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Gwenn -
Those were wonderful and well thought out pieces. It points out the
importance of understanding that the markets are psychological animals.
I put these stories up not because I believe these scenarios (I don't),
but they do cause pause for reflection and I do suspect that they are
worst case (and unlikely) possibilities.
Bon chance.
Steve
Gwenn Ael Gautier wrote:
>
> >From my European perspective, I would also add that Europe is sitting in a
> similar situation, only that we have:
> - capital markets that are far less developped, ie even less liquid (with
> corporations relying much more on banks),
> - the Euro that is going live shortly in addition
> So far, trust in the Euro is still there, but central bankers are dead worried
> that creating too much liquidity short term would kill the Euro before it got
> even a chance to fly. Hence no great chances of rate cuts before february 20th,
> when first reports will be available for the ECB meeting.
> - a severe pension funding problem:
> In 1980 in Germany there were 10 active people financing 1 retiree.
> Today it is 4 to 1
> In 2010 it will be 2 to 1
> It is similar in many other European countries
> - a totally inexperienced and naive governement at the helm in Germany, Europes
> most powerful country.
>
> In terms of the current mood, top bankers in Europe are truly tense at the
> moment concerning the bond market situation worldwide, adopting language I never
> heard before except while reading the 1929 stories.
>
> In terms of most likely outcome to all this, the trend seems to be towards
> printing money in Japan and making short term liquidities more available
> everywhere else in the westernworld, although not before early 1999 in Europe.
>
> In terms of fixed income markets, they will stabilize / mature in the US
> (following extremely fast growth), and in Europe those will develop / emerge
> much more in terms of products (asset securitizations everywhere), and also as
> corporations need faster access to financing and can no longer rely on expensive
> banks that can go belly up (more high yield financing).
>
> In terms of equities, lower rates and huge pension funding needs most likely
> mean a strong and long bull market in European equities for the next decade at
> least, once the dust settles and what needed to be written down has been so.
>
> Just a view from the other side of the big pond...
>
> Gwenn
>
> steven poser a écrit:
>
> > Objet: Cramer's Rewrite of His Watch the Bond Market Column
> > la date: Sat, 24 Oct 1998 17:19:23 -0500
> > De: "James Bianco" <jbianco@xxxxxxxxxxxxxxxxxx>
> > Répondre-A: "James Bianco" <jbianco@xxxxxxxxxxxxxx>
> > A: "MTA" <mta@xxxxxxxxxxxxx>
> >
> > Remember, in a poll on this list that all the bond guys said the Fed cut
> > rates out of panic while the stock guys thought it had to do with some
> > revised view of inflation.
> >
> > This article does a good job of explaining all HUGE problems in the
> > financial system, why the Fed is panicked, and why the bond guys are scared.
> > I recommend it to all the "old stock hands."
> >
> > JB
> >
> > -----Original Message-----
> >
> > Wrong! Take Two: Cramer's Rewrite of His Watch the Bond Market Column
> > By James J. Cramer, www.thestreet.com
> > 10/24/98 12:16 AM ET
> >
> > >From this little piece, I must have gotten two dozen requests to do a
> > rewrite. As I am from the "customer is always right" school (unless you send
> > me a nasty email), here goes.
> >
> > People, the bond market is bigger than the stock market. (About 10 times
> > bigger. And far more important to the way business is done in this country.
> > It is the lifeblood of business, not the equity market, and it provides the
> > day-to-day cash for many enterprises large and small.) The problems are in
> > the bond market, not the stock market. Right now, the Fed could give a
> > %^$#&^^#%&^# about the stock market. If it saves it, that's a moral hazard
> > that the Fed will have to pay the price for. It will. (I could not believe
> > how many people told me I was nuts for saying this. Except our fixed-income
> > readers -- they all applauded this piece as the first piece that told of the
> > real plight. They know the truth. You can't float a bond in this
> > environment. In fact, the last piece of paper that got done of any size was
> > that giant Worldcom (WCOM:Nasdaq) offering. Boy that could never get done
> > today. We hear hints of the problems.
> >
> > Ascend (ASND:Nasdaq) and Lucent (LU:NYSE) advance capital -- people like it
> > from Lucent, hate it from Ascend. But you never read about the real pain in
> > this market. It has always been like that on Wall Street.
