Where is Debt Being Stuffed? Minyanville

Thanks Mr. Practical. On top of this i suggest to read the latest from Hussman An Irrelevant Fed: Thimbles of Water in a Forest Fire .

Besten Dank Mr. Practical. Ergänzend empfiehlt sich das letzte "Werk" von Hussman An Irrelevant Fed: Thimbles of Water in a Forest Fire

Thanks to Jim Borgman

Where is Debt Being Stuffed? Mr. Practical / Minyanville

As the markets seem to want to be relieved that global central banks have the “liquidity” problem under control, let us Minyans remind ourselves of the magnitude of the problem.

I have described just how central banks inject “liquidity” into the markets when they need it. Essentially central banks encourage debt creation, for people to borrow money, so that they buy things (consumption) to spur the economy. But due to too much debt, financial engineering has had to create new and better places to stuff more and more debt.

You may have seen this chart before. It shows the results of that financial engineering. Central banks can only affect the bottom two parts of the chart, high powered money and M3. M3 the Federal Reserve is growing as fast as it can in order to indirectly support the much larger problem of securitized debt and derivatives.

These two phenomenal pockets of debt are supported by asset prices: when asset prices (which act as collateral) decline, liquidity gets sucked out of the system. So the purpose of pumping new debt into the system is to keep nominal asset prices up to protect collateral values of the real problem of leverage in the system that the Fed cannot directly control. It takes more and more debt to do this because people are having huge problems servicing the debt they already have.

So we have two huge forces fighting each other right now: central banks desperately attempting to re-flate (create more debt) and the market grudgingly but purposefully attempting to deflate by paying back (which the bureaucrats are trying to help with) or more likely destroying (write-offs) that debt. We have extremely high volatility as these two forces fight it out.

Looking at the chart, which do you think will win?

>If you are still not convinced i urge you to read Straight Talk on the Mortgage Mess from an Insider via Herb Greenberg. One of the best i´ve seen in months. It looks like the "Hope Now Alliance" will become a running gag during the coming years.....

>Solltet Ihr immer noch Hoffnung haben das alles gut werden wird empfehle ich dringend Straight Talk on the Mortgage Mess from an Insider via Herb Greenberg zu lesen. Mit das Beste was ich in den letzten Monaten zu lesen bekommen habe. Es sieht so aus als wenn die "Hope Now Alliance" zum Running Gag in den nächsten Jahren werden dürfte......

Rams Home Loans Fails to Refinance A$6 Billion Debt

I have to repeat what i wrote in "Honey, I shrunk the company"

"And this happened despite no exposure to the US subprime market and a 100% mortgage insurance for their loans..... "

Ich muß wiederholen was ich bereits in "Honey, I shrunk the company" geschrieben habe

"Bemerkenswert ist das dieser Verfall stattgefunden hat obwohl kein Bezug zu Subprime besteht und die Hypotheken zusätzlich abgesichert sind.

RAMS Website

If you are buying your first home, refinancing, self-employed; you
have no deposit, want to purchase an investment property or if you simply want to cut years off your loan and manage your money better - there's a RAMS home loan to suit you.

I can see lots of No DOC , 100 percent financing and zero downs at "All our Products"

Aug. 16 (Bloomberg) -- Australia's Rams Home Loans Group Ltd. failed to refinance A$6.17 billion ($5 billion) of short-term debt as buyers shun credit markets on concern that subprime losses will deepen.

The Sydney-based lender slumped as much as 59 percent on the Australian Stock Exchange. The shares fell to 80 cents at 12:27 p.m. in Sydney, compared with A$2.50 paid by investors before the stock listed on July 27. Rams has lost two-thirds of its market value this week.

Countrywide Financial Corp., the biggest U.S. mortgage issuer, dropped the most since the 1987 stock-market crash after Merrill Lynch & Co. raised the possibility of bankruptcy while Canada's Coventree Inc. sought emergency funding after investors declined to buy its debt.

``Lenders globally who rely on commercial paper for funding will be hurt as the liquidity taps are turned off,'' said Craig Saalamann, credit strategist at JPMorgan Chase & Co. in Sydney.

The longer it takes Rams to refinance, the more it will cost the company. The yield on its short-term debt has jumped to 25 basis points more than the London interbank offered rate, or libor, it said. The debt yielded less than libor about two weeks ago.
Rams got temporary funding of A$1 billion from two of its providers, it said in the statement.

