.. and the saga continues!!

Rate cuts in Europe did little to improve market sentiment. The Bank of England reduced rates by 100bp, as expected. Bank rate now resides at 2%, the lowest rate since 1951. The ECB was a little more cautious, as befitting its hawkish reputation. The central bank cut rates by 75bp - the largest cut since its foundation - to 2.5%. Markit PMI survey data points towards a deep and lengthy recession, and the delays by both central banks in easing monetary policy now look costly. More rate cuts can be expected in the near future. And in US, the market had priced in a 42% chance of a 75 bps interest rate cut over Dec 16th FOMC meeting, and rest a 50 bps interest rate cut. The markets are pricing in a savage recession, and perhaps a depression. Economic data in the coming months is likely to point towards a gloomy scenario.

Dupont said it now expects a fourth-quarter loss and is forecasting that 2009 earnings will be well below consensus estimates. DuPont said it has seen a considerable drop in sales volume in the current quarter, supporting gloomy predictions from rival Dow Chemicals.

Trivia: Merriam-Webster's dictionary chose "bail-out" as its word of the year for 2008.

Though I didnt understand the implications of the artilce, except for the fact that China's slowdown is inevitable, an interesting piece on China from Brad Seter's blog: Most creditors believe that the debtor needs to take the lead in addressing their own problems. China is, apparently, no different. China now almost certainly has well over $1 trillion in US Treasury and Agency bonds, and probably close to $1.5 trillion in total dollar exposure.

And it is a universal trutht that most of the growth in China is export driven, and to keep the exports flowing China should make its goods cheaper for other countries. The only way to do it is to hold their exchange rate down. China in part is doing it by continuing to buy the US debt. This policy implies financial loss for China, as China is effectively overpaying for financial assets (dollar reserves) that it doesn’t need in order to support its export sector.

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and Noriel Rubini write for FT: (I am too lazy to summarize it)..

Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity; and by early 2009 the target Fed funds rate will formally hit 0 per cent. Also, in deflation the fall in prices means the real cost of capital is high – despite policy rates close to zero – leading to further falls in consumption and investment. This fall in demand and prices leads to a vicious circle: incomes and jobs are cut, leading to further falls in demand and prices (a deflation trap); and the real value of nominal debts rises (a debt deflation trap) making debtors’ problems more severe and leading to a rising risk of corporate and household defaults that will exacerbate credit losses of financial institutions.

As traditional monetary policy becomes ineffective, other unorthodox policies have been used: massive provision of liquidity to financial institutions to unclog the liquidity crunch and reduce the spread between short-term market rates and policy rates; quasi-fiscal policies to bail out investors, lenders and borrowers. And even more unorthodox “crazy” policy actions become necessary to reduce the rising spread between long-term interest rates on government bonds and policy rates and the high spread of short-term and long-term market rates (mortgage rates, commercial paper, consumer credit) relative to short-term and long-term government bonds.

To reduce the former spread the central bank needs to commit to maintain policy rates close to zero for a long time and/or start outright purchases of government bonds; to reduce the latter it needs to spread massive liquidity, such as by direct purchases of commercial paper, mortgages, mortgage-backed securities (MBS) and other asset-backed securities. The Fed has already crossed that bridge with facilities that are aimed at reducing short-term market rates, such as Libor spreads; it has now moved to influence long-term mortgage rates by buying MBSs.

Traditionally, central banks are the lenders of last resort but they are becoming the lenders of first and only resort, as banks are not lending. Central banks are becoming the only lenders in the land. With consumption by households and capital spending by corporations collapsing, governments will soon become the spenders of first and only resort as fiscal deficits surge.

The financial crisis has already become global as financial links transmitted US shocks globally. The overall credit losses are likely to be close to a staggering $2,000bn. Thus, unless financial institutions are rapidly recapitalised by governments the credit crunch will become even more severe as losses mount faster than recapitalisation.

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government.

In the next few months, the flow of macroeconomic and earnings news will be much worse than expected. The credit crunch will get worse, with de­leveraging continuing as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, leading to further cascading falls in prices, other insolvent financial institutions going bust and a few emerging market economies entering a full-blown financial crisis.

The worst is not behind us: 2009 will be a painful year of a global recession, deflation and bankruptcies. Only very aggressive and co-ordinated policy actions will ensure the global economy recovers in 2010 rather than facing protracted stagnation and deflation.


contd.... tomw..

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Song: 'Stripped' - Rammstien
Mood: 'Surprisingly, excited!!'

When ever I listen to this song, it reminds me of a friend in Cyrpus. She once asked me to send her songs taht I think are a good listen over a drive. Among a couple I forwarded this was one.. Well, couple of hours later, I realized that the lyrics of this song go something like 'Let me see you stripped'. :) .. I dont think she ever minded it, as she still talk to me!!