> >
> > The day I first interviewed at Goldman Sachs, I was amazed to find that
> > equities, at the most important equity house on Wall Street, were virtually
> > Lilliputian compared to bonds. All the real big money came from
> > underwriting. As the bull market took off, it got even worse. The big money
> > came from securitization of different pieces of credit, car mortgages, house
> > mortgages, credit-card mortgages. You name it. These giant pieces of paper
> > were sold and sold aggressively. That's where the real money was. The
> > underwriting fees from the issuers were enormous. But you could trade these
> > pieces of paper and take 1/8th, as they say, and make millions. I never made
> > as much money selling stocks as I did with bonds. Ever. And bonds always
> > sell like hotcakes because people have to own them. Pensions have to own
> > them. Retirees have to own them. They can take every piece of paper ever
> > made and sell it -- even that Milken junk. Until now.
> >
> > Now, there is no money. Now, there are no buyers. That's the point of this
> > article. By the way, Treasuries used to be sold aggressively when the
> > government used to print them like newsprint. You could make pretty good
> > money taking 1/64th on those! And what the heck is Jimmy Rip Van Rogers
> > talking about? Our government doesn't do this stuff any more. We are
> > skinflints. Have been since Clinton got in. I am no fan, but he's gotten the
> > bond market right, for certain.)
> >
> > I keep reading that the worst is over. It may be in the stock market. But
> > the bond market? Heck, it is just beginning. (In other words, the marginal
> > buyers of everything but treasuries were, for the most part, accounts that
> > looked and acted exactly like Long Term Capital. When you buy stocks and you
> > want to leverage, you can borrow up to half of the value of the stock. When
> > you buy bonds, you can repo them, get more money, leverage that and leverage
> > it some more. Heck, you can borrow 10 times what you have. And if the Fed
> > and the lenders turn a blind eye, you can borrow 20 times. And if the ex-Fed
> > guys are involved and the lenders are invested, we know now you can invest
> > 100 times your money. Or their money. Or whatever money you may be playing
> > with.
> >
> > This market was like that scene upriver in Apocalypse Now when Martin Sheen
> > is asking those soldiers at night "Who is in charge here?" and they turn to
> > him and say "You are." Sure, nominally the Fed in New York is in charge, but
> > that's a whole other story, one that no one is willing to do because it is
> > too hard. Bond traders have always acted as if they had the full faith and
> > credit of the U.S. government behind their purchases. Turns out they don't
> > have the faith or the credit of anybody. Since Long Term Capital, what has
> > happened is that no firms want to lend you money to finance bond
> > inventories.
> >
> > If you are sitting on a giant inventory of bonds and you are Fannie Mae
> > (FNM:NYSE), that's cool. You have no financing problems. But if you are
> > anybody else, believe me, you need some financing to keep all of that
> > inventory. In normal times, you could sell off what you had to sell if the
> > lenders want their capital back that they lent you to take down bonds. But
> > these are not normal times. The lenders want their money back, as they are
> > all capital-constrained right now and are trying to slim down their balance
> > sheets -- they basically loaned way too much, every brokerage house loaned
> > way too much -- and the borrowers can't sell the fixed-income junk they have
> > because the brokerage desks won't bid for the stuff and every other buyer is
> > full up.
> >
> > So, one by one, these big players either liquidate via auction at prices
> > that are barely able to keep them in business, or they default and lose the
> > whole ball of wax, or they file bankruptcy a la Criimi Mae (CMM:NYSE). The
> > numbers are staggering. We are talking billions of dollars in loans from
> > brokerage houses that can't get paid. To make matters worse, the brokerage
> > houses already have billions upon billions of dollars in inventory. And they
> > are sitting on pieces of Long Term Capital's inventory. And nobody has the
> > capital or the inclination to buy this stuff except at vastly reduced
> > prices. As the crisis is worldwide -- all of the major banks in Europe were
> > in this, and the Japanese were in too -- and simultaneously everybody wants
> > to shrink his balance sheet -- there has been no movement in the market
> > whatsoever. If the sellers elect to sell at the prices that the brokers are
> > bidding, they will be forced to mark their other positions down to where
> > they will have even less collateral, which will beget more margin calls,
> > which will beget more forced selling. It is a real Mexican standoff. So, one
> > by one, these holders of paper wither or default.) That's where the layoffs
> > and the shutdowns are occurring. (Not only are the brokerages all trying to
> > shrink their balance sheets, they are all trying to shrink these
> > departments. They may not need all of those fixed-income traders and
> > salesmen because there are no new issues to sell, nobody to sell them to
> > right now as everybody just wants plain old Treasuries, where very little
> > money is being made trading and selling because it has become so competitive
> > and there are so few 30-year auctions, where all of the juice -- mark-ups,
> > commish, whatever -- was to begin with. So, inexorably, everyone of these
> > firms wants to fire people, streamline fixed income and get these incredibly
> > expensive people off their books. It will only get worse when the bonuses,
> > if there are any, get dispensed next month. Then I imagine we will see real
> > bloodshed.) That's where the market that has ceased to function. (No one
> > wants to take down any inventory. No one wants to extend financing. So,
> > imagine a housing market with no new houses being created and no mortgages
> > available so you had to pay with cash. Would you want to be a realtor, a
> > contractor, a developer in that market? That's what the bond market looks
> > like right now: a giant, multitrillion-dollar housing market with no
> > mortgages available.)