Countrywide Financial would be in ``effective insolvency'' if creditors force it to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note yesterday.
> Oh boy..... This was his comment just a week ago....

> Mal wieder spaßiges von der Analystenfront..... Hier sein Kommentar von vor einer Woche....

Less than a week ago, Bruce had reiterated his buy rating on Countrywide

> Maybe he should read Paper-Money or every other Blog (Blogroll) to upgrade his analyzing skills and get a view outside his Wall Street office....

> Er sollte evtl. mal Paper-Money oder einen anderen Blog (Blogroll) besuchen um seinen Blick etwas zu schärfen und mal den Blick für das wahre Leben ausserhalb seines Wall Street Büro´s zu bekommen.....
Thanks to Bespoke

Emergency Financing
Coventree found buyers for C$600 million ($558 million) of asset-backed commercial paper after earlier failing to sell about C$950 million of the securities. This forced as many as 17 commercial paper funds in Canada to seek emergency financing from banks.

American Home Mortgage Investment Corp. and New Century Financial Corp. have already filed for bankruptcy.

Rams included a debt-market crisis among a list of potential risks in a June 27 document for prospective investors ahead of its A$695 million share sale.

UBS AG managed and underwrote the offering, when Rams forecast a 35 percent gain in 2008 net income to A$58.6 million.


> Good that eveybody tells us the markets are cheap based on future earnings projections..... :-)

> Nur gut das man jeden Tag zu hören bekommt das die Märkte günstig bewertet sind wenn man die zukünftigen Gewinne als Maßstab nimmt.... :-)

Disclosure : Short KBW Mortgage Finance Index (including Countrywide)

Losses spark hedge fund redemption concerns

Let the run begin.... And when you read comments from the hedge funds managers like the following via the excellent Naked Capitalism they better should take steroids to run faster.... I also recommend to read Genius Fails Again from Mish

Das gibt einen schönen Run auf die Kohle......Und wenn man Kommentare wie diesen von einem Manager liest sollte das auch nicht weiter verwundern. Besten Dank geht an Naked Capitalism für dieses wahrhaft aufschlußreiche Zitat. Zudem gibt Genius Fails Again von Mish weiteren Aufschluß darüber wie spaßig die nächsten Monate noch werden können.

"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."

Read this twice! They should combine their models with models from the rating agencies....... :-)

Lest diesen Satz zur Not zweimal! Die sollten am besten Ihre Modelle mit denen der Ratingagenturen zusammenlegen.... :-)

This news isn´t helping either...Auch diese Neuigkeit dürfte nicht gerade hilfreich sein....
Basis Capital Tells Investors Loss May Exceed 80%
Desperation.....Verzweiflung....
Goldman Fund Cuts Fees to Woo Investors After Loss



Thanks to Minyanville !

SAN FRANCISCO (MarketWatch) -- Recent losses suffered by some hedge funds have raised concern that managers in the $1.5 trillion industry could get big redemption requests from investors this week.

Hedge funds usually lock up investor's money for three months or longer. There are also redemption-notice periods, giving managers time to raise cash to repay investors. Those range from roughly 15 to 90 days.

If investors want to get their money out of a fund by the end of the third quarter, a 45-day redemption notice period would mean that withdrawal requests need to be in by the middle of this week.

Some of the largest hedge fund firms in the world were hit by losses in early August, including Goldman Sachs , Renaissance Capital and AQR Capital Management. See full story.


If investors are rattled by such losses, they could ask for their money back this week. That, in turn, may be causing hedge funds to raise cash now to prepare for big withdrawals. (It's not clear whether Goldman, Renaissance or AQR have received redemption requests).

"This week is a major redemption window," said Lawrence Glazer, managing partner of Mayflower Advisors LLC, a Boston-based financial advisory firm. "So managers may be raising cash in anticipation of these redemption requests."

Sentinel Management Group Inc., a firm that manages cash for institutional investors including hedge funds, roiled markets on Tuesday after telling clients that it will halt redemptions to avoid selling securities at deep discounts.

Some of the hedge fund managers who are worried about possible redemption requests from their clients could be contacting Sentinel to ask for their cash back. See full story.

