For all the spin that the US Federal Reserve Bank (the Fed) Governor Dr. Bernanke was different to Mr Greenspan, when push comes to shove they both blinked.
Providing liquidity for banks borrowing from the Fed was not enough apparently to stave off further spikes in overnight/fed funds/interest rate which banks would lend money to each other and borrow from the Federal Reserve. For a reasonable explanation of the process read this article
from the weekend Sydney Morning Herald.
Unfortunately the missing or unstated part of this process of short term lending is the fact that the Fed and the Australian Reserve Bank assets keep ballooning over time.
When any central bank comes out with a interest rate statement, they need to defend that interest rate by injecting credit into the system or withdrawing from the system, depending on the supply or demand for that credit.
The other fun part of this week was the only slight mention of the slight unwinding of the Yen carry trade. Basically the Japanese Central bank has been throwing credit at anyone who wants it and Japanese investors have looked for overseas yielding assets in preference for holding Japanese assets yielding 0.25%-0.50%.
If you are a bank you would be stupid to source your credit from anywhere but Japan. Say you borrow $1 Billion USD equivalent from a Japanese Bank, you can turn around and buy USD denominated assets or even better NZ and AUS denominated assets. Pay interest on %0.5 and collect interest on %6.5-8.5%. So earn a tidy 6-8% p.a. on the borrowed money.
So why does US non-performing high risk loans cause the carry trade to get hammered. Potentially the purchasers of these CDO was mostly the yen carry trade money!
Why, the potential to make a little more margin on the yield pay! Making an extra $10 million for every extra 1% yield per $1 billion borrowed.
Now if this is correct you should see the USD appreciate against the YEN as investors borrow in Yen, sell the Yen and buy USD to buy US dollar assets. Similarly for AUD and NZD assets. The longer term trend reflecting where the investors doing the carry trade believe the highest yield margins exists.
A little interesting thing to come out of this was the media and interviewed analysts saying their was a "flight to quality" meaning a flight to government bonds. If the investors saw this as a longer term issue, they would be buying bonds across the board.
Not so. Look at this table, the short-term bond yields have dropped (as investors demand them and therefore increase the price) more than 70 basis points (0.7%) in a week. So the stampede is/was into short term bonds... wait until the Fed blinks and cut rates like every other time, and let the credit binge continue as before, now the early bond investors can sell their bonds and pocket the tidy 110 Basis point profit, and jump back into the sold down high yield assets.
It will be interesting to see how short term bonds go now. I would expect selling pressure to be intense.
Given nothing has changed in AUS and NZ. There will be money chasing yield again, possibly flowing out of US as they just cut the margin on the yield play from 0.5%.
Tomorrow will be a big up day for both NZ and AUD (and their respective bonds and markets).
Last thing, the CDOs have let bank and non-bank lenders to get loans off their books, by bundling the loans as yielding assets. So plenty of hedge and other fund managers have bought these "assets", possibly in the hedge funds case using borrowed money (from banks). So whilst the banks no longer have the risk of default from the borrowers eg. mortgage borrowers, the larger banks now have the risk of default from the hedge funds.
The idea that there is excessive savings (something the Fed governor wrote about some time ago) is spin at best, a plain lie at worst. It is not excessive savings, it is hot money in the form of credit sloshing around global markets looking not for alpha or beta but whatever asset can yield the most margin.
Not one politician in Australia mentioned that the 11.3% drop in a little over a week was good for Australian exporters, but then really, only people fixated on exports and trade deficits (bad of course) worry about a $AUD 12 Billion annual trade deficit when the GDP is $AUD 922 Billion! That 12 billion is 1.3% of the total GDP. Big woot!
If you use the 2004-2005 Company tax statistics, Australia has a AUD 1.4 to 1.6 Trillion (1000 Billion) economy backed by $AUD 4.4 Trillion in Assets!!
That AUD 12 Billion becomes 0.075% of that sized economy.
What the media and lobby groups play/prey on is that 12 Billion dollars is an extremely large
amount of money for 99% of the population, forgetting the fact that even AUD 1.6 trillion split evenly over the 707,455 companies who were taxed that is only AUD 2.2 million per company.
Of course nothing human is an even split or even a Gaussian bell curve, it is power law curves everywhere.
For all the press about capacity constraints, this has only come about as external demands for products from Australia has caused an capacity used within Australia to be bid away to external uses rather than internal uses.
Have Fun
Paul
