Sunday, August 12, 2007

44m x 0.14 x 0.13

Excerpts were taken from Jack Miller's popular blog "Stocks Or Bonds"
Many would have liked Bernanke to cut rates by 50 basis points last week on hindsight. The business media has been having a field day with the majority believing that Ben Bernanke has held short rates too high too long.

The President of the Federal Reserve Bank of Richmond wrote a nice rebuttal to some of the negative press. It was published as the President's message in the "Regional Focus," spring of 2007. The summary point of the article was, "Monetary policy works best when it allows the real economy to respond appropriately to economic fundamentals, rather than attempts to insulate the economy from shocks by tolerating swings in inflation." Ben could have lowered rates to "fix" the sub-prime problem. This would have been like castrating a dog to prevent breeding. Ben has injected reserves into the system so that those who are running scared can hoard all the cash they want at relatively low market returns. Neither the fed funds rate nor the discount rate was changed. In a few more months, Ben will be getting high praise for standing firm in order to bring inflation expectations to very attractive levels. In the meantime, "talking heads" will continue to make "much to do about nothing."

Jerry Bowyer wrote yesterday about the "sub-prime mess." He notes that of the 44 million mortgages in America, 14% are sub-prime. Of those, 13% are currently at least one payment behind, however: 44m x 0.14 x0.13 = 800,800 mortgages that are one payment behind. Many developed countries would want to have those figures. The large majority of the late payers are still paying and many are working with lenders to restructure payments. The bottom line is that there are about 250,000 mortgages that are moving to foreclosure. The total value of these loans is about US$7 billion. If these houses are worth 30% less than what is owed, the total money lost will be in the neighborhood of US$2 billion. Even in a worsening case scenario, double that o US$4 billion (Gee! Malaysia would have squandered that amount in a few unfinished or incomplete projects). Thats why I am not bearish but the shorts and bears have been having the upper hand for the last two weeks. Americans have net worth of US$53 trillion dollars. The "total hit" will be in the neighborhood of .003% of value.


SAMMY MU said...

Mr. Bernanke thinks he can control markets. To be truly successful he must be willing to buy vast amounts of things like stocks and junk bonds in order to get the "liquidity" he wants into the markets.
All it will do is stave off the inevitable.
Stay discipline. For now more than ever, the ability not to trade remains as valuable as trading ability.

solomon said...

Nop. I think Mr Bernanke is creating his own creditability and walk away from his predecessor shadow.

I think it is wise for some of the Central Banks to act. The key question is the frequencies. One cannot keep pouring in money. You will lost creditability.

Unlike Salvatore, I disagree the situation now is manageable. It is a rat and cat run. Today, you pour in money, on the end the bad news bank losing money keep on streaming in....the system is borne to have problem. Only time can cool the problem. Before Then Central Banks just cannot pump in money one day after another. (The sick patient cannot be cured this way). On the other hand, the hedge funds is vulturing and eat you up somewhere.

Well again, maybe when this issue cool down, the world might be disorder again. The media attention will be focused on those issues. So, it is the day of fool traders will rule because the smart traders who rely on graphs cannot predict the market.

hellthy correction said...

dali, think it is not as simple as what it seems....otherwise the big boys wouldnt have press the panic button and starts pumping billions of USD into the mkt....How could a 5billion USD loss possiblly affect a 'call margin' of well over 200billion boj, eu and fed combined together? i still dont get it.