not for long anyway.
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