Planning Intervention in Financial Markets
|November 3, 2006||Posted by Staff under Progress Report, The Progress Report|
Planning Intervention in Financial Markets
Bush Administration Expecting a Recession?
The federal budget deficit is huge, the bungled war against Iraq has already cost far more than permanently fixing Social Security, and now the idiotic government considers its top priority to be more subsidies for the rich? Bush is not the only one AWOL — common sense and leadership are also AWOL from his administration.
Here are portions of an article from the Telegraph (UK).
Paulson Involved in Secretive Support Team to Bailout Market Meltdown
by Ambrose Evans-Pritchard
Judging by their body language, the US authorities believe the roaring bull market this autumn is just a suckers’ rally before the inevitable storm hits.
Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the ‘plunge protection team’ (PPT), a shadowy body with enormous powers to artificially support stock index, currency, and credit futures in a crash.
Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.
Mr. Paulson says the group had been allowed to languish over the boom years. Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.
The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.
The Progress Report observes — just like the Soviet Union!
Paulson has asked the team to examine “systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis”.
“We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?” he said, fretting about the secrecy of the world’s 8,000 unregulated hedge funds with $1.3 trillion at their disposal.
The PPT was once the stuff of dark legends, its existence long denied. But ex-White House strategist George Stephanopoulos admits openly that it does exist, and was used to artificially support the markets in earlier crises.
“They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said.
“In 1998, there was the Long Term Capital crisis, a global currency crisis. At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall,” he said.
The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929. The level of moral hazard is subtly different.
Paulson is not the only one preparing for trouble. Days earlier, the SEC said it aims to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15 percent, down from a range of 25 percent to 50 percent.
The ostensible reason is to lure back hedge funds from London, but it is odd policy to license extra leverage just as the Dow hits an all-time high and the VIX ‘fear’ index nears an all-time low — signalling a worrying level of risk appetite. The normal practice across the world is to tighten margins to cool over-heated asset markets.
The move is so odd that many are already accusing SEC chief Chris Cox of juicing the markets to help stop the implosion of the Bush presidency.
As it happens, I used to eat Mexican enchiladas with Cox 20 years ago at a dining club in Washington, where California Reaganauts gathered to plot the defeat of Communism. Die-hard Republican he may be, but I can think of nobody less likely to betray the public trust in such a way.
So one is tempted to ask if Paulson and Cox know something that we do not: whether other hedge funds are in the same sinking boat as Amaranth Advisers and Vega Asset Management, keel-hauled by bets on natural gas and bonds.
Or whether currency traders with record short positions on the Japanese yen and the Swiss franc are about to learn the perils of the Carry Trade, a high-stakes game of chicken where you bet against fundamentals with high leverage to make a quick profit. Everybody knows it will blow up if the dollar goes into free fall.
They had a fright last week when US growth for the third quarter came in at just 1.6 percent, and new house prices plummeted 9.7 percent year-on-year in the sharpest drop since the property crash of 1981.
The dollar dived from 119.65 to 117.57 yen in a heartbeat. With $2.9trillion of derivatives now trading daily on the currency markets alone — according to the Bank for International Settlements — is this the start of the most vicious short squeeze ever seen?
The futures markets have priced in a 77 percent chance of a flawless soft-landing for America’s obese economy, now living 7 percent of GDP beyond its means off foreign creditors. They are counting on moderating oil prices, and — a contradiction? — another year of torrid world growth. Nice if you can get it.
They have not begun to price in the risk of recession, typically entailing a drop in the S&P 500 stock index of 28 percent from peak to trough. Evidently, the equity markets assume the Fed can and will rescue them by slashing rates in time, if necessary.
They should examine a recent report by the New York Fed warning that whenever the yield on 10-year Treasuries has fallen below 3-month yields for a stretch lasting over three months, it has led to each of the six recessions since 1968.
The full crunch hits 12 months later as the delayed effects of monetary tightening feed through, even if the Fed starts easing frantically in the meantime. By then it is too late. “There have been no false signals,” it said.
As of last week, the yield curve was inverted by 29 basis points, was continuing to invert further, and had been negative for over three and a half months. If the Fed is right this time, the recession of 2007 is already baked into the pie. Those speculative positions may have to be unwound very fast.
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