If there is panic selling early next week out of sheer terror, and there may be, then I'll totally expect a bailout emergency cut of he fed funds rate by 50 basis points.....BEFORE the Sep 18 meeting.
I wouldn't chase any shorts next week....I'd look to get long and play the bailout rate cut.
JMO, what do you think?
Another
day in the bond market like yesterday, and the Fed will cut rates on
Friday. Short-term interest rates and long-term interest rates are
moving in opposite directions. When that happens, it's bad news.
We're
tracking the divergence through yield indexes that trade at the CBOE.
Yields move in the opposite direction to bonds. Right now, the three
long-term yield indexes we follow -- 5-Year (FVX), 10-Year (TNX) &
30-Year (TYX) -- are more than three standard deviations below their
respective 90-day mean prices. They're more than two standard
deviations below their 10-day mean values.
But the short-term
yield index -- 13-Week (IRX) -- is only one standard deviation below
its 90-day mean. On a 10-day basis, IRX has been around three standard
deviations above its mean price for the past couple days. Banks will not lend to each other over the short term, hence the divergence.
If the black-box hedge funds couldn't deal with CDOs, they'll never be able to withstand this incredible divergence for long.
We
thought it was laughable that the Fed said it will look to "anecdotal"
evidence of tight credit in the future. LIBOR rates are at seven-year
highs, and that's what most scalable loans use as a reset touchstone.
So,
either the Fed acts soon, or the stock market takes a serious hit. If
they're smart, the Fed will try to help this thing settle down slowly
by instituting a series of rate cuts. We think they are smart, they
just needed to be reminded of it by the market.
Jim O’Neill, chief economist at Goldman Sachs, said the credit squeeze confirmed his view that the US economy would grow at below 2 per cent, probably for the next six quarters. “The big issue is whether the Fed can keep it from tumbling over into being a lot weaker.” He suggested the Fed must prevent the US housing market sinking into a depression resembling the Japanese property crisis of the 1980s.
Ken Rogoff, former chief economist at the IMF, said the world was experiencing its “first new-age financial crisis” that was following an unpredictable path and posing new problems for the world’s monetary authorities.
“We are in a window of vulnerability,” he said. “We have reached the point where there is going to be fairly aggressive interest rate moves and if that proves not to be enough then we may see some dramatic regulatory intervention,” he said.
Mr Rogoff even suggested that a further twist in the financial crisis could help clarify issues. “Having a medium-sized bank go under would almost be a blessing at this point because it would give them [central banks] confidence to do something more dramatic.”
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