Notes From Undergound: Its all Greek to them but not to us

There is news out of Dubai that authorities have created a support package to ease the stress on the Dubai economy, which has been hampered by credit problems. Dubai World has offered a much better restructuring deal than the market expected. The equity markets of the Gulf states has rallied off the news, giving some buoyancy to the U.S. equity market tonight. Also from the Mideast, we received news that the Bank of Israel raised rates today in an effort to deleaven the robust Israeli economy. This is another fringe economy moving to get ahead of the curve as the economic growth story is far better in the peripheries than in the advanced capitalist nations. We have advised that Stanley Fischer, the chief of the Bank of Israel, is one of the better central bankers and his knowledge of the global economy is very deep. Just like Reserve Bank of Australia Governor Glenn Stevens, we are beginning to see that the peripherals are trying to get ahead of the growth curve and are becoming more comfortable doing so.

The U.S. credit markets found a slight bid by Friday, but overall the long end of the market is being tested by increased supply of debt, the curtailing of the FED MBS purchase program, and anticipation that the unemployment situation is beginning to turn. Some analysts think that part of the recent selloff in the bond and note futures has been due to foreign selling of U.S. securities, but the DOLLAR has been too strong for this scenario to be in play … YET. The U.S. story is still mixed as there are some signs of improvement in corporate profitibility and the deterioration in the data has certainly stopped. The unemployment situation needs to improve quickly otherwise the balance sheet problems of the U.S. consumer will not be alleviated. If jobs don’t start to grow, the problems in the CMBS and MBS will continue to be a drag on the banks’ ability to lend. This is the next element in the “balance sheet recession” puzzle. If foreign lenders slow their bond purchases and long rates go higher as a result, the FED is going to have to rely on that fickle couple, Fannie and Freddie. The treasury may have to test the Christmas Eve decision of removing the caps on Freddie and Fannie losses and then we will find out exactly what the global financial system thinks of the FED and Treasury’s policies. Until then it is all Greek to us.

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2 Responses to “Notes From Undergound: Its all Greek to them but not to us”

  1. scott Says:

    im not understanding the fannie freddy comment near the end of the post. will fannie and freddy come in as buyers of mortgage paper in an effort to keep mortgage rates somewhat contained? maybe, if you get a moment you could talk about this situation a bit more. Thanks Yra!

  2. yra Says:

    scott–by removing the caps on fannie and freddie losses the FED will be able to dump the MBS ‘s that it has bought onto the Treasury’s balance sheet and giving them the task of unloading the massive amount of paper—will they be dumped at a loss or just allowed to be redeemed at expiry date—but the FED is anxious to clean up its balance sheet and return to an all treasury paper balance sheet—-bernanke said this at his testimony in questioning—they weren’t going to be in a hurry but I think they believe they can sell the stuff at minimal loss from where they bought it rather then utilizing Frannie and Freddie–but we will find out.we think their models are devoid of reality for they think the cost will be 20,30, 40 basis points but if we are not in a defaltionary spiral the market will exact a much greater price especially with all the new treasury debt coming to market to compete with the Fed’s MBS portfolio

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