Friday, December 21, 2007

The Calm (Fed) Before the Storm

This chart shows the long-term Fed Funds rate. I started in 1964 because that was the last year our quarter had 90% silver in it and was also the year I was born. Perhaps I'm just being overly sentimental.

My eye continues to be drawn to the "walking on eggshells" Fed of this new century. It really started spoooking me in 2004. It continues to spook me. It has a certain look of desperation about it, in my opinion.

Let's look at the volatility in the chart over the period. There's a lot of different ways to show it. I have chosen (unlike times in the past) to simply chart the absolute value of the difference in the rate from one business day to the next. It has a certain frozen in the headlights look to it. As long as nobody moves quickly, nobody can fall quickly? Once again that's just my opinion though.

This chart shows the average volatility over the previous 200 business days. As can be seen, there was an unprecedented calm. Ever get the feeling we're in the eye of a hurricane? I sometimes do.

Here's a closer look. The official start to the credit crunch volatility season appears to be August 10, 2007. On August 9th the rate was 5.41%. On August 10th the rate dropped to 4.68%. Something broke. However, if one looks back in time (see the second chart) that 0.73% change is nothing in the grand scheme of things. Perhaps we're simply getting warmed up for the main event. Change
When the winds of change blow hard enough, the most trivial of things can turn into deadly projectiles.

You know, like AAA rated securities.

Unbridled Markets: Conservatives Embrace Securitization Run Amok
The default rate on these loans has been so high that all three of the lowest quality securities are totally worthless, four of the seven mid-level securities are worthless and one other is deteriorating rapidly. The ratings on the top-level securities have been reduced from AAA to BBB and as a result their value has declined markedly. To date, the losses to Goldman Sachs customers are probably in excess of $300 million.

But the real bombshell in Sloan’s story was not the shockingly poor quality of the products that were sold or the massive losses that were absorbed by hapless buyers. The real surprise is that Goldman Sachs not only absorbed none of the losses but in fact profited handsomely from the demise of the securities that they were telling clients to invest in. How? Because another part of Goldman Sachs was heavily shorting these securities in their own portfolio at the same time they were recommending them for the portfolios of other institutions. Customer Care
If we really cared for the customer, we'd send them somewhere better.

Source Data:
FRB: Selected Interest Rates


Anonymous said...


Re: Goldman

I know many wall streeters. They sell what is selling. Individuals and institutions buy what is going up. Future fundamentals be dammned.

The customer care quote describes this situation perfectly.

Anonymous said...

Goldman Sachs

One of the best books that has been written by and insider of Goldman is "Other Peoples Money" by Nomi Prins these guys are bad news.
With our current Treasury secretary having been the head of Goldman, Canada's new head central banker from Goldman, and about 17 ex-Goldman Sachs people in the current administration there is no doubt in my mind that the game is rigged. The fall in oil prices that started within days after Hank Paulson was sworn in and started the last advance in the stock market were a result of Goldman reconfiguring their commodity index which caused oil to be given a smaller weighting and caused firm who tracked that index to sell oil and re-balance their funds. I follow this group as closely as I can. These guys are the dealers in a crooked casino IMHOP.


Anonymous said...


Its not just Goldman. Its all of wall street. Buy side and sell side.

Without big spending governments and the fed as their advocate, wall street would be the grease that oiled the wheel. Not the wheel itself.

If we eliminated our policy of positive inflation, the entire financial services industry would shink dramatically.

BTW, I've read the book.

Stagflationary Mark said...

If we eliminated our policy of positive inflation, the entire financial services industry would shink dramatically. - MAB

You make it sound like we have too many banks.

These guys are the dealers in a crooked casino IMHOP. - Kevin

You make it sound like we have too many casinos.

New Casino Banks on Downtown St. Louis

Whew! "Banks" is apparently a verb in this article, lol.