Trading Diary

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Dr. Minsky the economist proposed theories linking financial market fragility, in the normal going of an economy, with speculative investment bubbles endogenous to financial markets.

Basically, Minsky found that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts

Disagreeing with many mainstream economists, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a free market economy, unless government steps in to control them, through regulation, central bank action and other tools; such mechanisms, in fact, came into existence in response to the Great Depression. He opposed the deregulation that characterized the 1980s.

“Looking at the economy from a Wall Street board room, we see a paper world – a world of commitments to pay cash today and in the future. These cash flows are a legacy of past contracts in which money today was exchanged for money in the future. In addition, we see deals being made in which commitments to pay cash in the future are exchanged for cash today. The viability of this paper world rests upon the cash flows…that business organizations, households, and governmental bodies, such as states and municipalities, receive as a result of the income-generating process. The focus will be on business debt, because this debt is an essential characteristic of a capitalist economy.” Hyman Minsky, “Inflation Recession and Economic Policy,” (p. 63) “

The everending cash flow is the most important part of the bubble.Will the fed continue the availability of the cash flow by a rate cut.

 The problem in financial markets is a liquidity issue and not a wider economic issue. The Fed does not have a mandate to change interest rates purely for providing greater liquidity. The Fed has other tools at its disposal to help with a liquidity problem, something it is currently working at with the markets and major banks.

 The US economy grew at an annualized 3.6% growth rate in the second quarter. All the evidence thus far for quarter 3 points to further economic expansion, albeit at a slower rate. It would be unprecedented for the Fed to lower the fed funds rate for the purpose of trying to stimulate growth based on current economic data.

 US inflation has been at or above the Fed’s comfort zone all year and the core consumer price index has been running at a 2.2% rate for the past 3 months, signaling a bottoming out, having come down from a high of 2.9% at the end of 2006. US CPI inflation has not been under the 2% comfort line in over 3 years. With a weak dollar adding to imported inflation, higher energy costs and unemployment at historic lows, there is every reason why inflation should remain at the top of the Fed’s agenda right now and why it would be premature to ease the fed funds rate. In fact inflation in the US is currently higher than that in the euro area and the UK, where the Central Banks remain a firm tightening bias.

The current credit crunch has not run for long enough to have had any meaningful deflationary impact on prices so the risks to inflation remain to the upside as per the statement from the August’s FOMC meeting.

 A reduction in interest rates now would see a rush of liquidity to the market that would have an inflationary impact on consumer prices and could see the Fed having to reverse course and increase rates again early next year. That in essence means it would be a mistake to reduce rates now.
6. Market volatility and uncertainty because of bad debts and risky investments is not the Fed’s problem and is not something that should trigger changes to monetary policy. It is also not the Fed’s responsibility to come in and change monetary policy to help investment companies and speculators that got it wrong.

 The current downturn in equity markets is a long overdue correction. The apparent credit crunch is a reality check and overall it is good for the economy in the longer run. Monetary Policy intervention is neither required nor justified.

With moderate to good growth in the economy and an upside risk to inflation, easing interest rates in this scenario would be akin to pressing a panic button and could have the reverse impact of that desired and plunge the wider economy into major difficulty.

The US carries a major current account deficit and relies on foreign purchases of US securities to offset against this deficit. A reduction in US interest rates at a time when rates are rising elsewhere would lead to an erosion of foreign investment, needed by the US to balance its current account.

 The dollar is already riding near all-time lows and the greenback would probably come under attack if interest rates were reduced. A broadly weakening dollar would lead to higher imported inflation, less appeal for dollar-denominated assets, possible central bank diversification away from US dollars and ultimately reduced purchasing power for US importers and US consumers. This would place the US economy in a much weakened position in the longer run.

I feel that we will have two great international financial events in september.US FED rate cut and Japan BOJ rate increase.The World Financial Thinktanks hope to provide stabilty by this two opposing events.

http://money.cnn.com/galleries/2007/fortune/0708/gallery.crisiscounsel.fortune/index.html

This link will take you to cnnmoney.com where Henry Paulson, Warren Buffett, Bill Miller, John Mack and others tell Fortune what they see next for the markets.

Some extracts

“Federal Reserve was not founded to bail out Bear Stearns or a few hedge funds. It was founded to keep a stable currency and maintain its value.” Jim Rogers

“For example, right now we are stewing over what everyone calls “the subprime mess” and going crazy, mourning all day and into the night–falling over ourselves to get all of the misery right, to paraphrase Evita. I’m writing this on Aug. 13, 2007, and in the past four or five weeks, the markets of the U.S. have lost some 7% of their value, or about $1 trillion.