Some firms that allocate money to a range of outside hedge funds - so-called fund of hedge funds - may be forced to redeem because they are getting withdrawal requests from their own clients, Parker also noted.

"Money could disappear quickly - faster than it came in -- if you've had a bad drawdown this past month or two," he explained.

However, some of the biggest and most respected hedge fund firms have much longer lockups - of two or three years. See story on lockups.

Parker also noted that many hedge funds have 60-day redemption notice periods, so the window for third-quarter withdrawals may have passed for some investors.

A bigger concern is that investment banks are trying to shrink their balance sheets and could decide to lend less money to hedge funds, Parker said.

Most hedge funds rely on leverage, or borrowing, to magnify their returns. Some fixed-income hedge funds that don't have long-term financing in place could be forced to sell their assets quickly if their financing lines are pulled by investment banks, Parker explained.

"Liquidating a portfolio when there are no bids is devastating to the investors," she added

Bear Stearns Saga Part IV " How To Mask The Derivative Value"

This story that started already interesting ( see links) has the potential for something really big. to me it is obvious that nobody from Wall Street wants to show how far the real market value of the derivatives have already crashed. it will be interesting to see how long this fact can be hidden......one thing is for sure... the liquidity in this segment will take a significant hit....

part 1 http://tinyurl.com/23s9fp ,
part 2 http://tinyurl.com/2sdv2u,
part 3 http://tinyurl.com/2p75le

Das ganze fing ja schon recht interessant an (s.links). Nun denke ich das die Entwicklung der letzten Tage und vor allem das Verhalten der großen Spieler an der Wall Street gezeigt hat das hier wirklich dramatische Auswirkungen drohen. Dürfte für Leser dieses Blogs nicht ganz überraschend kommen :-). Es scheint ziemlich offensichtlich das hier mit aller Macht versucht wird den Marktwert der Derivate zu verschleiern. Habe Zweifel ob das noch lange gelingt. eines scheint aber jetzt schon klar...die Liquidität in diesem Segment wird einen Schlag versetzt bekommen.....aber wie ich den Markt einschätze "die Karavane zieht weiter"......

The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds.

All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable.

As the morning unfolded, lenders to two hedge funds at a unit of Bear Stearns, the investment bank, tried to ascertain what they could expect if they auctioned off mortgage securities with a face value of up to $2 billion. The solicitations were hastily withdrawn when investors reacted with little enthusiasm. But by the end of the day, some of the less-risky securities did change hands.
At the same time, several lenders, including JP Morgan Chase, Goldman Sachs and Bank of America, reached deals with Bear Stearns that forestalled a need to sell securities in the open market. It appeared that some lenders pulled back over concerns about the effect that a large liquidation would have on bond prices and investor confidence. While the securities involved represent a fraction of the market, a liquidation could have forced a bigger sell-off while setting a lower price.

One lender, Merrill Lynch & Company, moved ahead with plans to auction $850 million in collateral it had seized from the Bear funds, according to people briefed on the matter. And Deutsche Bank was said to be shopping $600 million in assets. ......

The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter. It was not clear what price the two banks agreed to.

Goldman Sachs and Bank of America reached similar deals, though details remained unclear. Also unclear is what price the assets will eventually fetch for the Bear funds and what types of losses investors, who have been unable to redeem their investments since May, will face.

The securities causing the greatest concern within the Bear Stearns funds are known as collateralized debt obligations, or C.D.O.’s. Run by portfolio managers, these complex instrument are akin to mutual funds in that they buy stakes in a variety of bonds backed by mortgages.

They often invest in the riskiest portion of the bonds, usually with a hundreds of millions or billions in borrowed money. Some simply buy stakes in other C.D.O.’s. About $316 billion in C.D.O.’s specializing in mortgages were issued last year, up from $178 billion in 2005. ...

>no wonder they dont want to price them to market.....
>hier kann man erahnen warum einer die zum Marktpreis bilanzieren will.....

He said it would take time — perhaps several days — for potential buyers to drill down into some of the more complex securities in order to value them before any bids could be prepared. From 33 to 45 percent of the $2 billion in C.D.O.’s on offer by the funds early yesterday were investments in other C.D.O.’s,

One worry about the possible unwinding of the Bear funds is that it will cascade into larger liquidations by other investors who hold similar securities at far higher prices. Accounting rules require investment banks to mark the value of the investments to the price of similar assets trading in the market. Many mortgage-related securities, and C.D.O.’s in particular, do not trade frequently, making them hard to value.

