Advanced economies to contract sharply in '09, upturn next year. IMF.
Slaughtering sacred cows: its the turn of the unsecured creditors now. Willem Buiter, Maverecon, FT.
On the Fed's "shock and awe". Yves Smith, naked capitalism.
I suppose I could hotwire this thing. Accrued Interest.
The Real AIG scandal. Eliot Spitzer, Slate.
A conversation about AIG. Charlie Rose interviews Meredith Whitney and others.
Causes of a great inflation: tunneling for resurrection. Simon Johnson, The Baseline Scenario.
Nationalize; reorganize; decentralize. A New Way Forward.
Grass-roots protests are forming.
Thursday, March 19, 2009
Data Watch - March 19th
CANADA
CPI for February surprised to the upside this a.m. as gas prices, food costs and mortgage interest costs were higher; core CPI was up 0.5% MoM vs. just 0.1% expected, leaving the YoY rate steady at 1.9% vs 1.5% expected; headline CPI was up 0.7% MoM and 1.4% YoY, vs. 1.1% in January and 1.0% expected; seasonal effects played a part here as well, as seasonally-adjusted numbers didn't pop up quite as much; the sagging loonie has had a bit of inflationary impact, particularly on items like furniture, due to costlier imports
US
initial jobless claims were about as expected (646k) and continuing claims continued to rise (5.473M vs 5.323M expected)
Philly Fed and Conference Board Leading indicators both came in a bit better than expected, at -35 (vs expectation of -39) and -0.4 (vs. -0.6), respectively, though the previous months LEI was revised down by three ticks, and December's was also revised lower; the coincident-to-lagging ratio was unchanged; the yield curve, supplier deliveries, building permits and money supply were the largest positive contributors to the LEI in February, while the largest negative impacts came from initial jobless claims, stock prices, consumer expectations and average weekly manufacturing hours
INTERNATIONAL
pretty quiet day for international data, but Japanese (both Toyko and nationwide) department store sales were down 12% YoY
Updated Interest Rate Forecast
At the beginning of the year, I had penciled ranges of:
US10s 1.5-3.0
US30s 2.0-3.5
Can10s 2.25-3.35
Can30s 2.95-3.95
With the high yields in Q1 and the low yields in H2
My low yields were framed in the context of the Japanese experience under ZIRP and QE and deflation, whereby the whole Japanese curve traded under 1% in 2003, and even before that in 1998 their 10s got to 0.8% and their 20s to 1.3%
Obviously I didn’t foresee US longs backing up 130 bps from their December low of 2.50 (I thought up to 100)
I’m sticking with my US 10s forecasted range, though my US longs ceiling needs raising to 3.70
And I’d stick with my low yields for Canada (though I think there’s a risk we go even lower --- US10s went to 2.05 in December; now that Canada is likely to also go to ZIRP and to QE, and given that I think Canadian GDP and other economic data will be at least as horrid as the US), but would drop my highs to 2.95 on 10s and 3.70 on longs (given that economic data has deteriorated even faster in Canada than I would have anticipated, increasingly the likelihood of Canadian QE)
As such, the relative duration bets I’d advocate, pending further consideration and debate, would be:
2.25 – 0.2 short
2.35 – 0.1
2.45 - neutral
2.55 +0.10
2.65 +0.20
2.75 +0.30
2.85 +0.40
2.95 +0.50 long
US10s 1.5-3.0
US30s 2.0-3.5
Can10s 2.25-3.35
Can30s 2.95-3.95
With the high yields in Q1 and the low yields in H2
My low yields were framed in the context of the Japanese experience under ZIRP and QE and deflation, whereby the whole Japanese curve traded under 1% in 2003, and even before that in 1998 their 10s got to 0.8% and their 20s to 1.3%
Obviously I didn’t foresee US longs backing up 130 bps from their December low of 2.50 (I thought up to 100)
I’m sticking with my US 10s forecasted range, though my US longs ceiling needs raising to 3.70
And I’d stick with my low yields for Canada (though I think there’s a risk we go even lower --- US10s went to 2.05 in December; now that Canada is likely to also go to ZIRP and to QE, and given that I think Canadian GDP and other economic data will be at least as horrid as the US), but would drop my highs to 2.95 on 10s and 3.70 on longs (given that economic data has deteriorated even faster in Canada than I would have anticipated, increasingly the likelihood of Canadian QE)
As such, the relative duration bets I’d advocate, pending further consideration and debate, would be:
2.25 – 0.2 short
2.35 – 0.1
2.45 - neutral
2.55 +0.10
2.65 +0.20
2.75 +0.30
2.85 +0.40
2.95 +0.50 long
Wednesday, March 18, 2009
QE comes to the US
Well, the Fed decided to pull the trigger on Quantitative Easing (QE) to augment its on-going, and now-expanded, campaign of Credit Easing (CE) --- and the bond market loves it.
