Consumer Confidence is Down in August Says the Conference Board
Excerpts below from an article from Market Watch, indicates the consumer confidence is lower in August. It appears that the consumer is losing some confidence in the near term economy. This still needs to play out a little more, but a number of the components of this index are moving in the wrong direction.
Softening economic conditions and volatility in financial markets led to a sharp decline in U.S. consumer confidence in August, the Conference Board said Tuesday.
The consumer confidence index fell to 105.0 in August from a revised 111.9 in July, which was a cyclical high, the private economic research group said.
This is the lowest level of confidence since August 2006 and the biggest drop since the aftermath of Hurricane Katrina in September 2005.
Lynn Franco, director of the Conference Board's research center, said the continued problems stemming from the woes in subprime mortgages may have played a role in the drop in confidence, but softening business and labor market conditions were also factors.
Ken Goldstein, an economist with the Conference Board, said in an interview with cable network CNBC that the index was "nowhere close to a recession right around the corner," and said consumers were showing resilience.
"This number is still above 100. If we were about to go into recession, this number would be a good 30 to 40 points lower," Goldstein said.
The number of consumers saying conditions are "good" dropped to 26.4% in August from 28.3% in July. Those claiming conditions are "bad" increased to 16.3% from 14.5%.
The assessment of the labor market was less favorable than last month. Those saying jobs are "hard to get" rose to 19.7% from 18.7% in July. (my emphasis)
Tuesday, August 28, 2007
The Case-Shiller Home Price Index Down in July
It looks like along with declining home sales there are continuing price declines as well. There are some quotes in the Market Watch article below that are interesting. Also the original press release from S&P has some interesting tables and graphs.
U.S. home prices fell at a faster rate in the second quarter, down 3.2% compared with the same period in 2006, Standard & Poor's reported Tuesday.
It marked the largest year-over-year decline ever recorded in the 20-year history of the Case-Shiller home price index.
A year ago, home prices were rising at a 7.5% pace nationally.
"The pullback in the U.S. residential real-estate market is showing no signs of slowing down," said Robert Shiller, chief economist at MacroMarkets LLC, which computes the price index for S&P.
In an interview with MarketWatch, Shiller noted that the figures were for activity ending in June -- well before the more recent blowup in the mortgage markets.
"This slow-burn downswing probably has a long way to go," wrote Charles Dumas, an economist for London's Lombard Street Research. "The backlog of unsold homes has reached a level at which buyers are likely to get nasty, insisting on deep price cuts. As repossessed homes come on the market over the next 18 months, downward pressure on home prices and whole neighbourhoods will intensify." (my emphasis)
"We are fast approaching the rate of price decline seen at the end of the 1990-91 recession, and the odds strongly favor blowing past this mark in coming months," wrote Joshua Shapiro, chief economist for MFR Inc. "With supply overhang growing and mortgage financing tougher to obtain, home prices are going to soften considerably further in the quarters ahead."
The last time prices fell so much, it took more than eight years for home prices to return to their peak level.
It looks like along with declining home sales there are continuing price declines as well. There are some quotes in the Market Watch article below that are interesting. Also the original press release from S&P has some interesting tables and graphs.
U.S. home prices fell at a faster rate in the second quarter, down 3.2% compared with the same period in 2006, Standard & Poor's reported Tuesday.
It marked the largest year-over-year decline ever recorded in the 20-year history of the Case-Shiller home price index.
A year ago, home prices were rising at a 7.5% pace nationally.
"The pullback in the U.S. residential real-estate market is showing no signs of slowing down," said Robert Shiller, chief economist at MacroMarkets LLC, which computes the price index for S&P.
In an interview with MarketWatch, Shiller noted that the figures were for activity ending in June -- well before the more recent blowup in the mortgage markets.
"This slow-burn downswing probably has a long way to go," wrote Charles Dumas, an economist for London's Lombard Street Research. "The backlog of unsold homes has reached a level at which buyers are likely to get nasty, insisting on deep price cuts. As repossessed homes come on the market over the next 18 months, downward pressure on home prices and whole neighbourhoods will intensify." (my emphasis)
"We are fast approaching the rate of price decline seen at the end of the 1990-91 recession, and the odds strongly favor blowing past this mark in coming months," wrote Joshua Shapiro, chief economist for MFR Inc. "With supply overhang growing and mortgage financing tougher to obtain, home prices are going to soften considerably further in the quarters ahead."
The last time prices fell so much, it took more than eight years for home prices to return to their peak level.
Monday, August 27, 2007
Existing Home Sales Are Down in July
Existing home sales, which comprises the lion’s share of the home sales, is down again in July according to NAR. Existing home sales are down 9.2% from July of last year. As an aside new home sales were down 10.2% from the same period last year. The disturbing number is that the inventory is up to 9.6 month supply. This will only get worse as the market moves into the slower fall and winter months, plus the next big surge of ARM re-sets occurs from October through February. It would not be surprising to see the inventory number approach 11 or 12 months.
Another thing that should be considered, but is difficult to quantify is shadow supply. Those the are people that want to sell, but have pulled their homes off the market due to market conditions. When you consider, the inventory, potential inventory from the ARM resets over the next 6 months, shadow supply, illiquidity in the mortgage markets, tougher underwriting criteria, and the effect that all of this will have on the economy it is difficult to be optimistic until 2009 at the earliest and more than likely it will be 2010 before the market bottoms out.
Total existing home sales, including single-family, townhomes, condominiums and co-ops – slipped 0.2 percent to a seasonally adjusted annual rate1 of 5.75 million units in July from an upwardly revised pace of 5.76 million in June, and are 9.0 percent below the 6.32 million-unit level in July 2006.
The national median existing-home price2 for all housing types was $228,900 in July, down 0.6 percent from July 2006 when the median was $230,200, the highest monthly price on record. The median is a typical market price where half of the homes sold for more and half sold for less.
Total housing inventory rose 5.1 percent at the end of June to 4.59 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, up from an upwardly revised 9.1-month supply in June.