“Do you want to be the first one out and perhaps cause the lows to be hit in the market, or do you want to wait and see how this all plays out?”

In fact, rather than aggressively selling the assets it has seized, Merrill is quietly showing it to a small group of potential buyers, according to a person briefed on the process.

Such an approach helps to keep the pricing of the securities under wraps, allowing Wall Street firms to avoid marking down their own stakes. Keeping the sales price quiet also means that the firms may not have to add collateral immediately to shore up their portfolios.

At the end of the day, Merrill sold only a small portion of the $850 million in assets it had seized from the Bear funds as collateral. Traders said what did sell was the less risky, well-collateralized securities and that those sold near or at par in many cases. It is unclear whether Merrill intends to hold onto the remaining securities or whether it will try to sell them again down the road.

Yet another emerging worry is that the big investment banks that until now have generously lent billions of dollars on good terms to traders and portfolio managers are pulling back or demanding stricter terms.

One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road.

“We have heard that lenders have already reduced the amount that they are willing to lend against C.D.O.’s,” said Timothy Rowe, a portfolio manager at Smith Breeden Associates.

Still, analysts note that credit remains easy by historical standards and the market seems to be weathering the current storm well.

“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”

liquidity and risk taking / Jeff Saut

great stuff from jeff saut! (headline for more!)

looks like in china (down 9% http://immobilienblasen.blogspot.com/2007/02/china-down-9-biggest-slump-in-10-years.html they have become a little more nervous )

zumindest in china scheint diese these heute einzutreffen.

....my firm believes liquidity certainly plays a role and currently the monetary base is exploding. Moreover, it is not just our money supply that is surging but Austrailia’s (+13% year-over-year), England’s (+13%), the Euro Zone’s (+9.3%), Korea’s (+10.3%), China’s (+16.9%), etc.

Yet as my firm has suggested, while liquidity is unquestionably a driver of asset classes, if investors are unwilling to take that liquidity and buy something with it asset classes go nowhere. Manifestly, you can throw all the liquidity you want at the markets and if investors have no “risk appetite” they will merely take said liquidity and stuff it in a money market fund.
We, therefore, have argued that investors’ risk appetite is the ultimate driver of asset prices and after the nearly unprecedented rally from July 2006 to February 2007, participants’ risk appetites are currently high. When this will change is unknowable, but change it will.

i´ve put up a chart from end of 2006 that meassiures risk taking. but you just have to look to the spreads, the latest action in the private equity sector, carry trade etc to see that risk taking is going into extra innings.....

ich habe hier einfach mal nen chart von ende 2006 genommen. man muß aber nur auf die spreads und die letzten wahnwitzigen private equity transaktionen, den carry trade etc blicken um zu sehen das hier wohl bereits die verlängerung läuft...

pimco´s gross on liquidity / hall of fame

wow. another "must read" from pimco. they are really connecting the dots. and gross has it right with his quote:

my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse.....

donnerwetter. noch ein geniales teil von pimco. hier werden schön alle punkte zusammengeführt. und das zitat von gross (oben ) sagt alles.

The twin barrels of financial innovation and globalization have significantly complicated the forecasting of asset returns in recent years. Two domestic bubbles in the last decade are testimony to the power of levered money and the recirculation of price insensitive reserves back into U.S. financial markets.

......, what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into U.S. Treasury and mortgage markets at subsidized yields, as well as innovative funny money mortgage creation which allowed anyone to buy a house at escalating and insupportable prices. Bond, stock, and real estate trends then, have recently been increasingly at the mercy of relatively price insensitive and levered financial flows as opposed to historical models of value or the growth of the real economy itself. ..... This foreign repatriation produced artificially low yields, (perhaps 50-100 basis points confirmed in numerous Federal Reserve staff reports and speeches in recent years) which in turn drove housing values to unsustainable levels as recently as six months ago – the estimated peak in national home prices. (add to this china........)
...., my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity. What used to be an Economics 101 “CIG + exports-imports” analysis leading to predictions for interest rates and stock prices has turned into an Economics 2007 analysis of corporate buybacks, international reserve flows and hedge fund/private equity positioning seeking to front run or take advantage of the first two. And it’s not simply a question of analyzing the animal spirits or “exuberance” of investors wherever they may be. Corporations are buying back stock with their historically high profits not really because they’re enthusiastic about their own company’s value, but because they have little else to do with the money.Likewise, foreign central banks and petroreserve recyclers are turned on more by capping their own currencies or geopolitical considerations in the Middle East.