But read on: The subprime mortgage world is about 15% of all mortgages, or $1.5 trillion worth, very roughly. About 10%–approximately $150 billion–is in arrears. Of that, something like half is in default and will likely be seized in foreclosure and sold. That comes to about $75 billion. Roughly half to two-thirds of that will be realized on liquidation, leaving a loss of maybe $37 billion. Not chump change by any means–but one-thirtieth, more or less, of what has been knocked off the stock market.” Ben Stein

“In one way, I’m sympathetic to the institutional reluctance to face the music. I’d give a lot to mark my weight to “model” rather than to “market.” Warren Buffett

The Working Group on Financial Markets, also know as the Plunge Protection Team, was created  by Executive Order 12631, signed on March 18, 1988 by United States President Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission.

Recently, the team has been on high alert given the increased volatility of the markets and what Hank Paulson calls “the systemic risk posed by hedge funds and derivatives.”

 These have all contributed to the markets’ erratic behavior and created the likelihood that the Plunge Protection Team may be stealthily intervening behind the scenes.

According to John Crudele of the New York Post, the Plunge Protection Team’s (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used.

Former Clinton advisor George Stephanopoulos verified the existence of The Plunge Protection Team (as well as its methods) in an appearance on Good Morning America on Sept 17, 2000. Stephanopoulos said:

Well, what I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets . . . perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally . . . I don’t know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall.

Stephanopoulos’ comments have never been officially denied. In fact, as Ambrose Evans-Pritchard of the UK Telegraph notes, Secretary of the Treasury Hank Paulson has called for the PPT to meet with greater frequency and set up “a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.”

“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:

The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline, need to be prevented by a rally already in flight. To get that rally, the PPT’s key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer’s account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today’s prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals’ rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own. (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)

For the  Plunge Protection Team,There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions. It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms. The original objective was to prevent disastrous market crashes. Lately it seems, they buy markets when they decide markets need to be bought, including equity markets. Their main resource is the money the Fed prints. The money is injected into markets via the New York Fed’s Repo desk.

Yesterday when nasdaq touched 2398 and Dow touched 12558 the rally started.If it is a computer program the value to watch is the breaking of DOW 12560 and Nasdaq 2400(day traders please watch to put your calls).

USD to YEN is now 112.5.From 123 in june last has become 112.5.Carry trade is worth around 1500 billion dollars and is HIGHLY leveraged.The fall of dow will be very swift and fast.

For dow 12275 is the bottom,from there a rally to 12760 and from then a slide to the end of the world .A small bottom at 12570. How many days will it take for this all to happen.?

The unwinding of carry trades has now hit the panic stage with the yen strengthening very rapidly over the past few hours as there has been a capitulation of positions. The yen has strengthened temporarily through the 114.00 level and, unusually within the USD/yen pair, there has been evidence of liquidity problems.Yen at 114 sound the death knell for highly leveraged hedge funds with complex computer models.

 The yen gained to a 4 1/2-month high against the dollar and the euro . The yen climbed to 116.61, the highest since March 28, before trading at 116.78 at 6:30 a.m. in New York, from 117.57 late yesterday. It also gained to 157.21 per euro, the strongest since April 2, before being quoted at 157.43 from 159.12.

Investors are still exiting overweight positions in risky assets, and in the currency markets the large net long speculative positions being unwound are in the Aussie, Kiwi, sterling and euro

This rising yen is not good for Dow. The chart above shows the correlation with Yen and DOG(INVERSE ETF OF DOW).

Now some good news is emerging from japan that the rate cut may be deffered.The chances of a rate hike this month have dwindled, but there is growing speculation that a September hike may also be unlikely and that the BOJ will wait until later in the year to raise interest rates,” said Hiroyoshi Sandaya, a fixed-income strategist at Goldman Sachs.

Can  three Peaks and a Domed House patterns of Georg Lindsay be noticed in the weekly chart of Dow from 2001 to the present.If the pattern is noticed and if the pattern is prophetic then we are in for a big party.12200 seems a very nice resistance as per the chart.I still think that the downward slide will come only after a short rally.

I last commented on this 2001 to present chart on july 28.

Today dow will end at above +150. we are going to have a 2-3  week bull rally.

The US Federal Reserve has injected $19 billion of temporary reserves into the financial system on Friday — its biggest single temporary open market operation in four years and second such move in two days.

In a second move on Friday, the US central bank injected another $16 billion, bringing the day’s total to $35 billion.

The European Central Bank and Asian authorities also added cash to their financial systems on Thursday and Friday.

The Bank of Japan announced on Monday that it will inject 600 billion yen into the banking system to avert liquidity shortages after recent turbulence on global financial markets.

what we are hearing is only the firefighting.The fire is still there…….Anyway now is the time to buy your calls and when this rally reaches a peak you can buy your puts and wait for the whirlwind.

I will post a immortal phot of a bull by Leviathor .

The chart above  explains what the feds did on friday.They purchased lots of repurchase agreements using mortgage backed securities as collateral to inject money into the banking system.   blue line. 

The days after feb 27 and the past days have been similar as far as the $xbd is concerned.Are we going to see a 21 day bull rally???