Existing home sales, which comprises the lion’s share of the home sales, is down again in July according to NAR. Existing home sales are down 9.2% from July of last year. As an aside new home sales were down 10.2% from the same period last year. The disturbing number is that the inventory is up to 9.6 month supply. This will only get worse as the market moves into the slower fall and winter months, plus the next big surge of ARM re-sets occurs from October through February. It would not be surprising to see the inventory number approach 11 or 12 months.
Another thing that should be considered, but is difficult to quantify is shadow supply. Those the are people that want to sell, but have pulled their homes off the market due to market conditions. When you consider, the inventory, potential inventory from the ARM resets over the next 6 months, shadow supply, illiquidity in the mortgage markets, tougher underwriting criteria, and the effect that all of this will have on the economy it is difficult to be optimistic until 2009 at the earliest and more than likely it will be 2010 before the market bottoms out.
Total existing home sales, including single-family, townhomes, condominiums and co-ops – slipped 0.2 percent to a seasonally adjusted annual rate1 of 5.75 million units in July from an upwardly revised pace of 5.76 million in June, and are 9.0 percent below the 6.32 million-unit level in July 2006.
The national median existing-home price2 for all housing types was $228,900 in July, down 0.6 percent from July 2006 when the median was $230,200, the highest monthly price on record. The median is a typical market price where half of the homes sold for more and half sold for less.
Total housing inventory rose 5.1 percent at the end of June to 4.59 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, up from an upwardly revised 9.1-month supply in June.
Sunday, August 26, 2007
Another Move by the Fed to Work with the Big Banks
The Fed made another move this last week to work with the big banks. This move allows the banks to move more capital their the brokerage subsidiaries. The problem is, I am not sure why this is happening. Is it because the brokerage subsidiaries are having liquidity issues or is it to facilitate the movement of capital into the markets? From CNNMoney.com:
The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.
This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed's move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don't have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed's discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity. (my emphasis)
On Wednesday, Citibank and Bank of America said that they and two other banks accessed $500 million in 30-day financing at the discount window. A Citigroup spokesperson declined to comment. Bank of America dismissed the notion that Banc of America Securities is not well positioned to fund operations without help from the federally insured bank. "This is just a technicality to allow us to use our regular channels of business with funds from the Fed's discount window," says Bob Stickler, spokesperson for Bank of America. "We have no current plans to use the discount window beyond the $500 million announced earlier this week."
There is a good chance that other large banks have been granted similar exemptions. The Federal Reserve and J.P. Morgan didn't immediately comment.
The regulations in question effectively limit a bank's funding exposure to an affiliate to 10% of the bank's capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, "that represents about 30% of Citibank's total regulatory capital, which is no small exemption," says Charlie Peabody, banks analyst at Portales Partners.
The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in "the most rapid and cost-effective manner possible."
So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.
Sure, the temporary nature of the move makes it look slightly less serious, but the Fed didn't give a date in the letter for when this exemption will end. In addition, the sheer size of the potential lending capacity at Citigroup and Bank of America - $25 billion each - is a cause for unease.
Indeed, this move to exempt Citigroup casts a whole new light on the discount window borrowing that was revealed earlier this week. At the time, the gloss put on the discount window advances was that they were orderly and almost symbolic in nature. But if that were the case, why the need to use these exemptions to rush the funds to the brokerages?
Expect the discount window borrowings to become a key part of the Fed's recovery strategy for the financial system. The Fed's exemption will almost certainly force its regulatory arm to sharpen its oversight of banks' balance sheets, which means banks will almost certainly have to mark down asset values to appropriate levels a lot faster now. That's because there is no way that the Fed is going to allow easier funding to lead to a further propping up of asset prices.
Don't forget: The Federal Reserve is in crisis management at the moment. However, it doesn't want to show any signs of panic. That means no rushed cuts in interest rates. It also means that it wants banks to quickly take the big charges that will inevitably come from holding toxic debt securities. And it will do all it can behind the scenes to work with the banks to help them get through this upheaval. But waiving one of the most important banking regulations can only add nervousness to the market. And that's what the Fed did Monday in these disturbing letters to the nation's two largest banks. (my emphasis)
The Fed made another move this last week to work with the big banks. This move allows the banks to move more capital their the brokerage subsidiaries. The problem is, I am not sure why this is happening. Is it because the brokerage subsidiaries are having liquidity issues or is it to facilitate the movement of capital into the markets? From CNNMoney.com:
The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.
This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed's move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don't have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed's discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity. (my emphasis)
On Wednesday, Citibank and Bank of America said that they and two other banks accessed $500 million in 30-day financing at the discount window. A Citigroup spokesperson declined to comment. Bank of America dismissed the notion that Banc of America Securities is not well positioned to fund operations without help from the federally insured bank. "This is just a technicality to allow us to use our regular channels of business with funds from the Fed's discount window," says Bob Stickler, spokesperson for Bank of America. "We have no current plans to use the discount window beyond the $500 million announced earlier this week."
There is a good chance that other large banks have been granted similar exemptions. The Federal Reserve and J.P. Morgan didn't immediately comment.
The regulations in question effectively limit a bank's funding exposure to an affiliate to 10% of the bank's capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, "that represents about 30% of Citibank's total regulatory capital, which is no small exemption," says Charlie Peabody, banks analyst at Portales Partners.
The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in "the most rapid and cost-effective manner possible."
So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.
Sure, the temporary nature of the move makes it look slightly less serious, but the Fed didn't give a date in the letter for when this exemption will end. In addition, the sheer size of the potential lending capacity at Citigroup and Bank of America - $25 billion each - is a cause for unease.
Indeed, this move to exempt Citigroup casts a whole new light on the discount window borrowing that was revealed earlier this week. At the time, the gloss put on the discount window advances was that they were orderly and almost symbolic in nature. But if that were the case, why the need to use these exemptions to rush the funds to the brokerages?
Expect the discount window borrowings to become a key part of the Fed's recovery strategy for the financial system. The Fed's exemption will almost certainly force its regulatory arm to sharpen its oversight of banks' balance sheets, which means banks will almost certainly have to mark down asset values to appropriate levels a lot faster now. That's because there is no way that the Fed is going to allow easier funding to lead to a further propping up of asset prices.
