-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- Today's Lesson From Cryptonomicon by Neal Stephenson "You are storing your data in the Kinakuta data haven. You need to download a terabyte of crucial data. You begin the process--your encrypted bytes are screaming up through the Philippines at a gigabyte per second, to Taiwan, from there across to the States." Randy pauses and swigs Guinness, building the drama. "Then a ferry capsizes off Cebu." "So?" "So, in the space of ten minutes, a hundred thousand Filipinos all pick up their telephones simultaneously." Cantrell actually whacks his forehead. "Oh, my god!" ===== Federal Reserve Should Greespan Burst the Bubble? Do you mean to say Clinton's economy is like Clinton's speeches? WASHINGTON - In a speech late in 1996, Alan Greenspan, the Federal Reserve Board chairman, asked two questions that have worried investors ever since: ''How do we know when irrational exuberance has unduly escalated asset values?'' and added, ''How do we factor that assessment into monetary policy?'' In other words, he was wondering openly about whether the stock market was overvalued, and if so, whether the Fed should do anything about it. At the time of the speech, the Fed chairman was concerned that U.S. stock prices were too high and that a major correction might damage the American economy. Stock prices have soared since then: The Dow Jones industrial average was then hovering around 6,500 points; on Tuesday, the Dow closed at 11,117.08 after the Labor Department said the consumer price index rose 0.3 percent last month, in line with expectations. Today, some analysts and investors say Mr. Greenspan and his Fed colleagues are so concerned about the high-flying market that they want to raise interest rates to deflate the bubble. Other analysts conclude the opposite, that Fed policymakers won't dare raise rates very much, out of fear that they will cause the bubble to burst and drop the economy into a recession. Neither group is quite right, according to recent comments by Mr. Greenspan and other Fed officials. Fed policymakers have long taken potential reactions in the stock and bond markets, and the potential for overreaction, into consideration as they acted. But the relationship between the Fed and the markets has become more complex as stock prices have headed higher and the bond markets have come to react so instantaneously to Fed actions and pronouncements. To avoid surprising the markets, Mr. Greenspan often uses his public appearances to send signals to investors about likely actions on interest rates. In an unusual instance, he used his July testimony before two congressional committees to clear up widespread confusion about why Fed officials in June announced that they had adopted a neutral stance on the possibility of a rate increase in the near future. He explained that, although they agreed in June to raise the Fed's target for overnight interest rates to 5 percent from 4.75 percent because of worries about a possible rise in inflation, their concern about possible investor reaction had caused them to signal that they did not plan a series of such increases ''in short order.'' In part, such heightened concern stems from the fact that Mr. Greenspan and most Fed officials do believe that the stock market is overvalued and worry that their actions could trigger a big correction. It also reflects their uncertainty about how a sharp drop in stock or bond prices would affect the economy. The huge drop in stock prices in October 1987 had no discernible effect on consumer spending despite the loss of wealth, and thus no effect on the overall economy. Mr. Greenspan and some of his colleagues, however, have attributed part of the extremely strong U.S. economic growth of recent years to the ''wealth effect'' produced by the rising stock market - the possibility that many consumers have been emboldened to spend more because of the increasing value of their stock portfolios, or because they have more cash on hand after selling stocks for big profit. If that is the case, then a steep decline in stock prices might slam the brakes on consumer spending and on economic growth. But recent research by two economists at the New York Federal Reserve Bank questions the extent of that connection. Essentially, the two economists argue that stock wealth is so concentrated at the top among American households that most have few or no stock holdings. While spending growth has been augmented by capital gains on stock, the concentration of ownership suggests that a market decline should not necessarily lead to a large drop in spending. In testimony last year, Mr. Greenspan said the impact of a market correction depended largely on ''whether or not you took out debt against'' the paper gains. ''The real danger exists if there is an awful lot of debt, which, in the event of a significant stock-market contraction, then all of a sudden becomes unserviceable,'' he said. After Mr. Greenspan's speech in 1996, he sent top staff members to work seeking answers to the questions he had posed. As with so many issues involving economics, markets and policy, the results