…The NYT article invoked research conducted by Joseph Mason and Joshua Rosner (the former is a professor at the Drexel University business school
and the latter at research consultant Graham, Fisher & Co.) — “How Resilient are Mortgage Backed Securities to Collateralized Debt Obligation
Market Disruptions”. This is a must read, in our opinion. In a nutshell, “Decreased funding for residential mortgage-backed securities could set off a downward spiral in credit availability that can deprive individuals of home ownership and substantially hurt the US economy”. So the question the media should be asking is not what does Alan Greenspan see that Ben Bernanke does not see, but whether or not the folks on the FOMC have actually read this report? The Fed has a de facto tightening bias on the books – then again, this is the
same Fed that had a tightening bias on the books all the way through the Asian crisis (until it morphed into LTCM) and the same Fed that had a tightening bias on the books through the first 35% slide in the Nasdaq, from early 2000 through to
the end of the year. Plus ca change … plus ca meme chose. Recall that in both cases, the Fed ultimately was forced to follow the bond market’s edict and cut rates. The Treasury yield curve has been inverted now in full since July and
sorry, it is not about forced buying of Treasuries by OPEC or Asian central banks. Last we heard, these entities were supposedly “diversifying” out of US Treasury securities. And the Treasury market rarely gets it this wrong for this long. True – the Fed is not going to show up to save the mortgage market in time any sooner than it did from August-September 1987 when the S&P 500 was down 18% before the market crash; nor as it did in the summer of 1998 when, before LTCM, the stock market again was down 18% before any action was taken; or the waiting the Fed did as Nasdaq collapsed 35% before it lifted a finger in early 2001. The so-called ‘Greenspan Put’ made for nice tail conversation, but never really did exist. Greenspan may have gone too far in the easings in
early 1988, early 1996, late 1999 and again in 2003 – but contrary to popular opinion, he never began to cut rates at any time until a good dose of “market pain” was first extracted. We think the Fed is going to ease; we hold to June and
at that point it will probably still be too late to reflate anything; and before they do
anything, things are probably going to have to get quite a bit worse in the mortgage market and seep through, as has already been the case to an extent,
into the S&P financial space.
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