Don't forget: The Federal Reserve is in crisis management at the moment. However, it doesn't want to show any signs of panic. That means no rushed cuts in interest rates. It also means that it wants banks to quickly take the big charges that will inevitably come from holding toxic debt securities. And it will do all it can behind the scenes to work with the banks to help them get through this upheaval. But waiving one of the most important banking regulations can only add nervousness to the market. And that's what the Fed did Monday in these disturbing letters to the nation's two largest banks. (my emphasis)
Saturday, August 25, 2007
Problems in the Credit and Stock Markets Are Not Over Yet
The article below from the Financial Post (Canada) gives another perspective on the markets. I prefer the views from outside the US, they tend to be less inclined to see the world through rose colored glasses.
Stock and bond markets regained a modicum of stability yesterday, but ongoing gyrations in the commercial-paper market indicate the U.S. subprime crisis is far from over and the risk of further financial-market contagion remains high.
Short-term U.S. government paper remains the haven of choice for rattled investors as they wait to see whether the Federal Reserve's discount rate manoeuvring and liquidity injections will be enough to prevent a seizure of the financial system or damage to the underlying U.S. economy.
Economists, who only weeks ago almost uniformly predicted the subprime-mortgage mess would remain "contained," are now all over the map with their prognostications, (my emphasis) while interest-rate futures predict the Fed will ultimately have to ride to the rescue with cuts to its more influential target rate.
Stock markets, usually considered more flighty than the more cerebral debt markets, may hold the key to how the drama unfolds.
On the pessimistic side, Stephen King, group chief economist at HSBC in London, wrote in a note: "Should the panic exhibited over the last few days turn into revulsion, the markets may never be the same again. The implied liquidity drain might leave the financial system, and the broader economy, more vulnerable than we currently believe."
The world economy "is now at risk from financial market seizure," he added.
Debt-rating agency Moody's Investors Service Inc. is adamant, however, that the global financial system can absorb the massive deleveraging going on.
"We continue to believe that, notwithstanding possible earnings depression due to asset impairment, higher funding costs and lower business volumes, the 'core' of the system is comfortably shock resistant."
While there may be problems at the periphery -- two small German banks have already triggered a bailout -- Moody's said core financial institutions such as the largest and most sophisticated U.S. and international financial firms have a "pretty high" pain threshold, higher even than in 1998 when the system was also under stress.
Still, it is clear that financial institutions all over the globe are now scrambling to off-load tainted debt. Yields on three-month U.S. T-bills tumbled more on Monday than on Black Monday in October, 1987, as investors fled money-market funds that may have exposure to debt linked to subprime loans or asset-backed commercial paper.
In the United States, half the US$1-trillion asset-backed commercial-paper market comes due in the next 60 days and buyers are likely to be scarce.
Dominic Konstam, head of interest rates at Credit Suisse First Boston in New York, said parts of the debt market are already constricting. "Illiquidity is showing up everywhere, even in the rates market, the swaps market, he repo market is going ballistic," he said.
Banks are getting unwanted collateral on their balance sheets. "Either because a [commercial paper] program fails or because there's a hedge-fund margin call and hedge funds are liquidating positions or ... because they've got a pipeline of corporate loans they can't get rid of because they can't collateralize them anymore, so they're having to finance these assets."
To ease the constraints, the Fed cut the rate it charges to banks to borrow to 5.75% from 6.25% on Friday. But interest-rate futures are still expecting it to cut the rate banks charge each other by at least 25 basis points on Sept. 18., or even sooner.
However, Mr. Konstam said the Fed will hold out as long as possible to see if its liquidity moves work.
"At the end of the day, you're probably not going to see that much borrowing going on [at the discount window] and that means that for all the panic and screaming out of Wall Street, banks are finding ways of financing themselves without too much stress, without sort of wholesale liquidation of these assets at rock-bottom prices."
Companies, which have had robust profits, have not really had to borrow much this cycle, except to fund their takeover binges, he said. It is only when they start having trouble finding funding to build a factory or expand a plant that the liquidity crisis turns into a crunch, which could hurt the underlying economy.
With debt markets now wrapped in a blanket of fear, it is share prices that are probably now in a better position to sniff out whether this is happening. If they start to seriously crumble again, the Fed will likely move forward with a cut to the fed funds target, moral hazard be damned.
The article below from the Financial Post (Canada) gives another perspective on the markets. I prefer the views from outside the US, they tend to be less inclined to see the world through rose colored glasses.
Stock and bond markets regained a modicum of stability yesterday, but ongoing gyrations in the commercial-paper market indicate the U.S. subprime crisis is far from over and the risk of further financial-market contagion remains high.
Short-term U.S. government paper remains the haven of choice for rattled investors as they wait to see whether the Federal Reserve's discount rate manoeuvring and liquidity injections will be enough to prevent a seizure of the financial system or damage to the underlying U.S. economy.
Economists, who only weeks ago almost uniformly predicted the subprime-mortgage mess would remain "contained," are now all over the map with their prognostications, (my emphasis) while interest-rate futures predict the Fed will ultimately have to ride to the rescue with cuts to its more influential target rate.
Stock markets, usually considered more flighty than the more cerebral debt markets, may hold the key to how the drama unfolds.
On the pessimistic side, Stephen King, group chief economist at HSBC in London, wrote in a note: "Should the panic exhibited over the last few days turn into revulsion, the markets may never be the same again. The implied liquidity drain might leave the financial system, and the broader economy, more vulnerable than we currently believe."
The world economy "is now at risk from financial market seizure," he added.
Debt-rating agency Moody's Investors Service Inc. is adamant, however, that the global financial system can absorb the massive deleveraging going on.
"We continue to believe that, notwithstanding possible earnings depression due to asset impairment, higher funding costs and lower business volumes, the 'core' of the system is comfortably shock resistant."
While there may be problems at the periphery -- two small German banks have already triggered a bailout -- Moody's said core financial institutions such as the largest and most sophisticated U.S. and international financial firms have a "pretty high" pain threshold, higher even than in 1998 when the system was also under stress.
Still, it is clear that financial institutions all over the globe are now scrambling to off-load tainted debt. Yields on three-month U.S. T-bills tumbled more on Monday than on Black Monday in October, 1987, as investors fled money-market funds that may have exposure to debt linked to subprime loans or asset-backed commercial paper.
