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Five Things You Need to Know: Inflation: It's the Fed's Story, and They're Sticking to It; Nuclear Option?; Mortgage Market Backed by Full Faith and Credit of Fannie Mae, Freddie Mac; Politicians Backed by Full Faith and Credit of Wall Street; Fore!


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Inflation: It's the Fed's Story, and They're Sticking to It

As expected, the Federal Reserve stuck to their guns yesterday at the Federal Reserve Open Market Committee meeting and suggested everyone continue to focus on the inflation they are desperately trying to create, and not on the deflationary credit collapse on the distant horizon.

  • In the FOMC statement released following yesterday's meeting, the Fed declared higher inflation is "the predominant risk'' going forward, holding their benchmark interest rate steady at 5.25%.
  • That despite the fact price increases have now slowed for four consecutive months, and a passing acknowledgment of "tightening credit conditions" being faced by both households and businesses.
  • Consequently, expectations for a rate cut in the coming two months fell to 58%, down from 84% based on October Fed Funds futures.
  • The clear message being sent by the Fed is that their "tightening bias" remains in effect.
  • But the real proof of any "tightening" bias is in the pudding: the U.S. dollar, which is trading lower even as we write.
  • And that brings us to today's Number 2...

2. Nuclear Option?

An interesting Telegraph UK article making the rounds among traders overnight sounds ominous: CHINA THREATENS NUCLEAR OPTION OF DOLLAR SALES.

  • "Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion of foreign reserves as a political weapon to counter pressure from the US Congress," according to the Telegraph.
  • He Fan, an official at the Chinese Academy of Social Sciences, reportedly said, "China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency."
  • Fan noted that Russia, Switzerland, and several other countries have reduced the their dollar holdings.
  • "The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," Fan said, according to China Daily.
  • Sure, China has some leverage - literally - but then again, should a "mass depreciation of the dollar" occur they'll lose on their own dollar holdings.
  • Perhaps more importantly, if the U.S. economy slows, Chinese exporters will find their business slowing as well.
  • Does it make any sense for China to induce what would surely amount to a renewed bout of protectionism?
  • That would certainly be harmful to China's exports-dependent economy.
  • Bottom line: Just as U.S. Treasury Secretary Henry Paulson postures politically for a "strong U.S. dollar," this seems like a similar case of political posturing from China.

3. Mortgage Market Backed by Full Faith and Credit of Fannie Mae, Freddie Mac

The regulator for Fannie Mae (FNM) and Freddie Mac (FRE) should consider easing a cap on the companies' investment holdings so they can buy more loans in the troubled mortgage market, two leading Democratic senators said yesterday, according to Reuters.

  • Sen. Charles Schumer, chairman of a Senate subcommittee on housing, said this would "allow Fannie Mae and Freddie Mac to provide needed stability to the secondary mortgage market."
  • And Sen. Christopher Dodd, chairman of the Senate Banking Committee, said in a statement, "It may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie's mortgage portfolio."
  • Naturally, Fannie Mae and Freddie Mac have long been opposed to portfolio limits, and easing the limits could directly increase their profitability.
  • And rather conveniently It could also bail out any number of Wall Street firms by providing them a place to unload mortgage-backed securities that are being marked to their real value.
  • Hmm, this sounds almost like a case of government sponsored enterprises bailing out those who perhaps overleveraged in ill-conceived investments, doesn't it?

4. Politicians Backed by Full Faith and Credit of Wall Street

Look, expanding the portfolio limits for Fannie Mae and Freddie simply allows them to do exactly what they were created to do - provide mortgage market liquidity, according to Bill Maroni, a former lobbyist for Fannie Mae writing to John McLeod at the aptly-named "" blog .

  • But what about "systemic risk"?
  • Doesn't allowing Fannie Mae and Freddie Mac to expand their portfolios and act as THE provider of mortgage market liquidity create potential systemic risk?
  • Well, that's what former Federal Reserve Chairman Alan Greenspan has alleged.
  • Of course, Greenspan is not exactly a disinterested party... especially now that he consults for PIMCO, which just so happens to run the world's largest bond fund.
  • Regardless, it's not as if Fannie Mae or Freddie Mac are backed by the full faith and credit of the U.S. Government.
  • Although, it appears both senators Schumer and Dodd are most certainly backed by the full faith and credit of Wall Street.
  • Top contributors to senators Dodd and Schumer:

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5. Fore!

You know, one of the oldest nuggets of wisdom on the Street is this:

Never dress better than your boss, and never beat your boss in golf or bridge.

We'll circle back to that in a moment.

The Wall Street Journal on Monday took a long look at why Bear Stearns (BSC) CEO James Cayne fired Warren Spector, Bear Stearns's co-president and the person most often cited as his likely successor.

According to the Journal, a week ago Cayne called Spector into his office and told him he had "lost confidence in him" and "I think it's in the best interests of the firm for you to resign." The firm was facing not just a loss of more than $1 billion due to the blow-up of two mortgage-related hedge funds, it was also facing a loss of investor confidence. Spector was reportedly caught offguard by Cayne's demand.

The Journal article noted that this wasn't the first time Cayne and Spector had butted heads in recent years. "They didn't see eye to eye on Mr. Spector's wish to trade derivatives," the newspaper said, and "they disagreed about whether Bear Stearns should have a gym in its Madison Avenue building."

Fair enough. But we think the issues between the two may be deeper, yet simpler. Not only is Spector a better golfer than Cayne, he's also a better bridge player.

Take a look at this side-by-side comparison of Cayne and Spector's most recent golf scores from the USGA Golf Handicap Website:


And then there's the North American Bridge Championships held held in Nashville July 19-29. Spector placed a solid 95th on the Total masterpoints list out of 4,822 players. Alas, Cayne finished 347th.

That's no way to butter up the boss, bro!

Throw in what the Journal describes as a "trim physique" and an actress spouse which, the paper says "played the vixenish wife of a CEO in the 1980s Wall Street parody "The Secret of My Success," and well... sometimes the oldest advice is the best advice:

Never dress better than your boss, and never beat your boss in golf or bridge.

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