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LIBOR is the London InterBank Offer Rate, the interest rate at which banks lend to one another. The TED Spread is the difference between 3-month US Treasury rates and EuroDollar rates (http://en.wikipedia.org/wiki/TED_spread). The TED Spread has widened considerably since the current credit crisis began last August. In recent days, it has been alleged that the banks that report the data on which the LIBOR index is based were understating their numbers in order to lower their borrowing costs. Today there is reaction.
Money-Market Rates May Rise on Threat of Libor Ban http://www.bloomberg.com/apps/news?pid=20601068&sid=auHuzk67W6Mg&refer=economy
My sarcastic comment is that LIBOR will get reliable but the TED will Spread …
And now the Bank of England follows the Fed …
It is understood that the Treasury about to finalise a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.
The Main Stream Media is not good with analyzing implications, which is to say that for every action there is an equal and opposite reaction. With the Fed now lending to Primary Dealers and exchanging Treasuries for (more questionable) Mortgage Backed Securities, the market is provided with a temporary palliative that degrades the US Treasury’s own credit rating. This is Moral Hazard in action. Mr. Volcker’s recent comments were spot on (http://calculatedrisk.blogspot.com/2008/04/volcker-video.html).
Transitioning now from interest rates to inflation, here is Chris Puplava’s long-term CPI graph taken from the Market WrapUp yesterday, a thread that is posted daily on Freedom4Um. I much favor multi-decade looks. Note the regularity and the higher highs and higher lows. We are currently much higher on the inflation curve than is shown on the graph, however, due to the understatement of the US Government’s numbers. Real CPI is at or above 10%.
http://www.financialsense.com/Market/cpuplava/2008/images/0416.h28.gif
Here’s the distortion:
http://www.financialsense.com/fsu/editorials/willie/2008/images/0416.h4.jpg
This is the functional equivalent of clipping coins, of stealing. The latter graph comes from Jim Willie’s article:
http://www.financialsense.com/fsu/editorials/willie/2008/0416.html
Yet the New York Times says:
“A credible case can be made that inflation is behaving as expected in a recession and starting to moderate,” Bernard Baumohl of the Economic Outlook Group wrote in a research note. “The healing process has begun.”
U.S. Inflation Appears to Be Retreating http://www.nytimes.com/2008/04/17/business/17econ.html?_r=1&ref=todayspaper&oref=slogin
Well, nonsense. Houses may deflate but demand and supply for food and energy are out-of-whack and will remain so for quite some time, if not indefinitely – there are too many people throughout the world competing for bread and gasoline.
And, finally, I’ve wondered for months how JPMorgan Chase, the bank with the largest derivatives book, had been able to avoid reporting massive losses. We see now that they are not exempt …
Double Take: JPMorgan Quietly Raising $6 Billion http://www.housingwire.com/2008/04/16/double-take-jpmorgan-quietly-raising-6-billion/
My thoughts for the day, Thursday, April 17th. These views are mine and do not represent those of the management or ownership of Normandy Mortgage. However, if you found this commentary to be worth your time and would like to have a Loan Originator “on your side” that can analyze the daily mortgage market equally as well as the world economy, or if you would simply like to discuss the above, please give me a call.
With Best Wishes,
H. F. Pete Nelson
Senior Loan Originator
License #510-LO-34002
PNelson@NormandyMortgage.com
(206) 890-6815
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