Investors have no more significant example of the influence of financial flows on asset prices than tracking the pace of the U.S. trade deficit in the 21st century.... there is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually. Without it, both bond and stock prices would be much lower, the $800 billion for instance representing 3 - 4x our current federal budget deficit. Almost perversely, then, an increasing current account deficit supports and elevates U.S. asset prices as the liquidity from it is used to buy stocks and bonds.......

Notice that in 2001 a monthly trend reversal of $10 billion ($120 billion annually) neatly coincided with a 20% decline in stock prices and a flat bond market despite a developing recession. ..... The draining of $120 billion from the foreign cash flow pump appeared to have magnifying, “it’s different this time,” effects on both. ......

Although the above historical analysis is subjective and vulnerable to “sampling error” (economist speak for too short a modeling timeframe) there is an inherent logic to it:

more money in the “bank” – asset prices go up; fewer deposits – asset prices go down or perhaps up less.

..... Financial derivatives ....allowing homeowners to lever home prices, institutions to compress risk spreads, and almost all assets to occupy a seemingly permanently higher plateau based on increased liquidity and perceived diversification of risk across the system. I have my doubts about this permanent plateau, but the market seemingly does not......

With that important caveat, let me proceed to analyze another source of increased cash flow that has markedly influenced asset prices in recent years. I refer to corporate profits and their meteoric rise since the 2001 recession, increasing from 5¼% to nearly 9% of GDP as shown in Chart 2.

While normally much of that rise of over $400 billion after tax dollars (almost identical to the pump provided by our increasing trade deficit over the same period) would have been reinvested in physical plant and equipment, this time it was not. more http://immobilienblasen.blogspot.com/2007/01/capital-spending-vs-buybacks.html

Combined, the total rise in corporate share buybacks and the financing for bond and stock markets via the increasing trade deficit have injected an average of perhaps $1 trillion annually of purchasing power into our asset markets since the end of the 2001 recession. Because hedge funds and levered players of all types have been aware of this trade deficit/share buyback “put” and have acted upon it, the incalculable but conservatively estimatable pump from these two sources alone have poured in several trillions of purchasing power per year. Take that money and use it to invest in further high powered and levered financial instruments such as CDOs, CPDOs, and 0% down funny money mortgages of all varieties and you can understand why asset markets have done so well in recent years, and why, as my initial Outlook sentence suggested, it is so hard to analyze “value” in asset markets these days. Prices are increasingly being determined by value insensitive flows and speculative leverage as opposed to fundamentals. (read this full block twice! diesen absatz zur not zweimal lesen)

...... The suggestion of no more bottles of beer on the wall comes from several sources, the first of which appears in Chart 1 as a recent reversal in the trade deficit. While some of this improvement is due to the standard dollar weakness of the past 12 months and its dampening impact on imports, much of it is due to the decline of oil since August/September of 2006. Follow with me if you will a projection by PIMCO analyst Ramin Toloui in Chart 4 that depicts the change in trade flows at a given dollar price of oil. read this excellent piece on the topic http://immobilienblasen.blogspot.com/2007/01/petrodollars-asset-prices-and-global.html

As you can see, the recent $20 reversal in per barrel oil prices results in a reduction of $100 billion or so in the annual trade deficit, and a like amount of liquidity extraction from bond and stock markets, much more if associated leverage is unwound. Granted, some would claim that there will still be $700 billion or so of purchasing power coming into our markets, but higher asset prices in a levered economy are dependent on greater and greater injections of liquidity, not less. Should oil hold in the $55 range, this extraction of high powered 100+ proof alcohol from the markets will be noticeable. (chart shows the 10 year yield in the timeframe when oil has plunged. in large part due to some very poor bond auctions with low indirect/foreign bidders..... zeigt die rendite der 10 jahresanleihe während öl stark gefallen ist. zurückzufüren auf einige schwache bondauktionen mit einem niedrigen auslandsanteil....)