US 10yr bonds have rallied 50bps from 3% to 2.5% and long bonds have rallied 44bps to 3.4% --- but the process of price-discovery is on-going here only 15 minutes after the announcement. Traders simply don't know yet where this will settle out.
Canadian bonds have of course rallied as well. 10-year yields have fallen to 2.7% and longs to 3.5%. We'll have to wait and see, probably until April 23, whether active QE programs in Japan, the UK, Switzerland and now the U.S. have any bearing on the Bank of Canada's decision about when to launch their own program.
The Fed statement follows:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
As dramatic an impact as the Fed has had on the market today with its announcement, the impact is borne of psychology. Ultimately, the Fed's purchase programs are relatively small compared to the size of the total credit markets and money supply. So, while it does go to show that betting against the Fed can be a painful trade, its not yet clear how much buying the Fed will have to do in order to offset the deleveraging going on in the broader economy (total US credit market debt of over $52 trillion). But there's no doubt that the lower yields will help.
US 10yr bonds have rallied 50bps from 3% to 2.5% and long bonds have rallied 44bps to 3.4% --- but the process of price-discovery is on-going here only 15 minutes after the announcement. Traders simply don't know yet where this will settle out.
Canadian bonds have of course rallied as well. 10-year yields have fallen to 2.7% and longs to 3.5%. We'll have to wait and see, probably until April 23, whether active QE programs in Japan, the UK, Switzerland and now the U.S. have any bearing on the Bank of Canada's decision about when to launch their own program.
The Fed statement follows:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
As dramatic an impact as the Fed has had on the market today with its announcement, the impact is borne of psychology. Ultimately, the Fed's purchase programs are relatively small compared to the size of the total credit markets and money supply. So, while it does go to show that betting against the Fed can be a painful trade, its not yet clear how much buying the Fed will have to do in order to offset the deleveraging going on in the broader economy (total US credit market debt of over $52 trillion). But there's no doubt that the lower yields will help.
No More Lehmans?
With some rare exceptions (Stanford economist John Taylor), most people agree that the meltdown of Lehman (i.e. allowing LEH to fail without some sort of government rescue) was responsible for the September-October meltdown in the credit markets, which in turn was responsible for the meltdown of the stock markets.
As such, “No More Lehmans” has become government policy. On October 10, the Group of Seven pledged to stabilize markets and prevent systemically-important financial companies from collapse: G7 finance ministers and central bankers agreed to “use all available tools to support systemically important financial institutions and prevent their failure.”
While I don’t agree with Taylor that the credit markets actually did not react all that badly to Lehman going under, and that the crisis was really the product of market uncertainty about the effects of government action, I also disagree with the apparent prevailing wisdom.
James Surowiecki and Mark Thoma certainly believe that letting Lehman fail was a mistake and, as best I can ascertain, their views fairly well represent common wisdom.
But have those who take that position considered counterfactual hypotheses? I find it terribly odd that people who believe this seem to believe that the credit crisis and stock market collapse would not have happened had the government perhaps done for LEH what it did with any of BSC, AIG, FRE, FNM, WAMU or Wachovia (take your pick) -- each of which was handled differently, none of which was handled transparently, fairly or well.
