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solarbirdThere'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:
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.
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 $55 trillion dollar elder god - might just be something we can survive. Things might not be even worse than we think.
That might be a bit optimistic of me. Certainly it's optimistic for me on these matters as of late. But after the auction news filtered out, lo, the dollar fell a bit against the index, maybe indicating just a little less dollar hoarding, and the TED spread actually fell a little too - not much, and to a still-terrifying 3.69 - but still, that's 26 basis points down from the high. It's not the end of the tunnel; it's not even the light at the end of the tunnel. But it's the first indication that maybe this particular tunnel has stopped getting darker.
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no subject
Date: 2008-10-07 06:45 am (UTC)no subject
Date: 2008-10-07 06:52 am (UTC)Unless they start just outright monetising the debt. I'm talking about honest-to-the-gods M1 printing. If they do that and you're stuck in US$ then grab index funds and hold on for dear life because while you're fucked no matter what you do at that point, at least that'll carry you partway up. But I don't see how they can do that.
no subject
Date: 2008-10-07 09:45 pm (UTC)no subject
Date: 2008-10-07 06:57 am (UTC)no subject
Date: 2008-10-07 07:02 am (UTC)no subject
Date: 2008-10-07 07:43 am (UTC)...unless of course the country goes all Road Warrior. Buh.
Oh well, at least Canada is still there.
no subject
Date: 2008-10-07 07:38 pm (UTC)I hear the ultrabears who aren't gold bugs (or crazy) are hiding out in Swiss government bonds.
no subject
Date: 2008-10-08 08:00 am (UTC)Hm, now reading the article on Russia bailing them out. A 131/Euro peg means we're only down 15% now; hmm...
no subject
Date: 2008-10-07 10:31 am (UTC)As I've said before, I know way too little about economics to grasp much of what you are saying. But I was surprised to see the dollar rising so much compared to the Norwegian krone. It was below 5 some months ago -- almost the lowest it has ever been. Yesterday it was at 6.12 and is apparently above NOK 6.20 to the dollar today. News media blame the falling oil price.
I've also read that since our "Statens banksikringsfond" (state bank security fund?) guarantees accounts of up to 2 million kroner, much higher than the EU, rich people keep salting their money across various Norwegian banks, 2 million per bank.
no subject
Date: 2008-10-07 12:35 pm (UTC)no subject
Date: 2008-10-07 07:36 pm (UTC)no subject
Date: 2008-10-07 05:08 pm (UTC)I read this, was slightly cheered, and then went on to read the following in the Economist, and cheer went away again ...
In Europe, an unseemly mishmash of bank rescues and a scramble across the continent to beef-up national deposit-protection schemes have done nothing to solve the paralysis in money markets. Stockmarkets steadied themselves a little, early on Tuesday October 7th, after a series of dramatic falls on Monday. But the overnight dollar London interbank offered rate (LIBOR), the rate that banks are charged for borrowing from each other and other investors, climbed by a heart-stopping 157 basis points to 3.94%.
no subject
Date: 2008-10-07 05:55 pm (UTC)no subject
Date: 2008-10-07 05:22 pm (UTC)no subject
Date: 2008-10-07 05:56 pm (UTC)I'm trying to move to more "show" type work, too. I'm gonna do this open mic in November, where I'll actually be able to sing my stuff. It'll be skeery.
no subject
Date: 2008-10-07 09:49 pm (UTC)I can play in front of anyone, any venue, but singing in front of people makes my knees shake. Good luck to you!
no subject
Date: 2008-10-07 09:14 pm (UTC)no subject
Date: 2008-10-07 09:21 pm (UTC)no subject
Date: 2008-10-07 09:46 pm (UTC)