> >
> > Let me write that again: ceased to function. (This is why I branded Bankers
> > Trust in denial. This is why I wish that there were many more people writing
> > about Long Term Capital instead of the equity market. This is why, except
> > for Tom Wolfe, nobody seems to even know where the real masters of the
> > universe used to reside. They resided in the bond market, not the stock
> > market. And they are no more. And the people, the vast number of people you
> > see downtown, are not needed anymore either.)
> >
> > As that market is only about 10 times as important to the U.S. economy as
> > the stock market, we should not gauge the stock market's strength as a
> > measure of whether the Fed should be worried. (Remember, it is not just the
> > corporate bond market that is frozen. It is the collateralized security
> > market -- mortgages, car loans, credit cards. It is the emerging debt
> > market -- that's just vanished, vaporized, without a trace. It is the
> > municipal market, nothing cooking there. Heck, even commercial paper has
> > dried up. There is nothing for these people to do except eat pizza all day.)
> >
> > If this freeze continues, a month from now, you could go to the fixed-income
> > floors of the major firms on Wall Street and turn them into bowling alleys.
> > (I am not being overly dramatic. These people are dead men walking if this
> > thing doesn't turn around soon. And those who follow stocks won't know the
> > difference.) There is still no liquidity. No credit. Nothing.
> >
> > So, if you think the Fed is done easing because the market rallied 1,000
> > points, you are looking at the wrong market. It's the fixed-income market,
> > stupid. (Yes, there is a solution to all of this. You cut the rate that
> > everybody borrows at overnight to some minimal level, say 3%, such as we had
> > in 1990-91. That makes it more likely that these firms can finance
> > inventories without going belly-up. Easier money in the form of lower rates
> > would make much of this paper more attractive to buyers. It would solve the
> > inventory problem. It would solve the credit problem. If it is not solved,
> > we will have a bad recession. That is written. I don't care what the
> > economists/talking heads say, this logjam gets broken or we go into
> > recession.
> >
> > But the logjam is broken by making the overnight rates dramatically cheaper,
> > so inventories of illiquid bonds don't cost much. The Fed, in its initial
> > ease, hoped that the problems weren't as systemic as they turned out to be.
> > Worldwide bond market shutdown isn't good for anybody. And it can be
> > changed. The rates are low in Japan, but no banks have enough capital to
> > finance inventories of bonds, and they are already financing real estate
> > that loses value by the day. So it has to be us. We are the only ones who
> > can break the logjam. Heck, if it causes the stock market to shoot up, so be
> > it. We have no choice. Greenspan knows this. Now. That's what the second
> > ease said.
> >
> > Why is no one else writing about this crisis? Maybe because they don't have
> > any friends in the fixed-income business. I have tons of them. I know what's
> > going on, and I don't want them to lose their jobs because of this crunch.
> > But they will if the Fed does not ease big and fast. Amazingly, everybody
> > who trades at the multimillion-dollar level, where corporations are
> > financed, knows this. But no one in the press has a clue, and the talking
> > heads they present seem equally oblivious. This is like if the Dow were to
> > have dropped to 4,000 points overnight, except more stark, because the Dow
> > would not yield 12% at these prices like many of these bonds do.) That's
> > what you should be paying attention to. (How do you follow this day to day?
> > Read the credit columns. Look for new issues. If you see a pickup, that's
> > good news. But I don't think you will.)
> >
> > If it still exists. (Yeah, remember, bonds are capitalism. Stocks are
> > offshoots of bonds. Stocks can do well in the very environment described,
> > provided the corporations don't need financing and have big cash flows.
> > Right now, corporate America is very liquid, so we don't see the problems
> > yet. But if we wait around, we will. The Fed knows this, though. I got very
> > negative on stocks when I did not think the Fed understood what I am
> > describing in this very column. How could they? The New York Fed, which is
> > supposed to monitor this stuff, was too close to Long Term Capital to see
> > the problems.
> >
> > But, believe me, they know it now. And they can solve the problem. Which is
> > why I am no longer bearish. Can't be. Not on equities. Not given the easings
> > that the Fed will have to do put the fixed-income markets back to work
> > again.)
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