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Friday, August 17, 2007

Bernanke Flinches

Bernanke flinched this morning.

Fed Cuts Discount Rate to 5.75 Percent to Ease Credit Crunch : "The Federal Reserve, in an unscheduled announcement, cut its discount rate and said it's prepared to take further actions to "mitigate'' damage to the economy from the rout in global credit markets.

The central bank reduced the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman. "

Equity futures melted up on the news in a massive short squeeze.

Having covered my shorts yesterday afternoon when the first rumours of an 'emergency Fed meeting' started circulating, I now have the ammo to scale back into my shorts.

Don't get too excited. This does not help the average fatty trying to refinance his overpriced home. This does not help the maxed out consumer. This does not help the average hedgie and bank holding the toxic derivative sludge. This is NOT a rate cut. Its a DISCOUNT rate cut. This solves nothing and will be a quick 'pop and drop'.

Who wants to be exposed to headline risk over the weekend? How many dead bodies will be discovered over the weekend? Dead hedgies, dead mortgage originators and dead LBO deals? Strength is to be sold.

Yen Set for Best Week Against Dollar Since 1998 on Credit Risk: "The yen was poised for its biggest weekly gain versus the dollar and euro in almost nine years as traders dumped investments funded by loans in Japan."
Keep watching the Yen. Until the hedgies get their confidence back and start putting the Carry Trade back on, we can't have a sustained rally in equities.


laurent said...

I love your Blogg.

I have 2 questions:

Is this reassuring of even more worrisome?
(How bad is it really?)

What do you make of this perfectly timed equity squeeze ahead of the unscheduled Fed's decision?

Ben Bittrolff said...


I'm glad you enjoy The Financial Ninja. I'm still playing with the content, format and timing of my posts. So any and all comments and suggestions are welcome.

To answer your questions:

1) The discount rate cut throws out the 'its contained' arguement. After Central Banks injected ridiculous amounts of liquidity, this cut is an admission that things are 'worse than we thought'. Also, the discount rate cut implies that there will NOT be an outright rate cut. This is a new, unproven regime. Bernanke is trying to establish his inflation fighting credibility and trying to differentiate himself from Greenspan. (Greenspan would almost certainly have cut and that is what traders have grown accustomed to.)

2) The prefectly timed squeeze was intentional. Friday on the open was option expiration. To get the biggest bang for the buck, Bernanke cut on Friday. This was designed to 'shake up' the shorts. Good link: Poole Skipped Fed's Conference to Maintain Secrecy (Update1):

Ben Bittrolff said...

Here is good post explaining why Bernanke chose to cut the discount rate on an option expiration Friday: Daily Options Report:

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