Saturday, August 18, 2007

What Central Banks want...

17th of August. Friday. Fed lowered the interest rate of its discount window by 0.50%, from 6.25% to 5.75%.

The discount window is a place where banks can shove all kinds of weird and crappy assets to the Federal Reserve in order to get loans.

Notice how the discount window rate was 1% above the Fed target rate. The difference is in the Fed target rate, banks can only get that rate providing "approved" assets as collateral. While the discount window allows for all sorts of crap.

Before I say what central banks want. Lets begin with what they (supposedly) don't want.

1. They don't want to destroy the value of the currency.
2. They don't want to encourage failed practices of bad lending/investment ie. do not want to encourage moral hazard.

Now, what don't they mind...

1. They don't mind people having their equity wiped out.

Therefore, what they do want...

1. An orderly selling in order for prices to fall to a level that truly reflects the value of assets.

I was an angry man as a bear on Friday when the Fed made its move... Then I began looking into what I wrote last week...

Turns out that I was an angry man LAST FRIDAY too when the Fed stepped in to provide liquidity...

I suddenly realize, the Fed basically is hoping to do just enough to slow selling. Notice I used the word SLOW and not STOP.

Falling will proceed, perhaps like last week, when on Monday and Tuesday, equity prices barely moved after gapping up 200 pts to open on Monday.

But by Wednesday, the carnage reignited.

Also, part of the tactical reason to announce on the 17th August Friday, was because a lot of put options in the US was going to expire. By jacking up the market for Friday, a lot of bear's financial strength was weakened (mine certainly was), thereby reducing the desire and ability to further short the market. The effect will be SLOWED selling.

Falls of a couple hundred points a day for the HSI or a 100pts a day for Dow is highly acceptable to the Federal Reserve. The fed will have to see 1000pts drop on consecutive days to act again.

For all those people who says this is over. I can tell you this...

IT AIN'T over until every asset can be priced.
Then with all assets priced...

IT AIN'T over until those with no equity left is wiped out,
IT AIN'T over until banks announced their losses,
IT AIN'T over until
everyone knows where their balance sheet stands...

Then its over.

When it's over... do you think the market will be higher or lower than now?


  1. 一直都讚同孫柏文的分析,但是今次卻不太同意。而家美國佬借錢有聯儲局包底,班炒家有持無恐,仲唔大炒特炒?下星期金、銀、期貨、石油、股票等等都只會一直上升。



  2. 唯一同意的是when it is OVER, the market will be lower than now!!

  3. 我地雖然無pakman睇得咁淡,不過對聯儲局出手同樣憤怒。好好地一個市場調整,將貪婪的私募、LBO、亂炒NO.的阿毛一筆掃清,咁樣清洗世界先可以重新來過,畢竟環球經濟動力增長根本未停。


  4. i dont think so, I think it is a delay, not reverse.

    The main point is Fed only accept investment grade rubblish, with everybody knowing Oct-Mar would be a ARM reset peak season, what would you expect the falling Standard Poors and likes do?

  5. 其實現時情況與九七年八月類似. 當時亞洲金融風暴第一波稍見平息, 不少分析員及散戶俱以為調整已過, 香港基本因素極佳, 而積極入市. 到九月尾十月第二波風暴爆發, 香港股市兩星期蒸發三分之一.

    現時由次按衍生的基本問題未有解決, 隨時令全球金融制度崩潰. 禍因早種, 解決方法只有一個, 就是由市場自行解決(即爆煲). 所有干預市場行為, 只會拖延問題及隱藏問題之嚴重性, 間接增加爆煲時的傷害性.

  6. Buy some long term put warrants...

    Sit back...

    And wait for the fireworks...