Confidence vs. Liquidity
Bove: The hoped-for cut in interest rates this month will do nothing to bring money back into the U.S. financial markets.
Bove: Lower interest rates will send the dollar into a tailspin and wreak havoc in the job market.
Mish: The jobs market is toast anyway.
Bove: Cutting rates will not lure investors back into troubled markets.
Bove: Investors and banks already have the cash to buy risky loans and investments, he said.
Mish: Disagree strongly. Banks and lending institutions are essentially “all in”. In fact, with leverage they are more than “all in” as a Duration Mismatch is Causing Severe Stress Everywhere Banks are very short of cash as what we are seeing is tantamount to margin calls in illiquid assets. But as Bove suggests, borrowing from the Fed at a marginally lower rates does not fix that problem.
Bove: “There is no liquidity problem, but a serious crisis of confidence.”
Mish: Disagree strongly. Liquidity (in the form of credit) and confidence are two sides of a double headed coin as well as two sides of a double tailed coin. Confidence and liquidity are both cowards that flee when problems arise. As long as there was confidence in housing there was plenty of credit for loans. Once confidence in housing dropped, liquidity did too. The same scenario is now playing out in junk bonds and LBOs. There is no liquidity without confidence and nor is there confidence without liquidity. Overconfidence and anything goes liquidity work hand in hand. One look at covenant lite deals, junk funding for stock buybacks, and enormous LBOs that make no economic sense should be proof enough. When confidence died, so did liquidity for the deals.
Bove: The Fed cannot reduce fear by stimulating inflation.
Bove: “It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value.”
Bove: “By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs.”
Bove: The solution to this crisis is to allow people who cannot repay their debts to default and allow the companies that issued bad loans to fail.
Mish: Bingo. I could not possibly agree more.
Mike Shedlock / Mish/