In the United States, half the US$1-trillion asset-backed commercial-paper market comes due in the next 60 days and buyers are likely to be scarce.
Dominic Konstam, head of interest rates at Credit Suisse First Boston in New York, said parts of the debt market are already constricting. "Illiquidity is showing up everywhere, even in the rates market, the swaps market, he repo market is going ballistic," he said.
Banks are getting unwanted collateral on their balance sheets. "Either because a [commercial paper] program fails or because there's a hedge-fund margin call and hedge funds are liquidating positions or ... because they've got a pipeline of corporate loans they can't get rid of because they can't collateralize them anymore, so they're having to finance these assets."
To ease the constraints, the Fed cut the rate it charges to banks to borrow to 5.75% from 6.25% on Friday. But interest-rate futures are still expecting it to cut the rate banks charge each other by at least 25 basis points on Sept. 18., or even sooner.
However, Mr. Konstam said the Fed will hold out as long as possible to see if its liquidity moves work.
"At the end of the day, you're probably not going to see that much borrowing going on [at the discount window] and that means that for all the panic and screaming out of Wall Street, banks are finding ways of financing themselves without too much stress, without sort of wholesale liquidation of these assets at rock-bottom prices."
Companies, which have had robust profits, have not really had to borrow much this cycle, except to fund their takeover binges, he said. It is only when they start having trouble finding funding to build a factory or expand a plant that the liquidity crisis turns into a crunch, which could hurt the underlying economy.
With debt markets now wrapped in a blanket of fear, it is share prices that are probably now in a better position to sniff out whether this is happening. If they start to seriously crumble again, the Fed will likely move forward with a cut to the fed funds target, moral hazard be damned.
Gold #12 – The Part That Gold Has Played in Past Crisis and the Gold Market Today
Excerpts below from a Market Watch article discuss gold prices in past financial crisis and how the gold market is different today than from times past.
As frustrating and unpredictable as gold has been in the past few years, it parallels history at times -- and sometimes it's anyone's guess. Analysts blame that on the metal's changing market.
"The entrée of large institutional players have most definitely altered the gold landscape to the point where it is no longer the same old game," said Jon Nadler, a senior analyst at Kitco Bullion Dealers. "This new reality has infused additional volatility and counter-intuitive trading patterns into the gold market equation," he said.
So in short, you can learn a lot about gold and where it may go by comparing it to what it's done before in similar situations but in the end, you may end up without a clue.
Take some of the market crashes of the past for example.
"There are certainly some parallels that can be drawn with 1987, 1929 and the 1970s," said Mark O'Byrne, director of GoldandSilverInvestments.com.
He stressed the word "parallels" and insisted that no one can actually "compare any one previous market crisis or crash as they are all so different."
And as investors "tread through the ongoing credit crisis," gold will likely act very differently than it has during past stock market corrections or crashes, said David Beahm, vice president of marketing and economic research at Blanchard.
It's difficult to know how this crisis will evolve; there are so many variables, said O'Byrne. And how the U.S. government and the Federal Reserve responds to the situation will largely "dictate whether a coming recession is deflationary, hyperinflationary or a virulent strain of stagflation."
"Gold would perform differently in each type of recession," O'Byrne explained. Gold would be the "asset class to own in a hyperinflationary or severe stagflationary scenario as it was in the brutal hyperinflation in Germany in the 1920s and in the stagflationary U.S. in the 1970s," he said.
In a deflationary scenario, gold prices might fall along with stocks and property, but fall by "far less" than other asset classes, he said.
In that scenario, a "combination of gold, but also cash, treasuries and conservative, fiscally prudent government bonds would be where investors should protect their wealth," he said.
Nadler said that while gold has historically fallen along with the value of other assets during times of deflationary crises, it's usually been in the initial stages.
"This time around, things may be different, insofar as both such a decline as well as any subsequent recovery may well be intensified by the presence of institutional players in the marketplace," he said.
"The gold market is much broader than in the past, and [most importantly] there are new players in the equation [hedge funds for one] whose trading motivation and patterns may not only go counter to the intuition and behavior of individual investors, but who have shown a predilection for treating gold as simply another asset without regard to its historical attributes," Nadler said.
A study of past recessionary periods will help traders come to some sort of conclusion or prediction on the gold market, but that should only be a reference point because so much of gold's market has changed.
Ned Schmidt, editor of the Value View Gold Report, points out that up and into the 1930s, central banks "hoarded" gold and private ownership was banned. That situation doesn't exist today.
And in 1929, gold was backed by the dollar (I thought the dollar was backed by gold?) and "thus did not fluctuate in price," said O'Byrne. "When stocks lost 90% of their value, gold was money and retained its value 100%."
Gold was then revalued to $35 from $22, or by some 60%, in 1933, he said. So "even in a massive deflationary event, gold massively outperformed all asset classes and performed its safe-haven role."
During the stock market crash in 1987, the price of gold reacted positively -- at first, then it gave back its gains and more, according to Beahm.
The main difference between then and now, however, was gold's inability to move freely, he said.
In 1987, major gold producers were or were starting to use forward selling, or hedging, to their advantage. "This prohibited gold from moving freely and behaving as a safe haven for investors long term," he said. Now these producers are closing their hedge books.
"De-hedging reached a record high in the second quarter [of 2007] as a wave of buybacks led to a provisional 5.2 million-ounce cut" from gold producers' hedge books, precious metals consultancy GFMS reported Tuesday, in a study complied for Societe Generale.
"Since major dehedging began in 2002, gold has begun to move more freely and the price of gold has increased more than 100%," said Beahm.
So what's happening now? Plenty.
Current catalysts for gold prices include: inflation, especially global inflation, geopolitical concerns, rising demand for gold, moves in the dollar and others -- in addition to the global financial crisis, said Dan Hassey, a senior research analyst for Boca Raton, Fla.-based Gold & Energy Advisor.
Some believe a lot of those factors are already in the price of gold and that's why gold has not moved much -- it's already doubled in the last five years with investors having anticipated some of these problems and bidding up the price, he said.
Even so, the seriousness of the financial situation is obvious. "A massive liquidity hole has opened in Europe as a consequence of the collapse of the U.S. mortgage market," said Ned Schmidt, editor of the Value View Gold Report. And "the pipeline for money from investors to the real economy is being ripped up."