underscored the limits of the policymakers' knowledge and power. In short, Mr. Greenspan and the staff concluded that, whatever the level of stock prices, there was no way to tell for sure whether there was a market ''bubble.'' And if the Fed can't tell, it can't do anything directly about it until after the bubble bursts. Mr. Greenspan summed up his views about equity prices in congressional testimony last month. Stock prices are important because they influence both consumer spending and business investment, but ''the central bank cannot effectively directly target stock or other asset prices,'' he said. Should an asset bubble arise, he said, ''monetary policy properly calibrated can doubtless mitigate at least part of the impact on the economy'' when the inevitable correction occurs.'' International Herald Tribune, August 18, 1999 Fin-de-Siecle The Spectrum That Ate the AntiChrist More weird astro-observations NEW YORK - Every night at their telescopes, astronomers invite the universe to a battle of wits. Surprise us, they say, with some teasing wink of light, some few cryptic clues to something unfamiliar and, better yet, an implied challenge to a cherished theory. In most cases, astronomers boast, we will have it figured out by dawn. have an unyielding mystery on their hands, something they have observed and pondered for three years, a point of light deep in the northern sky that appears to be like nothing seen before. This may turn out to be only a curiosity, an odd variation of a familiar phenomenon, or it may be the first evidence of some unsuspected object with reverberating theoretical implications. Planets around other stars are the most celebrated recent discovery to challenge scientists, forcing them to rethink their theories about the formation and dynamics of planetary systems and take more seriously the possibility of life existing elsewhere in the universe. The mystery object has so far confounded astronomers because they cannot decipher the language of its light. Usually, by breaking down the spectrum of light into its component elements and charting the spikes and dips on a graph, astronomers can identify and describe an object within minutes. In this case, however, astronomers are finding nothing familiar about the light spectrum, a couple of Everests representing emissions from the object surrounded by lower peaks and broad valleys of heavy elements that blot out the true contours of the object's nature. ''I've never seen a spectrum anything like this, and I take spectra for a living,'' said George Djorgovski, an astronomer at the California Institute of Technology who is the leader of the sky survey that detected the mystery object. Whatever the astronomers are seeing, it is probably not a star, or not any normal star. The light signature of stars is much simpler than this object's. Nor is it a distant galaxy, which would have much different light patterns. With little evidence and even less conviction, some astronomers speculate that the object is a quasar, one of the sources of tremendous energies at the farthest reaches of the universe where the enormous gravitational power of black holes presumably gobbles up surrounding matter. If it is a quasar, it must be a rare kind beyond current understanding. ''It doesn't look like a quasar to my eye, but I may be wrong,'' said Wallace Sargent, a Caltech astronomer and quasar specialist, who is also director of Palomar Observatory in Southern California, where the discovery was made. So if it is not a normal star, galaxy or strange quasar, astronomers say, the most intriguing possibility is that the mystery object is announcing the existence of an entirely new cosmic phenomenon. ''But we must do everything to rule out the known before we postulate that we have discovered something really and truly new,'' Mr. Djorgovski said. Mystification is likely to be a more common experience in astronomy as more powerful telescopes and instruments with improved sensitivity are used for systematic probes deeper into the universe and over broader stretches of sky. Several comprehensive sky surveys are expected to discover many rare or even previously unknown types of astronomical objects and forces. Exploring the entire northern sky in different color filters, for example, the Digital Palomar Sky Survey, now nearing completion, has collected data on more than 50 million galaxies and about 2 billion stars. The census has identified more than 70 quasars at such great distances that they are being seen at a time when the universe was less than 10 percent of its present age. One surprising discovery was a star-like light several hundred times brighter than the galaxy with which it was associated. Astronomers are not sure, but they suspect they were seeing the aftereffects of a gamma-ray burst, the most powerful events in the universe today. First detected in the 1960s, gamma-ray bursts are examples of an astronomical mystery that is only now being solved. For the survey, astronomers devised computer programs to sift through processed photographs for starlike objects, then distinguish the stars from galaxies and isolate rare points