thought for the day

No big update until I know how the CDS auction goes and what it means; until then, just watch the big boards. The question for today is whether we'll have a three-digit S&P500 to join the four-digit Dow Industrials Average by the end of the day. @whee!

Oh, and here, your thought for the day, found on a financials message board:



PS: The VIX is an indicator of stock-market instability. (Volatility IndeX, y'see.) Up equals less stability, or more volatility. It's setting 15+year highs today. Marketwatch's headline:

New VIX high is not all that bullish

How many clowns fit inside that damn car, anyway?

vilolin

I can has cheap-ass Chinese-made violin, or, more correctly, vilolin. I paid significantly less for it than a set of cheap strings. I had no idea violin strings cost so damn much - the G that I needed to replace after purchase (entirely my fault, but I learned from it) cost me $10 (not for a set, for a string; the good individual strings cost $42); the violin, bow, and case combined I got for $40 including tax. But yay! Toy I can play with to see whether I want a real one someday! ^_^


Vilolin

There's a hint of good news in this, believe it or not...

There's a hint - just a hint - of what might be actual good news today, in amidst all the crashing and disasters. Cherish it; hope it grows.

But first, the crashing and disaster. I won't spend any time on the collapse of Iceland's banking system over the weekend; it's everything you don't want to see happening to your economy all at once. You know that end-of-the-world-as-we-know-it scenario I outline, where US government debt gets downgraded and interest rates the government has to pay go through the ceiling? That's Iceland. Right now. Nobody has cash. Nobody has access to credit. Nobody has money. All while:

...the main supermarket can't get imported goods because they have no currency. The shops are half empty. One of the store managers has advised people to start hoarding. We're running out of oil. And winter came last night - about a month early.

And that's what I keep talking about.

I wrote earlier about the dollar rally, and how the CDS auctions are a big part of that. There's also a flight not to quality, but from perceived risk, which right now is being taken to mean Europe, what with headlines like "Germany takes hot seat as Europe falls into the abyss." You want to see some serious currency movement? Here, look at these charts. (As a side note, Brad's picked up on the idea some people including me have been floating - that interbank overnight lending has to start being insured by central banks, at least for the short term, to get things moving again. Hopefully that idea will keep on rising.)

Personally, I'm not convinced the dollar rally will last, for a lot of reasons. In part because Brad Setzer makes a decently good case that we're at 'peak petrodollars,' and that official flows now make up the majority of gross currently flows to the US (check out the private funds graph!), and sooner or later, we'll be out of CDS auctions. Not to mention that the political move against the dollar as the exclusive global reserve currency continues. Oh, and that the Treasury bill is loathed for everything except shelter value.

But I promised some good news, and I meant it. I said this morning I wasn't going to post until l knew about the big CDS auctions today - the Fannie Mae and Freddie Mac auctions - and what they meant. Today was the first major test of the CDS market, the $55 trillion shambling hog-shoggoth everyone fears but nobody really knows how to handle. See, CDS are functionally insurance that aren't regulated as insurance, and sales below par trigger calls on CDS issuers to pay the bearer the difference between the par price and the actual sale price. But most people playing the CDS game took out second-teir CDSes of their own, so they would get paid of they had to pay out - and so did those issuers, and on, and on, and on. This is the cascading effect everyone fears. In theory, most of it should cancel out. but nobody knows.

Today's US$500B CDS auction was, arguably, the creme de la crap - the best of the bad. Everyone knew that it wasn't going to sell at par; the question was how far below par it would sell, and, accordingly, how big the trigger would be. A lot of people were worried about the size of that CDS market hit. They were worried about 85¢, or even less, on the dollar.

Instead, you got a range between 91.5¢ and 99.9¢ on the dollar, with overall recovery rates in the 94% range. This is a big fat honkin' deal. It's not so much that the things we know about aren't as bad as we think they are; I assure you, they are bad. But if this holds up, if these recovery rates end up being on the good side of the estimates range, then that CDS monster in the closet - the $55 trillion dollar elder god - might just be something we can survive. Things might not be even worse than we think.

That might be a bit optimistic of me. Certainly it's optimistic for me on these matters as of late. But after the auction news filtered out, lo, the dollar fell a bit against the index, maybe indicating just a little less dollar hoarding, and the TED spread actually fell a little too - not much, and to a still-terrifying 3.69 - but still, that's 26 basis points down from the high. It's not the end of the tunnel; it's not even the light at the end of the tunnel. But it's the first indication that maybe this particular tunnel has stopped getting darker.