"… the current crisis has illustrated just what a mess can result from liquidity draining
by ilene - September 7th, 2010 3:42 pm
Courtesy of The Pragmatic Capitalist
The bond bubble theorists aren’t going to be happy about this report from RAB Capital. Their analysts believe there is room for a “massive decline” in government bond
“Interest rates cannot go up meaningfully for a very long time” in either country, the report said. U.S. Treasury yields have yet to fall far enough relative to the Fed’s target rate for loans between banks to reflect this prospect, he wrote. The same holds true for yields on U.K. gilts by comparison with the Bank of England’s base rate, in his view.
The 20-year Treasury yield ended last week at 3.49 percent after declining 1.2 percentage points from this year’s high, set on April 5. Twenty-year gilts yielded 3.91 percent after falling 0.83 point from a Feb. 19 peak. The gaps between the yields and benchmark
rates— 3.24 points and 3.41 points, respectively — were still close to 40-year highs, according to the report.
“Further purchases of bonds by central banks can only accelerate this inevitable adjustment” in yields, Joshi wrote, adding that the bull market in fixed-income securities “is far from over.”
The Fed may have to buy more debt to head off deflation, according to Joshi, who described this so-called quantitative easing as “the greatest pawn-broking scheme” ever implemented. Fed policy makers decided last month to keep the central bank’s securities holdings at $2.05 trillion by reinvesting proceeds from maturing mortgage-backed bonds into Treasuries.
It’s an interesting chart and analysis, however, the one thing I would point out is that rates tend to converge (1:1) when the Fed is fighting off an inflation threat. The periods shown on the above chart shows when the Fed raised rates substantially and inverted the yield curve. In other words, the bond market was less concerned with inflation than the Fed was. Perhaps more importantly, however, the economy was smoking hot when rates converged. While I don’t disagree that rates are likely to remain low for some time, the implication that rates could converge appears a bit misleading. 10 year rates in Japan are sub 1% after 20 year of malaise while the overnight rate remains near zero. Are we headed there? I am not that…
by ilene - September 4th, 2010 7:18 pm
Courtesy of John Mauldin at Thoughts From The Frontline
The Last Chapter
Let’s Look at the Rules
Six Impossible Things
Killing the Goose
Home and Then Europe
This week you will get a kind of preview as this week’s letter. I am desperately trying to finish the first draft of my book and am one chapter away from having that draft. I have promised my editor (Debra Englander) that she would see a rough draft next week, and the final version will be delivered on the last day of September. More on that process for those interested at the end of the letter. But this week’s letter will be part of what will probably be the 4th or 5th chapter, where we look at the rules of economics.
There is just so little writing time left that I have to focus on that book for a little bit. I am writing this book with co-author Jonathan Tepper of Variant Perception (who is based in London), a young and very gifted Rhodes scholar with a talent for economic analysis and writing. We each write the first draft of a chapter and then go back and forth until the chapter has been much improved. Alas, gentle reader, you will only get my first draft. You will have to wait for the book to get the new, improved version. But this is the last one I have to write. And Jonathan has done all his initial chapters. We are on the home stretch.
But first, my partners at Altegris Investments have written a White Paper entitled "The New Normal: Implications for Hedge Fund Investing." It is a very instructive read. If you are in the US and have already signed up for my Accredited Investor letter, you should already have been sent a link or a copy. If not, and you are an accredited investor (basically net worth of $1.5 million or more) and would like to see the paper, or are interested in learning more about how hedge funds, commodity funds, and other absolute-return strategies might fit into your investment portfolio, I suggest you click on www.accreditedinvestor.ws and fill out the form, and a professional will get back to you. And if you live outside the US and are interested, I have partners around the world who can work with…
by ilene - August 28th, 2010 3:56 am
Courtesy of Michael Snyder at Economic Collapse
Don’t worry everybody. Federal Reserve Chairman "Helicopter Ben" Bernanke says that the U.S. economy is going to be just fine, and that if it does slip up somehow the Federal Reserve is ready to rush in to the rescue. That was essentially Bernanke’s message to an annual gathering of central bankers in Jackson Hole, Wyoming on Friday. Bernanke insisted that even though the Federal Reserve has already cut interest rates to historic lows it still has plenty of tools that could be used to stimulate the U.S. economy if necessary.
Well, considering Bernanke’s track record, the "don’t worry, be happy" mantra is just not going to cut it this time. After all, if Bernanke and his team were such intellectual powerhouses the "surprise" financial crisis of 2007 and 2008 would not have caught them with their pants down. The truth is that just before the "greatest financial crisis since the Great Depression" Bernanke was telling everyone that the economy was just fine. So are we going to let him fool us again?
But Bernanke insists that this time is different. This time the Federal Reserve really has got a handle on things. During his remarks at Jackson Hole, Bernanke said that the Fed will adopt "unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly."
Could that be a thinly veiled way of saying that Helicopter Ben and his pals will do as much "quantitative easing" as they feel is necessary to keep the economy moving forward?…
by ilene - July 23rd, 2010 4:52 am
Courtesy of Jr. Deputy Accountant
I’m sick of hearing this from every two bit central banker with nothing better to do but assure us everything is under control. Of course there will be no double dip, we never got undipped from the last one. Duh.
