naked capitalism

Asian markets opened lower, then took a nosedive after the release of a report that troubled mortgage bond hedge fund to Carlyle Capital failed to reach a standstill with creditors (hat tip reader cb). The Nikkei fell 3.5% to 12,400. The dollar dropped to 100 to the yen. I bought yen at around 111 in November with a target of 100. I thought it might take a year to get there. I am now wondering whether the yen might reach 95 or even 90. (I’m not always that clever. I bought a commodities index then, which if I had stayed put, would have ben my best trade, but I didn’t like the volatility and got out).

The Carlyle collapse seems likely to undo whatever good the Fed’s latest moves may have done (the $200 billion TLSF and the new $100 billion repo facility). I imagine the Fed will ignore the distress signals coming from the currency and commodity markets and give us a 75 to 100 basis point cut at the FOMC meeting on the 18th.

And to what avail? The Fed is increasingly proving that its moves merely debase the dollar and stoke inflation without alleviating the crisis in the credit markets. It isn’t intelligent to persist in a failed course of action.

Oil at $120 in the not-too-distant future now seems very plausible. Energy and metals will eventually correct violently once it becomes apparent how bad the US recession will be (serious slowdowns are deflationary, and of China’s 11-12% GDP growth is accompanied by 7% inflation. Its real growth rates aren’t as stunning as commonly believed. I suspect growth is unevenly concentrated, with the coastal cities booming and the rest of the country not participating as strongly. A US recession will make a big relative difference). But with the dollar trashed, even a major reversion in commodities might bring oil only to $100 a barrel.

Given how out of whack things are, and how a weak dollar is devastating to our trade partners, it isn’t impossible to see a role reversal and find Japan intervening to shore up the dollar (that move would be too inflationary for China). But the dollar slide will have to get worse before that happens.

And per a comment yesterday by the CEO of Wachovia, we are only in the early innings of the housing crisis. Subprime resets don’t peak until August, with a substantial tail after that. Foreclosures take an average of 15 months. We won’t see the bottom until at least 2009, perhaps even later. The Fed will be out of tricks well before then.

First the high points on Carlyle:

Carlyle Group’s mortgage-bond fund, which received more than $400 million in margin calls since March 5, said it was unable to reach an agreement with lenders, who will “promptly” take over all of its remaining assets.

Talks on a so-called standstill agreement with lenders failed, Amsterdam-listed Carlyle Capital Corp. said in a statement last night. Through March 12, the company has defaulted on about $16.6 billion of debt, and any remaining debt is expected “soon” to go into default, according to the statement.

And the market reaction:

The dollar fell to the weakest since 1995 against the yen and a record low versus the euro after a Carlyle Group hedge fund failed to reorganize debt.

The currency also slid to an all-time low against the Swiss franc after Carlyle’s mortgage-bond fund said lenders will seize its assets. Government reports today will probably show U.S. retail sales growth slowed and unemployment claims rose….

“Investors are getting out of dollar assets and this is going to lead to a dollar crash,” said Tetsuhisa Hayashi, chief currency manager of foreign-exchange trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded lender. “Retail sales cannot be good.”

The U.S. currency fell to 100.29 yen at 2:37 p.m. in Tokyo after reaching 100.03, the lowest since Nov. 10, 1995, from 101.79 in New York late yesterday. The dollar declined as low as $1.5586 per euro, the weakest level since the European currency’s 1999 debut. The euro dropped to 156.10 yen from 158.30…..

“The dollar looks in real trouble and there is no obvious resistance level against the euro,” said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. “I don’t think you can pick a level for where it will stop.”