The second source of vulnerability comes from the corporate buyback stash, a trend itself as Chart 3 points out that is beginning to level off and reverse. Peter Bernstein, in a recent January missive, suggests that corporate profits as a % of GDP cannot continue to grow at the same pace. “Everybody else” he writes “is going to want a piece of that juicy action. Employees will demand higher wages, customers will demand lower prices, and the government will levy higher taxes.”

.... share buybacks could be cut back by a good $100+ billion in the near term future.

..... The risk markets (including bond term premiums) if not drunk, are definitely not walking a very straight line.

Stocks, credit spreads, and yes intermediate and long term bonds relative to a likely unwavering Fed Funds rate in 2007’s first half, may stagger shortly.

The global gusher / economist

really a home run and a must read! / pflichtlektüre!

Thailand's bungled attempt to stem capital inflows is just one symptom of the worldwide liquidity glut

WHEN Thailand's introduction of capital controls sent its stockmarket plunging a few days before Christmas, you could have been forgiven for thinking, “Here we go again”. It is almost ten years since the start of the Asian financial crisis, when capital flight on a huge scale caused financial markets and economies in the region to collapse. The problem that Thailand and other Asian countries face today, however, is the exact opposite:

how to stop capital flowing in.

Worldwide, an abundance of liquidity has lured investors into riskier assets (like this story about junk bonds) in search of higher returns. Though there is no agreement on how to measure liquidity, using the global supply of dollars as a proxy, The Economist estimates that in the past four years it has risen by an annual average of 18%, probably the fastest pace ever (see chart).( that is the answer! to almost all excess in almost all asset classes / die antwort auf alle excesse in den anlageklassen )

Last year it washed through emerging economies in record amounts, pushing up their currencies. Between the start of 2006 and mid-December the Thai baht rose by 16% against the dollar—more than most other currencies tracked by The Economist. When capital inflows accelerated in December, the Bank of Thailand panicked and slapped a tax on inward portfolio investment (similar to that used in Chile). After share prices fell by 15% in a day, the controls were hastily removed from equities. They remain on debt investments.

This clumsy flip-flop has severely undermined the credibility of Thailand's economic policymakers. Yet the drastic measures highlight the seriousness of a dilemma faced elsewhere in Asia: how to curb domestic liquidity when foreign capital is flooding in. Thailand could have allowed the baht to rise further, but it had already gained against all other Asian currencies last year, raising concerns about exporters' competitiveness.

Some economists ( i´m sure they were directly from wall street!..... / bin mir sicher das diese direkt von der wall street kamen...)argue that Thailand should simply have cut interest rates to stem capital inflows, making bonds less attractive to foreign investors. But this is to misunderstand the nature of the problem. David Carbon, an economist at DBS, a Singapore bank, argues that the baht's strength is not the real issue, because Thailand's exports have continued to grow strongly. Instead, the Bank of Thailand is more worried about excessive domestic liquidity. Lower interest rates would simply add to the problem, generating higher credit growth, inflation and asset prices. Similarly, central-bank intervention to hold the baht down by buying dollars would also boost the money supply.

Moreover, as Brad Setser of Roubini Global Economics points out, Asian central banks are having to buy dollars not just because of their current-account surpluses, but also because foreign investors are moving money into the region. If the dollar subsequently falls, the central bank may make a loss on its reserves (i´n not sure that this argument is the reason behind some interventions / bin mir nicht sicher ob dieses argument zugkräftig ist), but the country's exporters gain. However, though Asian countries may be happy to subsidise their exporters they are not so keen to offer the same subsidy to foreign banks, pension funds or hedge funds.

Capital controls are a way around what economists call the “impossible trinity”: an economy cannot simultaneously control domestic liquidity, manage its exchange rate and have an open capital account. Only two of the three are possible. .....

Other Asian countries are also looking for ways to discourage foreign capital inflows. In December South Korea raised reserve requirements on foreign-currency debt to make it harder for banks to borrow from abroad. China has kept its restrictions on portfolio capital inflows, helping it to hold down its exchange rate. This, however, is squeezing the competitiveness of other Asian economies. Many economists reckon that a rise in the yuan would do little to reduce America's trade deficit, but it would certainly help to take pressure off other Asian exporters—and assist in curbing the gush of global liquidity.