of light that are not immediately recognizable. This was how the new mystery object showed up. Mr. Djorgovski and his team - Stephen Odewahn, Robert Brunner and Roy Gal, a graduate student - examined the object's light spectrum. Some of the lines of emissions, especially the two Everest spikes, looked too sharp to be from a quasar. They combed the star catalogues and published research papers, but found nothing like it. A search in the archives of X-ray and infrared surveys failed to show anything in those wavelengths at the location where the object's visible light was detected. Radio antennas of the Very Large Array radio telescope in New Mexico scanned the same patch of sky. They picked up only weak radio emissions from the region; many quasars have proved to be ''radio loud.'' ''This was the first one of something new, and a complete mystery to us,'' Mr. Djorgovski said. By this time in most investigations of strange sightings, the mystery would have been solved. Mr. Sargent recalled being stumped only once by a strange spectrum, which turned out to be light from an exploding star, a supernova, in the late stages of its evolution. The next step for Mr. Djorgovski's team was to photograph the object again and again. Some aspects of the spectrum reminded them of a supernova a few days after the explosion. But in the pictures, the light from the object did not die down, as it would as a supernova faded. ''The light doesn't vary, doesn't move and doesn't erupt,'' Mr. Djorgovski said, reflecting the team's growing bewilderment. Other examinations ruled out the possibility that the object would be an aging white dwarf star, where strong magnetic fields had distorted normal spectral lines. Comparisons with all other examples of peculiar stars also failed to suggest a solution. It is not even clear from the spectrum whether the object is extremely far away or relatively close by. Distances are estimated by the shift of light to the red end of the spectrum, a sign of the object's velocity as it recedes from the observer in the expanding universe. International Herald Tribune, August 18, 1999 Year 2000 Banks & Companies Fear for Financial Markets Oh Lord, spare us from the 21st century (minus 1 year) Banks and financial services companies are increasingly confident that they will be able to enter 2000 without their computers grinding to a halt. But they are not so sanguine about the disruptive side-effects on financial markets. The financial industry has been among the heaviest spenders on the millennium problem. In the UK, Barclays has already spent £180m ($288m) preparing its systems, many of which recorded dates in a two-digit format, to handle the rollover from this year to 2000. In the US, Merrill Lynch has already spent $520m, while Citigroup expects its Y2K spending to total $900m by the end of this year. This has been the price of tackling a problem that threatened to bring everything from mainframe computers and cash machines to head office elevators to a standstill. But it is harder for banks to protect themselves against how customers - including institutional investors and corporate borrowers - may behave in the financial markets. At the least, they face a fall in revenues at the year-end as companies pull back from financial markets. Many investors will try to reduce trading in December to avoid having to clear and settle transactions at a delicate time. "Participants in wholesale markets may be more cautious in the last months of the year. Opportunities for our wholesale business may temporarily diminish," says Derek Wanless, chief executive of National Westminster Bank. But the effects could be considerably more serious. As investors and corporate borrowers withdraw from markets, liquidity could be squeezed. This would not only lead to volatile price movements but could hurt weaker financial institutions. In the worst case, smaller retail banks could even be affected by individuals withdrawing their cash deposits in a panic. Global 2000, a grouping of large international banks that has been pooling information on the millennium bug, recently warned its members that global markets could be "destabilised" by tight liquidity. Among the dangers were that market rumours would add to the problems; smaller financial institutions could be affected; and even some countries and regions could suffer from a flight of capital to "safe havens". There are 4 months to go until the critical period, but some effects are already being felt in financial markets. Central banks, which have plans to provide additional liquidity at the year-end to prevent banks being squeezed, are starting to bring those measures forward. The US Federal Reserve is to offer banks special borrowing facilities from October 1. A liquidity squeeze could happen in a number of ways. Consumers could start to withdraw money from their accounts because they are worried that their balances will be wiped out on January 1 or - less dramatically - because they fear cash machines will run out of banknotes over the millennium weekend. Central banks believe they have prepared for this by stocking up on notes. In Hong Kong, the