A Calm Day?

Things look calmer this morning.

Bernanke's `Rookie Mistake' Forces Fed to Shift Focus to Market : "Federal Reserve policy makers, who declared that inflation was their paramount challenge just two weeks ago, have been forced to make financial-market stability the trigger for changes in interest rates.

By lowering the discount rate and issuing a statement conceding threats to the economy, Federal Open Market Committee members effectively ripped up the economic-outlook statement from their Aug. 7 meeting. Some economists describe the about- face, coming after months of assurances that the subprime- mortgage rout was contained, as Chairman Ben S. Bernanke's first serious error since taking office last year."

We have a new regime at the Fed. Bernanke must establish his 'hawkish' credentials, his inflation fighting credibility to control inflation expectations. This discount rate cut does not signal an imminent rate cut. This discount rate cut was made instead of an imminent future rate cut. When traders realize that Bernanke is willing to let these assets bubbles deflate the selling we recommence...

Campbell, John Henry Get Losses on Carry Trade Exit (Update3): "A doubling in currency volatility since June has knocked the "carry trade'' off its perch as the most profitable strategy in foreign exchange, hurting investors from John W. Henry & Co. to Campbell & Co.

Chalk up another victim to the spreading U.S. subprime mortgage contagion. The fallout from losses on loans made to people with poor credit is spreading so fast that investors are selling any asset smacking of high risk around the globe, causing wide swings in exchange rates that weren't anticipated."

What does that look like? See yesterdays blogpost Global De-leveraging.

London House Prices Fell for the First Time in a Year (Update1): "London house prices fell for the first time in a year this month, a sign higher interest rates are cooling Britain's property boom, a Rightmove Plc report showed."

Just in case you think its over. The subprime situation in the UK is just as bad and by some measures worse. Only their market hasn't rolled over yet. But now that house prices are starting to slip there the reckoning isn't far off.

• My post on July 3rd addressed the subprime issue in the UK: Sound Familiar?
• My post on July 5th addressed the real estate bubble in Spain: Ghost Towns? In Spain?

Subprime Infects $300 Billion of Money Market Funds, Hikes Risk: "Money market funds were invented 37 years ago to offer investors better returns than bank savings accounts while providing a high degree of safety. Most of the $2.5 trillion sitting in these funds is invested in such assets as U.S. Treasury bills, certificates of deposit and short-term commercial debt.
Unlike bank accounts, money market funds aren't insured by the federal government. They almost never fail.

Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans."

That's how far this toxic sludge has spread.

Stocks May Grow More Volatile After Fed's Rate Cut (Update2): "The Federal Reserve's attempt to calm credit markets may have the opposite effect on equities after the most volatile week for U.S. stocks in four years.

The Chicago Board Options Exchange Volatility Index stayed near the highest since 2003 after the Fed unexpectedly reduced the rate it charges banks for loans on Aug. 17 and sparked the biggest rally in the Standard & Poor's 500 Index in four years. "

Until the VIX drops significantly, it isn't likely that any rally is more than just short covering.