BCA on the Fed

[HenryTo]

Asserts that based on the Taylor Rule, the Fed's easing cycle is still not done:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20071101.GIF

[HenryTo]

BCA believes that deflationary headlines will continue to dominate in the next 12 to 24 months - and as a result, the Fed and other central banks will cut policy rates much further:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20081117.GIF

JP Morgan now going on the record asserting that the Fed will cut the Fed Funds rate all the way to zero, with a promise to hold it there for a sustained period of time in order to bring down Treasury yields in the three to five year timeframe. The market has been pricing in that scenario over the last couple of weeks:

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

It is now time for the Fed and the GSEs to ramp up their purchases of GSE mortgage-backed securities.

[HenryTo]

I agree - BCA is only considering consumers' balance sheets and credit spreads at "market prices," whatever that is.

My sense is that the Fed will cut by 25 bps at the December 16th meeting and then cut by 25 bps again at the January 28, 2009 meeting. At a Fed Funds rate of 0.50% to 0.75%, it becomes problematic for money market funds to cover their costs and still give a positive yield to their investors (especially those that cater to retail investors as the average retail money market fund has an expense ratio of 0.55%). At a FFR of below 0.50%, we could see widespread liquidation of money market funds as it is no longer profitable for institutions to manage them. Such a scenario is counter-productive as money market funds provide substantial liquidity to the commercial paper and the asset-backed markets.

Once the FFR falls to 0.50%, and assuming this (along with the recent recaps of the banking sector and potentially the insurance sector in the coming days) is not sufficient to turn around the credit/equity markets, I expect to see the Fed to operate in longer-maturities of the Treasury market:

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

I also expect the GSEs to ramp up their purchases in the GSE mortgage-backed securities market and for a permanent increase in the agency conforming limit to $729,750 (now set to expire in December 2009). Finally, I am assuming that another round of "fiscal stimulus" is inevitable at this point.

From an international perspective (again, assuming the credit/equity markets do not turn around), I expect the Federal Reserve to create larger swap lines to Australia, New Zealand, Denmark, Norway, Sweden, the UK, Switzerland, the Euro Zone, and Canada:

http://www.federalreserve.gov/newsevents/press/monetary/20080924a.htm

We should also see larger swap lines to South Korea, Singapore, Mexico, and Brazil:

http://www.federalreserve.gov/newsevents/press/monetary/20081029b.htm

As India is now forced to cut rates, I also expect the Fed to create a swap line with the Reserve Bank of India should the Indian Rupee come under attack, as that is the one remaining 800-pound gorilla in the room (the Fed is going to ignore Russia).

If the swap lines aren't sufficient (which I seriously doubt), then the Fed will most probably intervene in the foreign debt market by purchasing the sovereign debt of other developed countries, as well as the sovereign debt of Korea, Mexico, Brazil, Singapore, and India. This will help bring down sovereign spreads all across the world (and importantly, the large EM markets) and flood the world with USD-denominated liquidity.

[rffrydr]

Wonder how they determine that the economy is "in far worse shape" than then? Corporates are much better...this far into it (long before December) cause, ironically, they had credit. That leaves the consumer.... but now, we have an "energy policy" --and, for all the inadequacies, we have a world consumer.

And then there was the "new world order." 1 percent FF is a milestone for sure. No doubt most of the Fed did not want the Greenspan echo. Savings culture is not antithetical to spending culture.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

BCA asserts that the Fed may have to resort to "Quantitative Easing" later next year:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20081030.GIF

[HenryTo]

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20080130.GIF

[rffrydr]

Yes, "leadership."

Martin Wolf sees key for Fed's success in china:

http://www.ft.com/cms/s/0/8bd26b04-ce9e-11dc-877a-000077b07658.html
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Hard to say what the "hawks" will do. They can sound as hawkish as they want - as long as we are under normal market conditions. In times of crisis, Bernanke will rein them in and be the sole voice of the Fed - which I believe he will do tomorrow.

[rffrydr]

Yes, I was more interested in people's impressions of FED actions. I suspect whatever they do, as long as they do something will be taken positively within a week or so. Probably more important for the markets to see some follow-on by BOE and ECB statements (perfect opportunity for Sarkosy and Merkel to intercede with the Unions).

I would say there's a more hawkish tone with the rotation. The two Democrat (?) unfilled posts may tilt this back. If we skirt the Recession look for them to tighten things up in a hurry. Better than to play the (rate) of ease would be to sell the Dec. 08 eurodollar (you already have the natural advantage of the inverse curve).

There is a risk 50bpts will be taken as a sign of weakness (thus co-ordination). From the Broker:

[HenryTo]

I am still long - don't intend to change my positions before or after the meeting, just yet. Will revisit tomorrow evening.

[diesel]

I sold some of my SP500 Emini futures at the close today and rotated those profits into a short position on the Euro. Other than that I am long the dow, select tech stocks + Jap small caps. Should be interesting tommorow!

[nodoodahs]

Haven't changed in a couple of weeks. Next revisit for the personal portfolio is 2nd W/E in Feb.

Long the BRI out of BRIC, Steel and Clean Energy, Euro and long Ts, Gold, Oil, and Soft Commods. Full house, 100%.
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[rffrydr]

Somehow I think they'll do what they've done before: they will make us feel it. Given they don't like intra-meeting cuts...which may be a reason not to. There are now four new voting members, with two dedicated hawks. Gold making all-time highs. Real Funds Rate out 2years is lower than it ever got in 0'1. And they will be better able to game the jobs numbers after. Bank index is over 90...maybe time to spring something innovative. Something with the SIV assets (a la the Russian central bank ) or RMBS CDOs. They could also go .50 at the Fiscal annnouncement.... But .50 does show they were'nt fooled by Jerome.

We owed' alot to BA and housing today. I'm staying short euro and aussie and trim my financials into the meeting--in other words, still long; hedging tomorrow.

Anybody else?
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

More easing still needed - and given the Fed's actions so far, the BCA doubts that it will disappoint:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20080129.GIF

[HenryTo]

Markets have no confidence in the ability of the Fed and Congress to stop the bloodbath in the market at this point, but the BCA says otherwise:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20080121.GIF

[HenryTo]

Very similar to what we discussed in our most recent commentary and over the last few trading days. Cites that a reassuring and stimulative Fed should ensure that stock prices will move higher this year:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20080114.GIF