Remember, in July we were assured over and over that MER would be fine, and that FNM and FRE were fine; and in less than two months we find out that the distinguished MER was in such desperate shape it could no longer go it alone, and that the GSEs were on life-support. And what happened to WAMU, as John Hempton has so convincingly described here and here and elsewhere, and is also described here, with pretty arbitrary FDIC action, had its own host of consequences.
The crux of the matter is NOT that LEH was allowed to fail; the crux of the matter is that LEH was in such bad shape that it DID fail! (and failed spectacularly -- Lehman CDS set a value of under 10 cents on the dollar for LEH debt)
The confluence of the revelations of the disastrous states of AIG, LEH, FRE and FNM, among others, was reason enough for credit markets to say “Holy Shit, we can’t trust any of these guys – whose next? Who knows? Shit, I’m not getting paid enough for this f’g risk”. Result: Spreads blow out.
And, clearly, both the revelations themselves and the credit market reaction were enough for equity investors to say “Holy Shit, the good old days of corporate profitability that we thought we would soon be able to go back to were a mirage! Corporate claims about their health mean nothing! Balance sheets suck, and who the hell knows about income!” (as an example, MER’s recent earnings surprises have wiped out all of its retained earnings accumulated since 1972). Result: Stocks tank.
But now government policy is being based on a flawed hypothesis, that the failure of LEH is what caused our mess.
Incorrectly diagnosing the root cause of a problem tends to lead to improper and ineffectual attempted “solutions”. All along throughout this crisis, authorities have failed to understand the underlying causes of our problems (unrealistic asset values that have been propped up by unsustainable levels of debt and leverage, both of which were/are endemic as opposed to contained), and have thus failed to come up with realistic solutions (for instance, the remedy of more debt (government / taxpayer) will cure us of too much debt (household debt / financial sector leverage); forcing all banks to accept TARP funds to disguise whom among them is desperately needy, and giving forebearance on things like mark-to-market rules hardly solves the problem of opacity and engenders confidence in the state of our financial institutions).
The belief that we cannot allow another financial institution to “fail” has led government to an approach to string along zombie companies with taxpayers footing a huge bill to prop these failed companies up, with no obvious benefits (certainly not relative to alternative policy approaches, such as Willem Buiter’s Good Bank recommendation), but all-too-already-obvious costs (the looting at AIG being the contemporary popular example), and this before the inevitable but as-yet rarely recognized cost that the U.S. financial system is becoming very Japanese, with all the longer-term ramifications that that entails.
As such, “No More Lehmans” has become government policy. On October 10, the Group of Seven pledged to stabilize markets and prevent systemically-important financial companies from collapse: G7 finance ministers and central bankers agreed to “use all available tools to support systemically important financial institutions and prevent their failure.”
While I don’t agree with Taylor that the credit markets actually did not react all that badly to Lehman going under, and that the crisis was really the product of market uncertainty about the effects of government action, I also disagree with the apparent prevailing wisdom.
James Surowiecki and Mark Thoma certainly believe that letting Lehman fail was a mistake and, as best I can ascertain, their views fairly well represent common wisdom.
But have those who take that position considered counterfactual hypotheses? I find it terribly odd that people who believe this seem to believe that the credit crisis and stock market collapse would not have happened had the government perhaps done for LEH what it did with any of BSC, AIG, FRE, FNM, WAMU or Wachovia (take your pick) -- each of which was handled differently, none of which was handled transparently, fairly or well.
Remember, in July we were assured over and over that MER would be fine, and that FNM and FRE were fine; and in less than two months we find out that the distinguished MER was in such desperate shape it could no longer go it alone, and that the GSEs were on life-support. And what happened to WAMU, as John Hempton has so convincingly described here and here and elsewhere, and is also described here, with pretty arbitrary FDIC action, had its own host of consequences.
The crux of the matter is NOT that LEH was allowed to fail; the crux of the matter is that LEH was in such bad shape that it DID fail! (and failed spectacularly -- Lehman CDS set a value of under 10 cents on the dollar for LEH debt)
The confluence of the revelations of the disastrous states of AIG, LEH, FRE and FNM, among others, was reason enough for credit markets to say “Holy Shit, we can’t trust any of these guys – whose next? Who knows? Shit, I’m not getting paid enough for this f’g risk”. Result: Spreads blow out.
