Bridge Loans to ... Everywhere

by Ashraf Laidi
Sep 17, 2008 8:23 | 12 Comments

Now that the Fed has assumed 85% of AIG in return of an $80 bln bridge loan, the central bank has relegated monetary policy to near irrelevance as far as market impact of future measures. Repo purchases of $70 billion on Monday and $50 billion on Tuesday as well as $85 billion loan for AIG is equivalent to as many as three 25-bp rate cuts as far market reaction and magnitude of liquidity creation are concerned in terms of Fed's historical forays.

Given the increasingly short duration of resulting market rallies following Federal (Treasury and Fed) interventions, the US central bank is progressively re-writing the rules and making history as the only effective way to create some type of lasting market reaction.

This announcement risks further desensitizing markets at the next major intervention or buyout by the "authorities".

While on one hand the Fed is attempting to stick to the rules of attaining price stability by not cutting interest rates, it has broken all rules of bailout and moral hazard.

Finally, this is a deja vu situation of the Fed's disappointing Dec 11th announcement to cut rates by only 25 bps, only to be forced by markets the next day to provide record liquidity alongside European central banks.

Will the Fed now take over Ford or GM?

FOREX REACTION Risk Appetite Pendulum swings back to the upside, boosting high yielding currencies against the yen, while the dollar is falling against all currencies except the yen, suggesting the market interpretation of the AIG bailout is not a dollar positive story but rather positive for risk appetite. Gold hits new session high at $785 per ounce. The next question is how short-lived will the latest surge in appetite be?

Comments (Showing latest 10 of 12) View All Comments
J king
Arizona, United States
Posted Anonymously
11 years ago
Sep 21, 2008 13:53
Hi Asfraf

I am looking for direction on the eur/usd from here as I have moved to the sidelines

I can see why analysts are saying that the dollar rise against the Eur is over but am looking to developments in Asia which are making me continue buying dollars on any long pullbacks

The yen seems to have strong momentum against the Eur over a 6 mth horizon and has a much further potential to travel as apposed to the Yen usd which is stalled ahead of the big 100 figure

This brings me to think that the action in these pairs might through the cross rate be the determining factor in bringing the usd back toward the 1.38 are versus Eur

You can allready see the violent swings in action at the moment as the Asian markets hand over to the opening of the London forex. This kind of seesawing dicotomy of a situation also occured back around the year 2000 and I remember trading the swings for a while. The volatility is far more extreme now but it strikes me as a similar kind of arbitrage type of situation.

harmonycptl
United States
Posted Anonymously
11 years ago
Sep 18, 2008 21:08
In full agreement. Went long gold when it dropped to 770-775 range. Have taken some profits as price mved above 900 (my four year old son is eating me out of house and home), but left the major part of my position open long.

I cannot think of a more exciting time to be in this business. This is a historic moment in the markets.

Ashraf Laidi
London, UK
Posts: 0
11 years ago
Sep 18, 2008 20:43
H Jason, yes i remember. Staying long gold remains the better long term strategy. Dow needed a catalyst to recover, but 10K seems inevitable.
harmonycptl
California, United States
Posted Anonymously
11 years ago
Sep 18, 2008 19:15
Correction your lecture was given on Friday the 12th. of Sept.
harmonycptl
California, United States
Posted Anonymously
11 years ago
Sep 18, 2008 15:48
My name is Jason Smith.

I sat in the front row at the Sept 13th lecture at Mandalay Bay, Jasmine room GH.
Grey hair, glasses, and I believe I was wearing a short sleave sport shirt and grey slacks.

We spoke rigfht after the lecture, and then later in the exhibit hall. I have sent an email to your CMCMARKETS address.

I studied under Professor Eisner at Northwestern University, and Professors Simmler and Coen at the University of Minnesota.

I also see Macro problems looming as the Fed has been covering the markets bad bets by "chasing after bad money with good" - eventually all of this will lead to rate cuts and inflation, and if oil ratchets up in price as the dollar weakens, stagflation, as the industrial and consumer sectors of the economy grind to a halt on capital flight to safety. The markets have already shown expectations of this happening: Gold appreciated yesterday by it's greatest amount in ten years, Oil is marching back over $100 bbl. and LIBOR rates are increasingly volatile. Everywhere in the marets there is fear of the unknown.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Sep 18, 2008 10:40
Where were you sitting at the conference? what's your name? Regarding inv banks, the devaluation is taking place as we speak. Is it fundamentally correct for these to trade at $1.00? Surely not. but it will take very long time for them to make any sustainable turnaround. many blame this on "undue fear". Next comes further deterioration in the macroeconomic fundamentals, a topic that is overshadowed by the market events.
harmonycptl
California, United States
Posted Anonymously
11 years ago
Sep 18, 2008 5:32
Yes - I have read the article and attended your lecture at the Las Vegas conference.

The gold/oil ratio gives a concise view of sentiment and fundamentals together. Simple and insightful at the same time as well, it is an indicator I will continue to use.

Do you believe there are further surprises in store as the balance sheets of AIG, Lehman, Merril et al. are fully scrutinized by their new masters, and assets are given a real valuation as opposed to what is listed? If eighty five cents on the dollar on balance, becomes 8.5 cents in reality every other investment house will have to revalue their balance sheets accordingly and we could see further worsening of the credit markets. Any thoughts?
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Sep 18, 2008 3:15
Hi Harmonycptl, thanks for the comments. As a matter of fact, just yesterday I was at the FT conference warning them about further increases in the gold/oil ratio. I also wrote a 2 1/2 page article in this month's issue of FUTURES, where predicted gold to rise relative to oil and drag down the dollar. these are interesting times, but the conistently shortlived rallies in the market are a spectacular opprtunity to get back in on the short side (long CHF and JPY vs high yielders and USD). It is remarkable and a great opportunity. but careful from violent short term rallies in equities. we're breaching key technical levels.
harmonycptl
California, United States
Posted Anonymously
11 years ago
Sep 17, 2008 21:42
USD/JPY retracement finding resistance at 105.13 as Key Pivot and Fib numbers converge.

Potential CAD/JPY break out on Oil pricing which is magnified by relative USD weakness.

USD/CAD in full retreat taking out support.

Tip of my hat to you Mr. Laidi for your discussion on the gold/oil ratio. I believe markets are behaving in anticipation of rising oil ( and possibly wheat) prices and looking at the relative health of the economy in the coming months. Assets are falling relative to rising cost expectations
harmonycptl
California, United States
Posted Anonymously
11 years ago
Sep 17, 2008 17:25
USD/CAD hitting strong resistance as it approaches monthly highs of 1.0821.
I believe buyer exhaution is imminent and am shorting at 1.08025 - high potential for bull traps and rapid sell-off - with stop set at 1.0825, just above monthly high.