Posts filed under “Credit”
Merrill Lynch’s two top strategists, David Rosenberg Richard Bernstein, both concur that the current backdrop is "highly reminiscent of the late-1980s cycle. While no two cycles are ever the same, some very similar patterns have emerged.
A backdrop highly reminiscent of the late 1980s:
• The late 1980s was a cycle characterized by a synchronized global expansion, but in the context of a fatigued US economy and strength back then in Europe and Asia.
• A cycle fueled by tax cuts and highly accommodative monetary policies early on, “new paradigm” views on the equity market bull run, and a massive housing boom that morphed into a bubble and credit excesses that turned into a crunch.
• As was the case this time around, the Fed moved in the latter stages of the cycle to hike rates aggressively and invert the yield curve. As is the case today, practically every reason was cited for why the yield curve didn’t matter any more (nice call).
• Back then, the Asian stock market that caught everyone’s attention was Japan – today it is China.
• We also experienced a wave of LBO-financed merger and acquisition activity that certainly also took hold through most of 2005 and 2006.
• Of course, we also had a faltering dollar in the late 1980s and rising commodity and gold prices igniting concerns over the inflation landscape – concerns that we can now say were overdone.
Interesting observations from the crew at Merrill . . .
David A. Rosenberg
Merrill Lynch Economics | 22 October 2007
Fascinating front page WSJ article today, titled More Debtors Use Bankruptcy To Keep Homes. It seems that Chapter 13 filings are gaining in popularity. Why? Because they halt foreclosure proceedings: “Last month, as the nation’s housing slump continued, consumer bankruptcy filings increased almost 23% from a year earlier – representing nearly 69,000 people — according…Read More
Yesterday, Traders embraced the release of the FOMC minutes. Indices were flat up until just before the 2:00pm release, and then took off, with the Dow gaining near 1%.
The thinking behind the Fed action was clearly revealed in that release. The emphasis was on the subsequent impact of credit on the entire system. The WSJ reported:
"Federal Reserve officials worried that credit-market
turmoil could reinforce slower growth at a time of "particularly high
uncertainty," leading to their half-point interest-rate cut last month,
minutes from the meeting show.
Without a cut, there was concern that "tightening
credit conditions and an intensifying housing correction would lead to
significant broader weakness in output and employment," the
rate-setting Federal Open Market Committee said. The minutes, released
yesterday, also showed members worried that market turmoil "might
persist for some time or possibly worsen."
They offered no clues about
the direction or timing of the Fed’s next move."
That last sentence is quite intriguing. Understanding whether or not a rate cut is forthcoming impacts yields, stocks prices, etc.
Given the significance of the Fed’s action, one would suppose that the markets which trade the Fed Futures would be, if not prescient, than at least telling about their future price action. One of the more fascinating aspects about this, however, has been the way the Fed Fund Futures have functioned over this time. They have been wildly wrong, forecasting an imminent rate cut since January 2006. I thought it might be instructive to look at why this maybe so, and what it might mean . . .