Brien Lundin, editor of Gold Newsletter, considers the current financial situation to be a "crisis ... similar to previous pricked bubbles."
The situation is characterized by repeated liquidity crunches in which overblown markets have forced speculators to raise cash as markets either tumble or completely shut down, he said.
"Gold has been victimized by this, as it has served as a ready source of liquidity for those desperate to raise cash," he said.
The rush to liquidity and safety at a time like this first targets cash and related instruments, said Kitco's Nadler.
"If the crisis develops into a real dire event, gold ultimately benefits by either falling less in a deflation or by rising as the official sector prints its way out of trouble and creates inflation," he said.
Excerpts below from a Market Watch article discuss gold prices in past financial crisis and how the gold market is different today than from times past.
As frustrating and unpredictable as gold has been in the past few years, it parallels history at times -- and sometimes it's anyone's guess. Analysts blame that on the metal's changing market.
"The entrée of large institutional players have most definitely altered the gold landscape to the point where it is no longer the same old game," said Jon Nadler, a senior analyst at Kitco Bullion Dealers. "This new reality has infused additional volatility and counter-intuitive trading patterns into the gold market equation," he said.
So in short, you can learn a lot about gold and where it may go by comparing it to what it's done before in similar situations but in the end, you may end up without a clue.
Take some of the market crashes of the past for example.
"There are certainly some parallels that can be drawn with 1987, 1929 and the 1970s," said Mark O'Byrne, director of GoldandSilverInvestments.com.
He stressed the word "parallels" and insisted that no one can actually "compare any one previous market crisis or crash as they are all so different."
And as investors "tread through the ongoing credit crisis," gold will likely act very differently than it has during past stock market corrections or crashes, said David Beahm, vice president of marketing and economic research at Blanchard.
It's difficult to know how this crisis will evolve; there are so many variables, said O'Byrne. And how the U.S. government and the Federal Reserve responds to the situation will largely "dictate whether a coming recession is deflationary, hyperinflationary or a virulent strain of stagflation."
"Gold would perform differently in each type of recession," O'Byrne explained. Gold would be the "asset class to own in a hyperinflationary or severe stagflationary scenario as it was in the brutal hyperinflation in Germany in the 1920s and in the stagflationary U.S. in the 1970s," he said.
In a deflationary scenario, gold prices might fall along with stocks and property, but fall by "far less" than other asset classes, he said.
In that scenario, a "combination of gold, but also cash, treasuries and conservative, fiscally prudent government bonds would be where investors should protect their wealth," he said.
Nadler said that while gold has historically fallen along with the value of other assets during times of deflationary crises, it's usually been in the initial stages.
"This time around, things may be different, insofar as both such a decline as well as any subsequent recovery may well be intensified by the presence of institutional players in the marketplace," he said.
"The gold market is much broader than in the past, and [most importantly] there are new players in the equation [hedge funds for one] whose trading motivation and patterns may not only go counter to the intuition and behavior of individual investors, but who have shown a predilection for treating gold as simply another asset without regard to its historical attributes," Nadler said.
A study of past recessionary periods will help traders come to some sort of conclusion or prediction on the gold market, but that should only be a reference point because so much of gold's market has changed.
Ned Schmidt, editor of the Value View Gold Report, points out that up and into the 1930s, central banks "hoarded" gold and private ownership was banned. That situation doesn't exist today.
And in 1929, gold was backed by the dollar (I thought the dollar was backed by gold?) and "thus did not fluctuate in price," said O'Byrne. "When stocks lost 90% of their value, gold was money and retained its value 100%."
Gold was then revalued to $35 from $22, or by some 60%, in 1933, he said. So "even in a massive deflationary event, gold massively outperformed all asset classes and performed its safe-haven role."
During the stock market crash in 1987, the price of gold reacted positively -- at first, then it gave back its gains and more, according to Beahm.
The main difference between then and now, however, was gold's inability to move freely, he said.
In 1987, major gold producers were or were starting to use forward selling, or hedging, to their advantage. "This prohibited gold from moving freely and behaving as a safe haven for investors long term," he said. Now these producers are closing their hedge books.
"De-hedging reached a record high in the second quarter [of 2007] as a wave of buybacks led to a provisional 5.2 million-ounce cut" from gold producers' hedge books, precious metals consultancy GFMS reported Tuesday, in a study complied for Societe Generale.
"Since major dehedging began in 2002, gold has begun to move more freely and the price of gold has increased more than 100%," said Beahm.
So what's happening now? Plenty.
Current catalysts for gold prices include: inflation, especially global inflation, geopolitical concerns, rising demand for gold, moves in the dollar and others -- in addition to the global financial crisis, said Dan Hassey, a senior research analyst for Boca Raton, Fla.-based Gold & Energy Advisor.
Some believe a lot of those factors are already in the price of gold and that's why gold has not moved much -- it's already doubled in the last five years with investors having anticipated some of these problems and bidding up the price, he said.
Even so, the seriousness of the financial situation is obvious. "A massive liquidity hole has opened in Europe as a consequence of the collapse of the U.S. mortgage market," said Ned Schmidt, editor of the Value View Gold Report. And "the pipeline for money from investors to the real economy is being ripped up."
Brien Lundin, editor of Gold Newsletter, considers the current financial situation to be a "crisis ... similar to previous pricked bubbles."
The situation is characterized by repeated liquidity crunches in which overblown markets have forced speculators to raise cash as markets either tumble or completely shut down, he said.
"Gold has been victimized by this, as it has served as a ready source of liquidity for those desperate to raise cash," he said.
The rush to liquidity and safety at a time like this first targets cash and related instruments, said Kitco's Nadler.
"If the crisis develops into a real dire event, gold ultimately benefits by either falling less in a deflation or by rising as the official sector prints its way out of trouble and creates inflation," he said.
Friday, August 24, 2007
Another Perspective on the Credit Crunch – An Insolvency Crunch
My favorite author (Ambrose Evans-Pritchard) on financial matters from the UK gives his views of where we are headed. Strangely enough, this article does not demonstrate his usual sense of humor. Maybe Ambrose is getting worried. From the Telegraph.co.uk:
The liquidity crunch is not yet over: the insolvency crunch has hardly begun.
