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November 20, 2007
We Are In The Second Inning
Freddie missed earnings estimates this morning in a big way and the company hacked net assets (fair value) lower by more than $8 billion. Just imagine what trouble Freddie could get into if their caps were loosened and the company was allowed to run wild in the subprime arena.
Also this morning, speculation is running hot that the Fed will/is holding an emergency meeting to cut interest rates. Marketwatch also contends that a U.S. dollar intervention is in the works:
“After the big market drop on Monday, traders speculated that the Federal Reserve may step in with an emergency rate cut, talk that helped to lift international stock markets. There also was speculation of intervention to help the beleaguered U.S. dollar.”
How exactly can Bernanke and company package another rate cut and support the dollar at the same time? Simple, convince OPEC to reaffirm their love for USD, get other central banks around the world to start cutting rates, and then find someway to inflict severe [protectionism?] damage on the Chinese economy if the Yuan doesn’t immediately start doing some of the ‘rebalancing’ lifting.
More Foul Balls Around The Corner
To get an idea of how far we are into ‘the crash’ (for lack of a better term), the following quote from Bloomberg will suffice:
“Banks and securities firms worldwide have already reported about $50 billion in losses from subprime mortgages, loans given to borrowers with weak credit that have been defaulting at a record pace. The total damage may reach $400 billion, Deutsche Bank analysts said last week.”
400 divided by 9 equals 44.4. Meaning we are less than $5.6 billion worth of destruction into the $44 billion second inning. Hooray! After another $38.8 billion of paper wealth is destroyed only another seven innings to go!
While the $50 billion figure may not be up to the second and the $400 billion estimate may prove to high or low, the fact remains that a lot more pain is around the corner. Goldman Sachs, which agrees with Deutsche’s $400 billion ‘total damage’ figure, said in a recent report that total lending could take a $2 trillion hit. For fear of really scaring people I will leave these and other trillion dollar figures alone.
Suffice to say, if anyone really believes that a few more Fed rate cuts can cure what ails the U.S. economy and financial markets, it is obvious they don’t know baseball. To be sure, Bernanke’s job is to try to and make it to the seventh inning stretch without encountering zero bound interest rates. The hope is that by then the ‘de-coupling’ cheerleaders will have disappeared and the rest of the financial world, feeling as miserable as America, will wonder why they ever doubted the good ol’ USA…
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