The deluge of spare cash has two main sources.

First, average real interest rates in the developed world are still below their long-term average. Second, America's huge current-account deficit and the consequent build-up of foreign-exchange reserves by countries with external surpluses has also pumped vast quantities of dollars into the financial system. A large chunk of Asia's reserves and oil exporters' petrodollars have been used to buy American Treasury securities, thereby reducing bond yields. In turn, low bond-market returns have encouraged bigger inflows into higher yielding emerging-market bonds, equities and property, especially in Asia. Liquidity has been further boosted by the use of derivatives, and by carry trades(borrowing in currencies with low interest rates, such as yen, to buy higher-yielding currencies).

The spread on emerging-market bond yields over American Treasury bonds fell to another record low last week. Share prices in emerging economies have risen by 243% on average from their trough in 2003. That still leaves the average price/earnings ratio below its historical average and less than that in developed countries, so for most markets it is premature to talk about bubbles. But if asset prices continue to climb at their recent pace, central bankers will become increasingly nervous.

"Asian Central Banks May Spook Investors in 2007"

its all about liquidity! to me it looks like the central banks "have" to spook investors or to say it more detailed "speculators".

es geht einzig und alleine um liquidität. meiner meinung müssen die notenbänker dringen eingreifen um investoren oder besser gesagt die spekulanten ein bißchen aufzuschrecken.

(Bloomberg) -- While a housing-led slump in the U.S. economy may indeed emerge as the biggest risk to Asian economies in 2007, a more immediate threat to investors will probably be posed by the region's central banks.

Policy makers in China, South Korea and India may have no option except to aggressively contain domestic liquidity and stamp out asset-price bubbles ....

Relying on ``shock therapy,'' central banks in these countries might end up making overstretched securities -- such as Indian and Chinese equities -- more volatile than they have to be. A case in point was the bloodbath on Indian stock markets earlier this week. ( mmmh, but when you look just 2 days later the market was unchanged close to another all time high. looks like there is much more work to be done.....!/mmmh, nur 2 tage später alles wieder ausgebügelt und nahe einem neuen ath. sieht so aus als wenn dort nich mehr zu tun ist......)

In Asia outside of Japan, lax local financial conditions and the authorities' efforts to deal with them may have a greater bearing on investor sentiment than anything that the Big Three global central banks may or may not do.

Perils of Shock Therapy
Some evidence of that came this week when the benchmark Indian equity index plunged 5.8 percent following the central bank's surprise announcement that it would remove 135 billion rupees ($3 billion) from the banking system by raising the ratio of deposits banks are required to hold as cash.( china did the same "thing"just last week.)

maybe they should be more radical like japan. they have been critizised for halting their rates close to zero. but they have taken action!

So the Bank of Japan did what any self-respecting central bank would do (unfortunatly they are the exception/leider ist das eher die ausnahme). when called on the global carpet for “creating” too much liquidity, they stopped. And not only did they stop, they began an immediate program of erasing their quantitative easing (printing money) efforts of the last half decade by beginning to shrink the Japanese monetary base in very big and rapid fashion. this is from contrary investor. i suggest to read the full excellent piece".

The need for cooling the overheated Indian economy is undeniable. What investors can't take for granted is that it will be accomplished in a credible manner.

The Reserve Bank of India isn't the only Asian monetary authority to resort to shock therapy. In Korea, the reserve requirement on demand deposits is going up by 2 percentage points after Dec. 23 to deflate a housing bubble. The decision, announced by Bank of Korea last month, is the first increase in reserves in almost 17 years.

Fragile Korean Consumer
The question in Korea is whether monetary policy will achieve a soft landing in the housing market or cause it to crash.

According to Samsung Economic Research Institute in Seoul, housing prices nationwide rose more than 11 percent in the first 11 months of 2006, compared with less than 6 percent last year. In overheated pockets, price escalation is even more rapid.

With floating-rate mortgages accounting for 98 percent of the total, a sudden drop in home prices may further depress consumer sentiment, which has yet to recover from a credit-card bubble that burst in 2003. (amazing. the debt latest debttruoble is just 3-4 years old..../ erstaunlich. nachdem der letzte bubble gerade 3-4 jahre alt ist......)