Federal Reserve Bank of New York President William Dudley said the U.S. economic expansion may slow this quarter, while a relapse into recession is unlikely.
“Growth in the third quarter may turn out to be a bit less than we saw in the first half of the year, though we think there is only a slight risk of a double dip,” Dudley said today at a press briefing on the regional economy at the New York Fed.
Gee, that sounds slightly less Armageddon-ish than Bernanke’s statements yesterday, who has been dosing Bill’s coffee with Prozac?
Anyway, what’s the reason Dudley gives for not expecting a double dip? Easy money and data that shows credit conditions are easing. Well that’s awesome, let’s wait and see what sort of impact financial reform and the Fed’s new credit card rules have on credit and get back to that issue when we’ve got more data.
The risk of the economy slipping into a second recession is low in part because monetary policy is “quite stimulative,” Dudley said in response to questions from reporters at the briefing. The nation also doesn’t face “excesses in terms of inventories” and “highly cyclical” industries such as housing and auto sales are “already at very depressed levels,” he said.
Dudley also said he’s “optimistic” about avoiding a double dip because the Fed’s senior loan officers survey has shown credit conditions are easing.
The U.S. expansion over the past year has been less robust than prior recoveries, with a “sluggish recovery in employment,” Dudley said.
I’m shocked that a supposed economic genius would actually say stimulative monetary policy can keep this thing afloat in case we get with a second wave of economic disaster – did no one inform him that the Fed is out of arrows and standing out there all limp and useless with nothing left to shoot?
by ilene - July 21st, 2010 5:32 pm
Courtesy of Mish
Be prepared for Quantitative Easing Round 2 (QE2) and/or other misguided Fed policy decisions because Bernanke Says Fed Ready to Take Action.
Treasuries rose, pushing two-year yields to the fourth record low in five days, as Federal Reserve Chairman Ben S. Bernanke said the economic outlook is “unusually uncertain” and policy makers are prepared “to take further policy actions as needed.”
Ten-year note yields touched a three-week low as Bernanke said central bankers are ready to act to aid growth even as they prepare to eventually raise interest rates from almost zero and shrink a record balance sheet.
“An unusual outlook may call for unusual measures, and that means the Fed may take more action as needed, which would lead to lower rates,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas, one of the 18 primary dealers that trade with the central bank.
The Fed chief didn’t elaborate on steps the Fed might take as he affirmed the Fed’s policy of keeping rates low for an “extended period.” Economic data over the past month that were weaker than analysts projected have prompted investor speculation the Fed may increase monetary stimulus in a bid to keep the economy growing and reduce a jobless rate from close to a 26-year high.
“Bernanke acknowledged that things weren’t very strong economically and left action on the table without going into details, and that’s sending investors from stocks into bonds,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Financial Group Inc.
Monetary Policy Report to the Congress July 2010
Inquiring minds are slogging through the 56 page Monetary Policy Report to the Congress July 2010. Here are a few key snips.
Summary of Economic Projections
Participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period.
Participants also revised down a little their projections for inflation over the forecast period. Several participants noted that these revisions were largely the result of the incoming economic data and the anticipated effects of developments abroad on U.S. financial markets and the economy. Overall, participants continued to expect the pace of the economic recovery to
by ilene - July 21st, 2010 5:27 pm
To summarize and save you time, Jr. Deputy Accountant writes:
I won’t call Bernanke a one trick pony since he’s got more tricks than a Hollywood madam but I will say this: the man is nothing if not consistent.
Federal Reserve Chairman Ben Bernanke told Congress Wednesday the economic outlook remains "unusually uncertain," and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.
Testifying before the Senate Banking Committee, Bernanke also said record low interest rates are still needed to bolster the U.S. economy. He repeated a pledge to keep them there for an "extended period."
Whatever it takes!
Full text of Bernanke’s semi-annual monetary policy check-in with Congress may be found via the Board of Governors.
by ilene - May 28th, 2010 12:25 pm
The world is suffering from the worst downturn since the Great Depression. The crisis has left tens of millions unemployed in the U.S., Europe, and elsewhere. The huge baby boomer generation in the United States, now on the edge of retirement, has seen much of its wealth destroyed with the collapse of the housing bubble.
It would be difficult to imagine a worse economic disaster. Prior periods of bad performance, like the inflation ridden seventies, look like mild flurries compared to the blizzard of bad economic news in which we are now enmeshed.
None of this is new. People don’t need economists to tell them that times are bad. However, what the public may not recognize is that the same people who caused this disaster are still calling the shots. Specifically, there has been little change in personnel and no acknowledgment of error at the central banks whose incompetence was responsible for the crisis.
Remarkably, this crew of incompetents is still claiming papal infallibility, warning governments and the general public that bad things will happen if they are subjected to more oversight. Instead, the central bankers and their accomplices at the IMF are dictating policies to democratically elected governments. Their agenda seems to be the same everywhere, cut back retirement benefits, reduce public support for health care, weaken unions and make ordinary workers take pay cuts.