Yes, investors are jumping back into the stock markets, hoping this is just another routine shake-out - much like February 2007, or May 2006 - before the rally resumes. The `buy-on-dips’ orthodoxy dies hard.
And yes, speculators have renewed their leveraged bets on the yen and Swiss franc carry trades, borrowing cheap in Tokyo and Zurich to play global assets. The core belief is that nothing has really changed, that the world economy is still in rude good health.
Be very careful. Interest rates in Europe and Asia are that much higher now, with delayed effects starting to bite hard. Japan’s economy has stalled to 0.1pc growth in Q2; the euro-zone has slowed to 0.3pc; and China’s refusal to import (by currency manipulation) makes it a drain on world demand. Above all, the credit bubble that perpetuated the rally of the last eighteen months beyond its natural life has definitively burst.
Credit spreads on the iTraxx Crossover (a good barometer of corporate bonds) have ballooned 180 basis points since February. The cost of borrowing for most firms in Europe and North America has jumped from circa 6.5pc to 8.3pc, if they can get it.
Many cannot. Germany’s Chamber of Industry told me yesterday that it had been flooded with distress calls from family Mittlestand firms unable to roll over credit lines. In Canada and Australia, junior mining finance has dried up almost entirely.
Global junk bond issuance has been frozen for two months. Fresh sales of collateralized debt obligations – the CDOs of subprime notoriety: a $1 trillion sold last year - have all but stopped. Banks have yet to off-load $300bn of debt from leveraged buy-out deals, forcing them to keep the liabilities on their books. They are all snake-bitten now.
The private equity buy-out premium – which pushed up the price/earnings ratio on the MSCI-600 of “median” stocks to a record high of 20 in May - has vanished. The P/E ratios on the DOW 30 big stocks are much lower – because they are too big even for the big cat predators, KKR and Carlysle – but they are not low, given the late stage of the cycle. In reality, an earnings bubble and ultra-cheap credit have flattered profits.
So no, the world has changed, dramatically. Whether this means a protracted global downturn and a “profits recession” depends on how quickly the central banks choose to respond, and how far they are willing to go.
Ben Bernanke is looking hawkish to me, given the shock of what happened on Monday when yields on 3-month US Treasury notes plunged at the fastest pace ever recorded, a panic flight to safety that no living trader had ever seen before.
Why? Because trust had collapsed to such a degree that players with a lot of cash no longer believed it safe to leave wealth in bank accounts, or the money market funds of brokerage companies - (exposed as they are to short-term commercial paper and subprime CDOs). This did not occur after 9/11, or in the heat of the October 1987 crash. Nor did was there such a banking panic in October 1929. (it hit in August 1931). If you think this is of no importance, or that this will pass swiftly, you have a strong nerve.
“When you have a run on the money markets like this, it is bound to spill over into the real economy,” said Albert Edwards, global strategist at Dresdner Kleinwort. (my emphasis)
“We already thought there was a 40pc chance of a US recession before all this happened, but the risks are now much higher and don’t forget that rates on adjustable mortgages will keep rising until a peak next March, so the maximum pain will be in the second and third quarters of 2008,” he said
“There will be large bankruptcies, and liquidity is not going to help because too many people bet the farm at the top of the cycle, and they’re now insolvent. A lot more bodies are going to be floating to the surface before this is over,” he said.
The belief that Europe would somehow be insulated has been tested over the last two weeks. Two German banks have required bail-outs on subprime bets – Sachsen LB for Eu 17.3bn, IKB for Eu 8.1bn.
Alexander Stuhlmann, boss of WestLB, confessed that the German banking system was in a "not uncritical situation". Jochen Sanio, head of the German regulator BaFin, said a few days earlier that the country faced the worst banking crisis 1931. (my emphasis)
Hence the continued actions of the European Central Bank, which has quietly injected 85bn euros in extra liquidity so far this week, almost as much as it did on the first day of emergency stimulus in early August.
“Banks are still thirsty for credit, and the spreads have been amazing. This is not business as usual at all,” said Julian Callow, chief Eurozone economist for Barclays Capital and an expert in the arcane field of central bank operations. (He used to work for the Bank of England.)
To clarify: the ECB allotted an extra Eu 45bn extra through a `weekly refi’ on Tuesday; and then Eu 40bn in a 3-month offer on Wednesday to stop the short-term commercial paper market seizing up.
What we know is that 146 banks bid for loans on Wednesday, some clearly in such distress that they were willing to pay up to 5pc interest – a full 1pc above the ECB’s benchmark rate.
Just like the dotcom bust: when the US sneezes, Europe catches… you know the rest.
In a warped sense, one has to admire the cool way that Americans – who save nothing, in aggregate – tapped into the vast savings pool of thrifty Germans to finance their speculative excesses, and then left the creditors holding a chunk of the subprime losses.
My favorite author (Ambrose Evans-Pritchard) on financial matters from the UK gives his views of where we are headed. Strangely enough, this article does not demonstrate his usual sense of humor. Maybe Ambrose is getting worried. From the Telegraph.co.uk:
The liquidity crunch is not yet over: the insolvency crunch has hardly begun.
Yes, investors are jumping back into the stock markets, hoping this is just another routine shake-out - much like February 2007, or May 2006 - before the rally resumes. The `buy-on-dips’ orthodoxy dies hard.
And yes, speculators have renewed their leveraged bets on the yen and Swiss franc carry trades, borrowing cheap in Tokyo and Zurich to play global assets. The core belief is that nothing has really changed, that the world economy is still in rude good health.
Be very careful. Interest rates in Europe and Asia are that much higher now, with delayed effects starting to bite hard. Japan’s economy has stalled to 0.1pc growth in Q2; the euro-zone has slowed to 0.3pc; and China’s refusal to import (by currency manipulation) makes it a drain on world demand. Above all, the credit bubble that perpetuated the rally of the last eighteen months beyond its natural life has definitively burst.
Credit spreads on the iTraxx Crossover (a good barometer of corporate bonds) have ballooned 180 basis points since February. The cost of borrowing for most firms in Europe and North America has jumped from circa 6.5pc to 8.3pc, if they can get it.