Lee Seong Tae, the central bank governor, made it clear that he won't make a habit of manipulating reserve requirements. That's reassuring. Changes in reserves, because they have long- term effects on money supply and economic activity, are generally seen as a central bank's weapon of last resort. ``The change in required reserves won't come often,'' Lee said.

the fed of course has just done the opposite and has eliminatet the reserve back in 1995./die fed hat im jahr 1995 genaus das gegenteil gemacht und die reserve defacto auf 0 gesetzt. thanks to this "piece What (Really) Happened in 1995?" from aaron krowne / itulip!

The key event that happened around 1995 is that the fractional reserve ratio was not only lowered, it was effectively eliminated entirely. You read that right.

`Heavy Dose of Medicine'
There are strong expectations that the People's Bank of China, which has already raised the reserve ratio by 2 percentage points in three steps since June, will be forced to act again to mop up the surfeit of liquidity being released by its massive trade surplus. (see first link/ siehe erster link)

People's Bank of China's third-quarter monetary policy statement released last month included 70 references to liquidity.

``Given the abundant liquidity, an increase in the reserve requirement ratio by a small margin is not a `heavy dose of medicine,' but rather a fine-tuning,'' the bank said.

Dearer Money
China's liquidity challenge is compounded by expectations of currency appreciation. The yuan, traders reckon, must strengthen substantially against the dollar to reduce the growing likelihood of the U.S. Congress passing punitive legislation against Chinese exports. (the us should be pleased with china thta it pumps all the surplusses back into the $. almost 1 trillion and counting....../ die usa sollen froh sein das china die ganzen überschüsse zurück in den $ pumpt. jetzt ne billionen euro und steigend....)

The one-way bet on yuan appreciation is drawing in overseas capital and pushing up equity prices in Shanghai and real-estate values in Beijing to dizzying heights. as shown "here"

While China's economy is plagued by overinvestment, India's is overheating. ..korea is also surprisingly strong.....

At least in these three Asian nations, investors may not find themselves worrying as much about a U.S.-induced growth slowdown next year as they may about the central banks suddenly turning off the money taps.

"you should never argue about a crazy market./ greenberg"

well said..... thanks herb!/ den nagel auf den kopf getroffen....danke herb!

Is it brains or a bull market?
Investors shouldn't lose sight that there are two sides to each trade

"It's said you should never argue with a crazy person. I'll add that you should never argue about a crazy market."

And that pretty much describes where we are - in a market that hangs by the thread of oil until it decides the risk of rising oil prices is irrelevant; in a market that hangs by the thread of the latest economic indicator, until it decides that indicator is irrelevant; in a market that one week is enthusiastic about the Fed's likelihood of cutting interest rates and the next week enthusiastic when it looks like a cut is less likely.

This is a market, as I've written previously, that lacks conviction and will fall in a vacuum on the whiff of something unexpected -......

Is the economy growing or is the economy slowing? YRC Worldwide , a trucker that should have its fingers on the pulse of the economy, says the latter.) Doesn't really matter because, as of today, the market sees both as good.

Not to worry: All that really mattes is "global liquidity," a catch-all to explain the inexplicable.

"Unnatural," is the way market strategist Jeff Saut of Raymond James explains this market in his latest missive. "....

He further marvels at how the SEC caved in to a New York Stock Exchange petition in mid-October to reduce margin requirements "for an already over-margined hedge fund community. And that 'mysterious surprise' gave the major market indices another leg up (read: re-rally)....Why in the world would one introduce more leverage into an already over-leveraged hedge fund community is a mystery to us!" (And to us!)

What about the value of the market relative to earnings? Everybody says it's cheap. Everybody, that is, but John Hussman, of Hussman Funds, who in his weekly commentary writes that at 18-times earnings the market is into its "third phase"( see labels!), ......."

There's no shortage of pundits who would disagree, of course. But that, dear readers, is what makes markets - inverted yields, consumer credit, shaky subprime-mortgages, the weak dollar, uncertain housing, financial leverage and complacency, be damned. Minyanville's Todd Harrison put it best in a column here the other day when he wrote, "For every risk, there is an offsetting reward. And those betting on a year-end ramp would be wise to remember that this is a two-way street." Amen, bro'.