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peter
6465 Posts |
 Posted - 01/30/2008 : 10:07:27 PM
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Stock Market to the Fed: “It’s Insolvency, not Just Illiquidity, Stupid!”...and the Systemic Financial Meltdown Risk from the Monolines’ Crisis
Nouriel Roubini | Jan 30, 2008
The reaction of the stock market to the unexpected 75bps cut by the Fed last week and its reaction today to the further 50bps cut clearly shows that markets and investors are now fully realizing that the US economy is suffering from serious credit, i.e. insolvency, problems, not just illiquidity ones; and that Fed monetary policy can partly tackle illiquidity problems but cannot resolve insolvency ones.
Last Tuesday when the Fed unexpectedly cut the Fed Funds rate by 75bps the US stock market fell by over 1% in spite of that cut (but by less than the 5% that the futures had priced before that surprise cut). The next day – Wednesday – the S&P tumbled by another 2.5% for most of the day giving the market verdict on the Fed action: too little, too late and useless to resolve the massive credit problems in the economy, including the serious market concerns that a downgrade of the monolines would lead to massive financial write-downs and a financial meltdown. The late day whopping rally in the last two hours of trading on Wednesday last week – 600 points on the Dow and over 5% on the S&P – was triggered instead by the news that the New York insurance regulator
had met with banks to try to work out a plan to recap the monolines and thus avoid a catastrophic downgrade of their triple AAA rating. So that day the market told the Fed (with a 3.5% stock market drop following the rate cut): your 75bps cut means practically nothing to us and unless the credit problems of the economy are resolved. And the 5% rally was indeed triggered by news that maybe the monocline downgrade could be avoided.
Same story – in reverse - today Wednesday after the additional 50bps cut by the Fed. The initial reaction of the stock market was a relief rally – with the S&P500 index up about 1.7% after the Fed announcement and its signal of more monetary easing ahead. But this rally totally fizzled again in the last two hours of trading as reality sank in that the rescue of the monolines is much harder than hoped for after Fitch revoked its top AAA ranking on Financial Guaranty Insurance Co, one of the bond insurers. So the S&P fell from its day peak by 2.2% and finished the day 0.5% below its opening level in spite of the 50bps gift by the Fed and in spite of the fact that the Fed had reduced policy rates by a whopping 125bps in eight days!
Same story – in reverse - today Wednesday after the additional 50bps cut by the Fed. The initial reaction of the stock market was a relief rally – with the S&P500 index up about 1.7% after the Fed announcement and its signal of more monetary easing ahead. But this rally totally fizzled again in the last two hours of trading as reality sank in that the rescue of the monolines is much harder than hoped for after Fitch revoked its top AAA ranking on Financial Guaranty Insurance Co, one of the bond insurers. So the S&P fell from its day peak by 2.2% and finished the day 0.5% below its opening level in spite of the 50bps gift by the Fed and in spite of the fact that the Fed had reduced policy rates by a whopping 125bps in eight days!
Same story – in reverse - today Wednesday after the additional 50bps cut by the Fed. The initial reaction of the stock market was a relief rally – with the S&P500 index up about 1.7% after the Fed announcement and its signal of more monetary easing ahead. But this rally totally fizzled again in the last two hours of trading as reality sank in that the rescue of the monolines is much harder than hoped for after Fitch revoked its top AAA ranking on Financial Guaranty Insurance Co, one of the bond insurers. So the S&P fell from its day peak by 2.2% and finished the day 0.5% below its opening level in spite of the 50bps gift by the Fed and in spite of the fact that the Fed had reduced policy rates by a whopping 125bps in eight days!
So both following the 75bps cut last week and the 50bps cut today the stock market told the Fed: “it’s not just an illiquidity problem; it’s most importantly a credit or insolvency problem we worry about, stupid!” And the market reaction on both occasions highlights the relative impotence of monetary policy in addressing credit problems.
http://www.rgemonitor.com/blog/roubini/241162
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homebroker@sbcgl
7370 Posts |
Posted - 01/30/2008 : 10:11:29 PM
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| the Feds can do nothing to stop this train wreck, the prices of homes will come down more and so will the stock market. The longer we delay the harder the fall later. This article called it right on, the Feds are very concerned, there actions prove this. I have to go to Europe a few times a year to see family, Really ***** as it may take $100 to get a cup of coffee now, if they keep this up! YIKES! |
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peter
6465 Posts |
Posted - 01/30/2008 : 10:28:29 PM
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Yes, the prices of homes are coming down ruefully.
Today, I received a call from a Tarbell realtor in Corona
soliciting me to do a purchase loan for her client who has
listed his San Bernadino home for sale and couldn't sell.
Now, he is making an offer to a much smaller house in Corona
and this realtor wants me to do a 100% My Community Mortgage
purchase loan of an owner-occupied home. I did not take up
the loan because I smell that this is a buyer's setup to
buy a smaller house while his credit is good and upon closing
escrow he will most likely walk away from the existing house
he has not been able to sell. I am hearing more and more
about these setup purchases from would-be walkaway homeowners
who are already over 20-30% upsidedown and they have figured
a way out. There are many such setup purchases being handled
by desperate realtors and brokers now.
Yes, Dr. Roubini is correct in that insolvency is an entirely
a different issue that the rate cut cannot address and the rate
cut can at best resolve the illiquidity which is not the crux
of the problem.
And if the pattern repeats itself, the bond yield should
trend down tomorrow and perhaps a few days after bringing rates
down temporarily like before before they go up again.
Peter
Peter |
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