Those who are feeling unusually cheerful may find a cure their unfortunate condition by reading through Naked Capitalism‘s latest round-up of gloom and doom … for example, George Soros says:
Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
Assiduous Readers will remember that I’m already amazed that long-term bonds haven’t already gone up in yield. What’s the 30-year Treasury doing, yielding 4.25% at yesterday’s close? It’s even lower today. I consider this to be proof that today’s archetypal bond manager is under 40 years old. Punk kids. Think inflation is one of their grandfather’s pointless old stories. They should all read Steven Cecchetti’s latest VoxEU piece:
Starting with the data, since the beginning of the month we have seen a very poor employment report (released on the 4 January), evidence of a fall in real retail sales (15 January), information that industrial production was unchanged in December (16 January), and confirmation of a continued precipitous decline in residential construction (17 January). Taken together, this all suggests that the US economy may already be in a recession. My own guess is that the peak in the business cycle was November 2007 and that the economy is currently shrinking, albeit modestly for now.
…
should not sign off without making some comment about inflation. As discussed in my most recent inflation update, recent readings suggest that inflation is on its way up. Most forecasts that I have seen suggest the inflation trend (as measured by the Consumer Price Index) will be not be lower a year from now than it is today. That means that we are likely to enter 2009 with a CPI inflation trend of at least 2¾ percent; surely above the 2 percent most of us would like to see. Clearly, today’s actions are not directed at combating this gathering menace. Instead, for now the FOMC is forsaking its inflation objective in an attempt to keep the recession from getting worse.
But Dean Croushore of the University of Richmond points out another nuance:
Fed Chairman Ben Bernanke’s first published economics article begins “This paper examines the possibility that the economy-wide level of bankruptcy risk plays a structural role in the propagation of recessions.” Published in the American Economic Review in 1981, Bernanke’s analysis showed how a recession causes lenders to reduce their lending so that they can remain solvent, which in turn causes the recession to become worse.
…
How ironic it is that Bernanke should be Fed chairman during the first financial crisis in a decade and the first credit crunch in almost two decades. But also how fortunate that he understands, far better than most economists, why it is crucial that the Fed ensure that credit flows smoothly in the economy, despite the clear breakdown of mortgage markets and substantial losses by financial firms.
The danger, I suppose, is that if you’re an expert on hammers, all problems look like nails!
Sean Silcoff of the Financial Post writes a very good article urging restraint with respect to the BCE / Teachers deal (link courtesy of Financial Webring Forum):
A sure thing? A lot of smart money doesn’t think so, fearing the deal could fall apart. After all, it requires about $33-billion in new debt, and the banks that committed the funds last summer are in worse shape than they were then, amid the bleakest credit crisis in 20 years. The lead backer, Citigroup, is one of the worst basket cases; it can hardly afford to take on more LBO debt. The LCDX, an index of high-yield loans, is trading at $90, implying a 10% discount for holders of high-yield debt.
There are $21-billion in such loans in the BCE deal. So they are worth $2-billion less to the financiers. There is another $11-billion in high-yield bonds to be sold. You can assume a 15% discount there. So anxious lenders are already US$3.5-billion in the hole, on capital they can hardly afford. The prospect of killing the deal and paying the $1-billion break fee to BCE must seem like a good trade.
The court case, in which BCE bondholders are attempting to quash the deal, continues:
In final arguments in court, BCE lawyers said the bondholder suits rely on a series of misrepresentations and incorrect or misleading evidence.
BCE says the bondholders are sophisticated creditors who know the potential risks and shouldn’t have been surprised by news of the sale.
So I guess all the widows and orphans bought the stock, leaving the bonds for the sophisticated creditors to buy.
Remember SIVs? Geez, it’s been a long time since I’ve written about SIVs. There was some more bail-out news today:
American International Group Inc., the world’s biggest insurer, will bail out its Nightingale Finance structured investment vehicle, according to Moody’s Investors Service.
AIG Financial Products Corp., a unit of the New York-based insurer, will either buy the SIV’s $2.2 billion of senior debt or replace it with loans, Moody’s said in an e-mailed statement today. Moody’s affirmed its top Aaa ratings for the U.K. Channel Islands-based SIV’s senior debt.
…
“Any realisation of current or future mark-to-market losses will be avoided given the support of AIG Financial Products, provided that AIG FP remains a going concern,” the New York-based ratings company said in the statement.
…
Bank of Montreal has shrunk its Links Finance Corp. SIV from $23.4 billion in July last year to $15.1 billion in mid- January, the Toronto-based bank said earlier this month.
Well … it’s after 9:30 and I still can’t download prices from the TSX. I can only suppose that the staff is so busy writing thank-you notes to Bernanke that they’ve run out of time to update the historical databases. I’ll update once I have something to update with.