Many cannot. Germany’s Chamber of Industry told me yesterday that it had been flooded with distress calls from family Mittlestand firms unable to roll over credit lines. In Canada and Australia, junior mining finance has dried up almost entirely.
Global junk bond issuance has been frozen for two months. Fresh sales of collateralized debt obligations – the CDOs of subprime notoriety: a $1 trillion sold last year - have all but stopped. Banks have yet to off-load $300bn of debt from leveraged buy-out deals, forcing them to keep the liabilities on their books. They are all snake-bitten now.
The private equity buy-out premium – which pushed up the price/earnings ratio on the MSCI-600 of “median” stocks to a record high of 20 in May - has vanished. The P/E ratios on the DOW 30 big stocks are much lower – because they are too big even for the big cat predators, KKR and Carlysle – but they are not low, given the late stage of the cycle. In reality, an earnings bubble and ultra-cheap credit have flattered profits.
So no, the world has changed, dramatically. Whether this means a protracted global downturn and a “profits recession” depends on how quickly the central banks choose to respond, and how far they are willing to go.
Ben Bernanke is looking hawkish to me, given the shock of what happened on Monday when yields on 3-month US Treasury notes plunged at the fastest pace ever recorded, a panic flight to safety that no living trader had ever seen before.
Why? Because trust had collapsed to such a degree that players with a lot of cash no longer believed it safe to leave wealth in bank accounts, or the money market funds of brokerage companies - (exposed as they are to short-term commercial paper and subprime CDOs). This did not occur after 9/11, or in the heat of the October 1987 crash. Nor did was there such a banking panic in October 1929. (it hit in August 1931). If you think this is of no importance, or that this will pass swiftly, you have a strong nerve.
“When you have a run on the money markets like this, it is bound to spill over into the real economy,” said Albert Edwards, global strategist at Dresdner Kleinwort. (my emphasis)
“We already thought there was a 40pc chance of a US recession before all this happened, but the risks are now much higher and don’t forget that rates on adjustable mortgages will keep rising until a peak next March, so the maximum pain will be in the second and third quarters of 2008,” he said
“There will be large bankruptcies, and liquidity is not going to help because too many people bet the farm at the top of the cycle, and they’re now insolvent. A lot more bodies are going to be floating to the surface before this is over,” he said.
The belief that Europe would somehow be insulated has been tested over the last two weeks. Two German banks have required bail-outs on subprime bets – Sachsen LB for Eu 17.3bn, IKB for Eu 8.1bn.
Alexander Stuhlmann, boss of WestLB, confessed that the German banking system was in a "not uncritical situation". Jochen Sanio, head of the German regulator BaFin, said a few days earlier that the country faced the worst banking crisis 1931. (my emphasis)
Hence the continued actions of the European Central Bank, which has quietly injected 85bn euros in extra liquidity so far this week, almost as much as it did on the first day of emergency stimulus in early August.
“Banks are still thirsty for credit, and the spreads have been amazing. This is not business as usual at all,” said Julian Callow, chief Eurozone economist for Barclays Capital and an expert in the arcane field of central bank operations. (He used to work for the Bank of England.)
To clarify: the ECB allotted an extra Eu 45bn extra through a `weekly refi’ on Tuesday; and then Eu 40bn in a 3-month offer on Wednesday to stop the short-term commercial paper market seizing up.
What we know is that 146 banks bid for loans on Wednesday, some clearly in such distress that they were willing to pay up to 5pc interest – a full 1pc above the ECB’s benchmark rate.
Just like the dotcom bust: when the US sneezes, Europe catches… you know the rest.
In a warped sense, one has to admire the cool way that Americans – who save nothing, in aggregate – tapped into the vast savings pool of thrifty Germans to finance their speculative excesses, and then left the creditors holding a chunk of the subprime losses.
With all the Problems Elsewhere, Growth in Asia Continues
It did not appear that the global credit crunch was effecting growth in Asia. Here seems to be some proof, from the WSJ:
Investors are watching every downtick in commodities prices as a potential sign that the credit crunch could torpedo global growth.
It might pay to glance at something else: the Baltic Exchange Dry Index, a lesser-known measure that is closely watched in grain and metals circles. Published by the Baltic Exchange, a ship-chartering marketplace in London for more than 250 years, the index reflects rates to transport bulk commodities such as coal, iron ore and grains in vessels from the relatively small to the gigantic.
Amid last Thursday's stock-market selloff, which also hit commodities, this index set a record. Since early August 2005, the BDI, as it is known, has more than quadrupled. Evan Smith, co-portfolio manager of U.S. Global Investors' Global Resources Fund, says the BDI's continued strength this week, just 1.1% off last week's peak, "is a good indicator that demand's not going away."
One reason the BDI has stayed high is China and other Asian countries have had to look farther away for commodities due to congestion in nearby Australia's ports. Shipping commodities from Brazil or Colombia takes vessels off the market for longer periods.
Gil Landy, a freight broker who also charters ships for agricultural cargoes for the Harrison, N.Y., commodity brokerage Pasternak, Baum & Co., also suggests watching the Baltic Exchange Panamax Index, which tracks the workhorse ships that carry grains as well as coal and metals and can navigate the Panama Canal. Panamax rates set a record on July 31 but have since fallen 3.9%.
Of course, supply and demand of ships can get out of whack and give a false indication of underlying commodity consumption. Dry-cargo rates also are high because shipyards in recent years have devoted more production capacity to oil tankers, Mr. Smith says. But Wednesday, BHP Billiton, the world's biggest miner, echoed the freight bulls when it said it didn't expect the credit squeeze to damp raw-material demand in China and India.
It did not appear that the global credit crunch was effecting growth in Asia. Here seems to be some proof, from the WSJ:
Investors are watching every downtick in commodities prices as a potential sign that the credit crunch could torpedo global growth.
It might pay to glance at something else: the Baltic Exchange Dry Index, a lesser-known measure that is closely watched in grain and metals circles. Published by the Baltic Exchange, a ship-chartering marketplace in London for more than 250 years, the index reflects rates to transport bulk commodities such as coal, iron ore and grains in vessels from the relatively small to the gigantic.