monetary authority has arranged for banknote reserves to be increased from the normal level of HK$90bn ($11.6bn) to HK$150bn. The Swiss National Bank has prepared to meet a tripling in demand for notes, while the Federal Reserve has asked the Treasury to print an extra $50bn of dollar notes. But higher than usual cash withdrawals affect more than the banknote supply. To meet customers' demands, banks need to have plenty of collateral to hand to pledge to their respective central banks so that they can draw cash. Good quality collateral tends to mean government bonds and bills, and demand for these securities is already running higher than usual at this time of year. The Bank of England has taken steps to ease any possible shortages of collateral by extending the range of securities it will accept in exchange for cash. In a move that it explicitly attributed to the need to ensure adequate liquidity over the millennium, the Bank has added £2,000bn worth of securities issued by euro-zone governments and central banks to its list. Hard cash may be the least of the banks' problems. The real squeeze on liquidity would come if fears of millennium disruption spread widely enough for companies to start drawing on bank credit lines - just in case they are not there to draw on next year. There are already widespread rumours in markets of companies starting to draw on back-up credit facilities, although bankers insist they do not know of this happening. "I've been hearing about this for a while as a potential threat, but I have not been able to confirm a single instance of it among our customers," says a European banker. Some bankers are particularly concerned about the impact of the millennium on the commercial paper market, in which companies issue 30-day securities to cover short-term financing needs. These are accompanied by a bank back-up credit facility intended to provide smooth funding in case of any short-term market turmoil at the moment their paper falls due. Bankers fear that some corporate treasurers will decide it is simply not worth the risk of maintaining a commercial paper programme over the turn of the year, and will instead call on the back-up banking facility. In the US, there is more than $250bn of commercial paper issued by non-financial companies outstanding - a sizeable amount for banks to provide from facilities. There is little evidence so far of corporate treasurers drawing on commercial paper credit lines. But there are clear signs of them taking pre-emptive action by bringing forward bond issues they might otherwise have spread over the coming months. No company wants to be trying to sell securities into an illiquid market in December. "If people believe there will be less liquidity in the markets at year-end, all the more reason to start closing your positions early, or raising your money early," says a London investment banker. In bond markets it is already becoming more expensive to issue some forms of corporate debt. Although millennium fears are not the only factor, they have helped to affect the price of swaps - derivative instruments that allow companies to exchange fixed interest payments for floating ones, and vice versa. Swap spreads - the difference between fixed rate being swapped and the yield on a benchmark Treasury bond of the same maturity - have widened as corporate borrowers try to secure financing. Banks and investment banks are also starting to position their balance sheets defensively. "While it may well turn out that the level of disruption is negligible or easily manageable, it is prudent to establish a reasonable - but not extreme - amount of liquidity over the course of the remainder of 1999, in order to avoid the potential for an illiquidity problem late in the year," said Morgan Stanley Dean Witter, the investment banking group, in a recent filing with regulators. Central bankers have been encouraging the private sector to manage their liquidity prudently in the run-up to the year-end. "Our impression is that market firms are actively engaged in planning their operations over the millennium change period. Their plans at this stage seem eminently sensible. Taken cumulatively, they do not seem to us likely to generate market dislocation over the changeover period," says Ian Plenderleith, executive director at the Bank of England." But the central banks have also taken their own steps to reassure the market that liquidity will be forthcoming. The Fed has even announced the establishment of a "Century Date Change Special Liquidity Facility" from which banks may borrow, at an interest rate 1.5 per cent points above the normal Fed funds rate, but with fewer than usual restrictions. The Fed had originally proposed to open this borrowing window from November 1 to April 7 next year, but has now decided to start it on October 1. One of the greatest concerns, both among central bankers and among large private sector banks, is of a sudden transfer of funds among financial institutions. If customers do start withdrawing deposits or drawing down credit lines, the banks they will target first are likely to be smaller institutions, or those in