Given how much they have messed up, it is amazing that these central bankers have the gall to even show their face in public. They are lucky that they still have jobs — and very good paying ones at that. (Many of the boys and girls at the IMF can retire with six figure pensions at the age of 50.) Ordinary workers, like teachers, autoworkers, or custodians, would be fired in a second if they performed as badly as the world’s central bankers.
What was going through their heads when they saw house prices in the United States, the UK, Spain and elsewhere spiral upward with no basis in any of the fundamentals of the housing market? How did they think this bubble would end; did they think that trillions of dollars of housing bubble wealth could just disappear without any impact on the economy. Or, did they think the…
by ilene - May 9th, 2010 1:26 am
Courtesy of Washington’s Blog
As the Wall Street Journal points out, the Federal Reserve might open up its "swap lines" again to bail out the Europeans:
The Fed is considering whether to reopen a lending program put in place during the financial crisis in which it shipped dollars overseas through foreign central banks like the European Central Bank, Swiss National Bank and Bank of England. The central banks, in turn, lent the dollars out to banks in their home countries in need of dollar funding. It was aimed at preventing further financial contagion.
The Fed has felt that it is premature to reopen this program — which was shut down in February as the financial crisis appeared to wane — because it wasn’t clear that foreign banks were in need of dollar funds. Still, trading floors on Wall Street are abuzz with anticipation today that the Fed might use the program again as Europe’s problems take on a more global dimension.
The international lending lines are known among central bankers as swaps.
Fed officials believe the swap program was one of its most successful interventions aimed at stemming a global crisis, when many banks overseas became strained for dollar funding. In their normal course of business, they borrowed dollars in short-term lending markets and used those dollars to finance holdings of long-term U.S. dollar assets, like Treasury or mortgage bonds. When those markets dried up, the swap lines helped to prevent overseas bank funding crises in 2008.
Fed officials see the swaps as a low-risk program, because its counterparties in these loans are foreign central banks, and not private banks. At a crescendo in the crisis in December 2008, the Fed had shipped $583 billion overseas in the form of these swaps.
As the BBC’s Robert Peston writes:
There is talk of the ECB providing some kind of one year repo facility (where government bonds are swapped for 12-month loans) in collaboration with the US Federal Reserve.
See this for more information on swap lines.
Indeed, the Federal Reserve has been helping to bail out foreign central banks and private banks for years.
For example, $40 billion in bailout money given to AIG went to…
by ilene - December 7th, 2009 11:46 pm
Courtesy of Tim at The Psy-Fi Blog
We’re in the middle of one of the most dramatic experiments financial markets have ever seen. Central banks, across the world, have bet your house and mine on a gamble of extreme proportions yet, such is the unpredictability of markets, we’ll only know the outcome of this with hindsight, a notoriously unhelpful bedfellow.
The problem is that changes in monetary and market liquidity can trigger outbreaks of investor insanity and by pumping the world full of cheap money central bankers are gambling that they can manipulate markets to beat behavioural biases. The omens are not especially good for them getting this right.
At a simple level significant market movements can be explained in terms of a combination of liquidity and stupidity. Liquidity comes in many different forms, mutating just about as soon as economists think they’ve nailed it down. They spend lots of time arguing over definitions of liquidity but we can roughly think about it as the available money in the system.
Cash in the bank account is part of it but so’s the credit card limit and the overdraft limit and that huge secured loan we took out against the garden shed where we store our limited edition garden gnome collection. Which is fine, just as long as no one comes to actually value the desirable bijou detached timber-framed residence at the bottom of the yard. Were they to do so then the liquidity in the system may drop suddenly, along with the clearing price of gnomes as the market’s flooded with the things.
Liquidity helps drive markets – when there’s more money entering the market than leaving it then stocks will, on average, go up. When the reverse is true they’ll go down. Large flows of liquidity then drive human fear and greed, depending on the overall market direction, causing over and under-reactions.
The Liquidity Trap
This is a trivially laughable description of the way markets operate. Yet there are times when “trivially laughable” comes uncomfortably close to the truth in our sophisticated modern markets. Such an occasion was the backend of 2007. As the Bank of England’s Paul Tucker puts it:
by ilene - December 3rd, 2009 6:45 pm
Courtesy of Mish
I talked about that idea most recently in Hussman Accuses the Fed and Treasury of "Unconstitutional Abuse of Power"
Hussman: "The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner’s actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.
Needless to say, I emphatically support recent Congressional proposals to vastly rein in the power (both statutory and newly usurped) of the Federal Reserve."
Fed Uncertainty Principle
Long before that, and even before such blatant abuses occurred, I predicted such happenings in the Fed Uncertainty Principle, written April 3, 2008.
Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Uncertainty Principle Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
Ironically, after being lied to for years by the likes of Bernanke and the BOE, the Central Bankers act shocked at proposals like "Audit The Fed".
With that backdrop, let’s now look at shenanigans, lies, and manipulations by the Bank of England.
Bank of England Props Up RBS, HBOS at Height of Crisis
Inquiring minds are reading Bank of England propped