We Need Another Volcker

Equity indices drifted up yesterday on extremely low volume. To have expected anything else is to misunderstand the psychology of September 11th. Prices can drift a bit further before most indices enter the danger zone once again for the Bears. I’m looking to add to my shorts around these levels.

Three-Month Pound Libor Holds at 9-Year High; King Shuns Market: “The three-month rate banks charge each other for pounds held at its highest in nine years after Bank of England Governor Mervyn King said policy makers are unwilling to supply extra cash to money markets.”

The Bank of England, thus far is the only central bank to BOTH fully grasp the future implications of moral hazard AND act accordingly.

“The central bank won't amend its system for financing commercial banks by changing collateral rules or making longer- dated loans for fear of encouraging risky behavior in future, King said today in written testimony to the U.K. Treasury Committee.

“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,” he said. “That encourages excessive risk- taking, and sows the seeds of a future financial crisis.””

What the world needs is another Paul Volcker to really purge the system and set things up for real, robust growth. ASSET PRICE inflation (yeah that would include your ridiculously priced home) is just INFLATION by another name.

“The overnight rate for euros dropped 2 basis points to 4.15 percent, after climbing 40 basis points yesterday as the ECB drained a record 60 billion euros ($83 billion) from the money market. The three-month rate declined 1 basis point to 4.74 percent, near an eight-year high, the BBA said.

The European Central Bank, the Fed and other central banks have loaned banks $400 billion over the past month to help lower lending rates. The Fed on Aug. 17 cut the rate at which it loans money directly to banks and dropped its bias toward fighting inflation.”

The other central banks just don’t get it. IF the central banks manage to navigate through this current mess, the disrespect of risk in the financial community will rise to knew levels.

Dollar Falls to Record Low Against Euro on Rate Differential: “The dollar fell to a record low against the euro as investors bet the Federal Reserve will reduce its target interest rate, narrowing the gap between the U.S. and Europe.

The currency declined for a sixth day, the longest losing streak since April, after the National Association of Realtors yesterday cut its home sales forecast, stoking concern the housing slump is spreading. Investors meanwhile added to wagers the European Central Bank will raise borrowing costs by year-end.”

Such a weak currency makes it very hard for Bernanke to cut rates. The bottom could really fall out then… Gold is already on the move and oil is misbehaving…

Saudi Arabia Wins OPEC Increase, Defying Iran, Libya (Update2): “Saudi Arabia persuaded OPEC members to increase production for the first time in a year, seeking to reduce the record price of oil, over the objections of Iran, Qatar, Venezuela, Libya and Algeria.

The 500,000 barrel- a-day increase will be on top of actual production, according to Kuwait's acting oil minister, Mohammed Abdullah al-Aleem.”

However, crude closed at a new cash high. Clearly a depreciating dollar is affecting crude prices even as economic forecasts the world over continue to be revised downwards.

GMAC Bonds Rally on Citigroup's $21 Billion Financing (Update4): “Bonds of GMAC LLC rallied after Citigroup Inc. offered $21 billion of financing for the automobile and home lender.”

Looks like some people are starting to find liquidity again…

Citigroup's Old Lane Hedge-Fund Unit Declined 5.9% in August: “Old Lane LP, the hedge-fund firm acquired this year by Citigroup Inc., fell 5.9 percent in August, hurt by losses on debt and emerging-market securities.”

Pirate Capital Bars Withdrawals From Two Activist Hedge Funds: “Pirate Capital LLC, the hedge-fund manager run by Thomas Hudson, barred withdrawals from its two Jolly Roger Activist funds after the firm's assets declined by almost 80 percent in the past year.”

Although the hedgies are still suffering, some are more than others. These clowns are in the same boat: Y2K Finance Hedge Fund Halts Redemptions and Sales (Update4)

Countrywide Shares Fall on Report Lender Needs Cash (Update4): “Countrywide Financial Corp., the biggest U.S. mortgage lender, fell almost 2 percent on the New York Stock Exchange after the New York Post said the company is negotiating a second multibillion-dollar bailout.

Blowing through the first $2 billion in about a month does NOT inspire confidence at all. Bank of America is going to be PISSED if the next bailout has similar or better terms because they took the risk of stepping up first.

U.S. MBA's Mortgage Applications Index Increased 5.5% (Update1): “Mortgage applications in the U.S. rose 5.5 percent last week, reflecting gains in both purchases and refinancing.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan rose to 657.4 from 622.9 the prior week. The group's purchase index rose 5.2 percent and its refinancing gauge rose 6 percent.”

I’ve discussed the MBA index in my post Bear Raid. Once again and to simplify, in this environment when this index goes up it is a BAD sign. As jammed up homeowners scramble to refinance and are REJECTED they have to apply MULTIPLE times to multiple lenders… hence RISING applications. The Bulltards will spin this as a ‘housing stabilization’ story.