countries perceived not to have done enough to prepare their computer systems. "The large money centre banks might then be flooded with liquidity," warns one senior banker. This fear of a sudden flight to quality exists in the US, but in practice the danger is probably greatest in Asia, where runs on bank deposits are more common. Some senior Hong Kong bankers talk openly of applying negative deposit rates - charging customers to place funds with some institutions - to deter such moves. But bankers are in a quandary over how they should act. If they warn customers openly about such risks, they risk stirring up the very fears they wish to dispel. The danger is greater in retail markets than in corporate securities markets. In some senses, the world's financial services industry can congratulate itself on the thoroughness - and expense - of its preparations for 2000. But inevitably it cannot predict exactly how customers will react to the threat. Even if all the computers in the world roll smoothly into the next century, the millennium bug will already have exacted a stiff toll from banks. The Financial Times, August 18, 1999 US Dollar Inflation Figures Excite the Dollar Bulls The ballooning of swap spreads The dollar's renaissance against the euro continued yesterday after further good news on inflation calmed fears of sharp rises in official US interest rates. The consumer price index added to evidence of relatively benign inflationary pressures in the US and helped to lift the dollar to a high of $1.0487 against the euro. "This at least clouds the waters a bit over interest rates, increasing the size of the minority who do not expect a hike this month," said Steve Barrow, currency economist at Bear Stearns. "Even if there is a 25 basis point hike in August this should not undermine US assets or the dollar too much," he added. The euro's plight was exacerbated, analysts said, by continued position adjustment. According to the latest DB/Frank Russell survey of international fixed income funds taken at the end of July, the average fund manager is now overweight euros for the first time this year. "These positions are vulnerable to retrenchment, especially if European data start to weaken," said Michael Lewis, senior economist at Deutsche Bank in London. Germany's Ifo business confidence survey on Thursday would be crucial in determining whether these long positions were maintained, analysts said. But the dollar's strength did not extend to the yen which continued to draw support from the recent upward revisions to first quarter gross domestic product and June industrial production figures. The yen forged higher against both the dollar, which narrowly managed to keep its head above ¥114, and the euro, which sank to a lifetime low of ¥119.94. "Japanese corporates had expected the euro to bounce back to around ¥125, and may be inclined to increase hedging below ¥120," said Paul Chertkow, head of global currency research at Bank of Tokyo-Mitsubishi. "This in turn could put pressure on dollar-yen," he said. Other agreed that pressure on the yen looked set to intensify. "A back-up in JGB yields, which could rise above 2 per cent for 10-year bonds, along with further gains in equities, make any let-up in the yen's rise unlikely," said Michael Lewis. But with the dollar staging a robust recovery against the euro and Swiss franc, analysts said the environment had become considerably more conducive to successful Bank of Japan intervention. "As a consequence intervention has a greater chance of achieving their goal than at any time since early July," said Mr Chertkow. Some analysts suspect that a fall in the dollar below Y110 might provoke concerted action Japan and the US. The ballooning of swap spreads over the past few weeks has been widely seen as a bad omen for the dollar. Although lower than its highs of a few weeks ago, the spread - a gauge of the extra risk attached to corporate credit over government debt - is still above levels seen during the August financial crisis last year. If this reflects mounting concerns over corporate credit, the argument runs, the implications for the fragile US stock market are worrying. A faltering asset market would then drag down the dollar which relies on inflows into equities to fund the swollen current account deficit. Advocates of the link point to the end of 1998 when a widening of credit spreads coincided with a slide in the dollar against the yen. But some are sceptical of the connection between swap spreads and the dollar. The main objection is that the widening of the spread is more a reflection of supply conditions than a lack of confidence in corporate borrowers. "A surge of corporate issuance coupled with a dearth in supply of Treasuries is the most important factor and as such does not bode ill for US stocks," said Steve Barrow. He added that although the connection between widening swap spreads and a falling dollar had seemed convincing over the past few weeks, there was no longer term correlation. The Financial Times, August 18, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. 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