And, clearly, both the revelations themselves and the credit market reaction were enough for equity investors to say “Holy Shit, the good old days of corporate profitability that we thought we would soon be able to go back to were a mirage! Corporate claims about their health mean nothing! Balance sheets suck, and who the hell knows about income!” (as an example, MER’s recent earnings surprises have wiped out all of its retained earnings accumulated since 1972). Result: Stocks tank.
But now government policy is being based on a flawed hypothesis, that the failure of LEH is what caused our mess.
Incorrectly diagnosing the root cause of a problem tends to lead to improper and ineffectual attempted “solutions”. All along throughout this crisis, authorities have failed to understand the underlying causes of our problems (unrealistic asset values that have been propped up by unsustainable levels of debt and leverage, both of which were/are endemic as opposed to contained), and have thus failed to come up with realistic solutions (for instance, the remedy of more debt (government / taxpayer) will cure us of too much debt (household debt / financial sector leverage); forcing all banks to accept TARP funds to disguise whom among them is desperately needy, and giving forebearance on things like mark-to-market rules hardly solves the problem of opacity and engenders confidence in the state of our financial institutions).
The belief that we cannot allow another financial institution to “fail” has led government to an approach to string along zombie companies with taxpayers footing a huge bill to prop these failed companies up, with no obvious benefits (certainly not relative to alternative policy approaches, such as Willem Buiter’s Good Bank recommendation), but all-too-already-obvious costs (the looting at AIG being the contemporary popular example), and this before the inevitable but as-yet rarely recognized cost that the U.S. financial system is becoming very Japanese, with all the longer-term ramifications that that entails.
Data Watch - March 18th
US
Fed day today - we find out at 2:15 whether or not Ben and company are heartened enough by the Bank of England's early success in bringing down gilt yields with its QE program to announce plans of its own to start buying Treasuries; lots of idle speculation out there about how much might be already priced into the market; but with US10s bouncing off a ceiling yield of 3% for the last five weeks, after getting nearly as low as 2% at last year-end after the FOMC announcement on Dec. 16 (that it was considering expanding its credit easing campaign into the realm of quantitative easing by perhaps buying longer-term Treasuries), it seems clear there's scope for a rally if today's statement does explicitly mention QE. On the other hand, there's surely also room for disappointment in the market if the Fed sheds no new light on its intentions --- particularly given that yields have remained pretty stable during this latest bear market stock rally.
US CPI came out a little less bond-friendly than expected, but still rather muted; CPI ex-food and energy was up 0.2 MoM and 1.8% YoY; headline CPI up 0.4 MoM and 0.2% YoY
CANADA
Canadian wholesale sales were worse than expected, at -4.2% MoM vs. expectations of -2.7%; inauspiciously, the inventory-to-sales ratio climbed further. This continues a string of downside surprises, including housing starts, new house prices, employment, capacity utilization. CPI is released tomorrow.
Perhaps not surprisingly, Marc Carney admitted a couple of days ago while speaking to reporters at a meeting of G20 finance ministers that the Bank's forecast of 3.8% growth for 2010 was too optimistic; though that number still stands as its official forecast until the next MPR in April, he said the the Bank was "in broad agreement" with the IMF's pessimism about a 2010 recovery, and that the downside risks that the Bank had identified in January were now indeed materializing. For his part, Carney's predecessor David Dodge said yesterday that "I think anybody would be dreaming in Technicolor to think that you're going to get through this by the third quarter of this year.” In an article in the Globe and Mail, he said that Canada and the world are facing a long and deep recession that will fundamentally alter the nature of capitalism.
INTERNATIONAL
Yesterday, Japan machine tool orders were -84% YoY; today Japan's business cycle leading index fell to a new low since 1986, at 77.2
Italian industrial production for January was better-than-expected for MoM but with revisions to December, was about as expected YoY, at -16.7%, but -22% on a not-seasonally-adjusted basis
UK jobless claims surprised significantly to the downside
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