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>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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