Amid last Thursday's stock-market selloff, which also hit commodities, this index set a record. Since early August 2005, the BDI, as it is known, has more than quadrupled. Evan Smith, co-portfolio manager of U.S. Global Investors' Global Resources Fund, says the BDI's continued strength this week, just 1.1% off last week's peak, "is a good indicator that demand's not going away."
One reason the BDI has stayed high is China and other Asian countries have had to look farther away for commodities due to congestion in nearby Australia's ports. Shipping commodities from Brazil or Colombia takes vessels off the market for longer periods.
Gil Landy, a freight broker who also charters ships for agricultural cargoes for the Harrison, N.Y., commodity brokerage Pasternak, Baum & Co., also suggests watching the Baltic Exchange Panamax Index, which tracks the workhorse ships that carry grains as well as coal and metals and can navigate the Panama Canal. Panamax rates set a record on July 31 but have since fallen 3.9%.
Of course, supply and demand of ships can get out of whack and give a false indication of underlying commodity consumption. Dry-cargo rates also are high because shipyards in recent years have devoted more production capacity to oil tankers, Mr. Smith says. But Wednesday, BHP Billiton, the world's biggest miner, echoed the freight bulls when it said it didn't expect the credit squeeze to damp raw-material demand in China and India.
The Last Week at the Discount Window
The excerpts below from a WSJ article on the discount window give a few more details about the extent of the borrowing at the Fed’s Discount Window.
Loans made from the Federal Reserve's little-used discount window shot up after the Fed eased borrowing terms and invited banks to borrow last Friday, though a sizable chunk was soon repaid, new data from the Fed show.
As of Wednesday, the only significant discount loans outstanding appeared to be the $2 billion in total announced with fanfare by the nation's four largest banks that day, according to weekly discount-window data released yesterday.
The data suggest that the Fed has had some initial success in getting banks to help in calming credit conditions, but whether that cooperation will continue or grow is an open question. Officials have played down the significance of the numbers, arguing that the very availability of the discount window should be a confidence booster, whether or not banks patronize it.
Analysts were divided on the significance of the data. "From the standpoint of trying to get some real liquidity into the market...by using the discount window, that part of the operation did not succeed," said Dave Greenlaw, economist at Morgan Stanley. The only institutions that borrowed, he noted, were the ones that borrowed after being encouraged to do so by the Fed. "That's real disappointing."
However, Lou Crandall, chief economist at Wrightson-ICAP LLC, took the opposite view. "The question is whether the knowledge that the discount window is available in the event of an unexpected liquidity need made a material difference in whether banks decided" to do more lending in the credit markets. While that will never be known, he noted that most markets started to improve soon after the Fed announced the easier borrowing conditions Friday, and those improvements have continued, though gradually.
On Friday, the Fed lowered the rate on discount-window loans to 5.75% from 6.25%, and lengthened the term of those loans to as much as 30 days from one day. In a conference call, the Fed also told bankers that taking loans from the discount window would be viewed as a sign of their strength, not weakness. Such loans have traditionally carried a stigma because they were usually a last resort for struggling banks. . . . .
. . . . . All five banks said they borrowed even though they had access to ample funds at lower cost elsewhere. Most said they did so to show "leadership" and encourage other banks to answer the Fed's call.
Fed officials acknowledge the banks don't need the money but hope they will lend it to creditworthy customers facing constrained financing conditions, helping restore normal trading conditions to now-sluggish debt markets. They also argue it could take some time for banks and their customers to figure out how best to exploit the window.
The excerpts below from a WSJ article on the discount window give a few more details about the extent of the borrowing at the Fed’s Discount Window.
Loans made from the Federal Reserve's little-used discount window shot up after the Fed eased borrowing terms and invited banks to borrow last Friday, though a sizable chunk was soon repaid, new data from the Fed show.
As of Wednesday, the only significant discount loans outstanding appeared to be the $2 billion in total announced with fanfare by the nation's four largest banks that day, according to weekly discount-window data released yesterday.
The data suggest that the Fed has had some initial success in getting banks to help in calming credit conditions, but whether that cooperation will continue or grow is an open question. Officials have played down the significance of the numbers, arguing that the very availability of the discount window should be a confidence booster, whether or not banks patronize it.
Analysts were divided on the significance of the data. "From the standpoint of trying to get some real liquidity into the market...by using the discount window, that part of the operation did not succeed," said Dave Greenlaw, economist at Morgan Stanley. The only institutions that borrowed, he noted, were the ones that borrowed after being encouraged to do so by the Fed. "That's real disappointing."
However, Lou Crandall, chief economist at Wrightson-ICAP LLC, took the opposite view. "The question is whether the knowledge that the discount window is available in the event of an unexpected liquidity need made a material difference in whether banks decided" to do more lending in the credit markets. While that will never be known, he noted that most markets started to improve soon after the Fed announced the easier borrowing conditions Friday, and those improvements have continued, though gradually.
On Friday, the Fed lowered the rate on discount-window loans to 5.75% from 6.25%, and lengthened the term of those loans to as much as 30 days from one day. In a conference call, the Fed also told bankers that taking loans from the discount window would be viewed as a sign of their strength, not weakness. Such loans have traditionally carried a stigma because they were usually a last resort for struggling banks. . . . .
. . . . . All five banks said they borrowed even though they had access to ample funds at lower cost elsewhere. Most said they did so to show "leadership" and encourage other banks to answer the Fed's call.
Fed officials acknowledge the banks don't need the money but hope they will lend it to creditworthy customers facing constrained financing conditions, helping restore normal trading conditions to now-sluggish debt markets. They also argue it could take some time for banks and their customers to figure out how best to exploit the window.
Sales of New Homes Up in July
The sale of one-family new homes was up in July 2.8% from June, but still down 10.2% from June of last year, according to the US Census Bureau and Market Watch. The number of homes on the market remains at a steady 7.5 months of supply.
Although higher than expected the numbers show continued weakness in the housing market.
The sale of one-family new homes was up in July 2.8% from June, but still down 10.2% from June of last year, according to the US Census Bureau and Market Watch. The number of homes on the market remains at a steady 7.5 months of supply.
Although higher than expected the numbers show continued weakness in the housing market.
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