Friday, March 2, 2012

Weekend links

1--A world awash in money, WSJ

Excerpt:  If you want to know who rules the world economy these days, Wednesday was instructive. In Europe, central bank chief Mario Draghi waved his hand and lent European banks another few hundred billion euros at 1%. (See below.) And in Washington, Federal Reserve Chairman Ben Bernanke roiled markets in Treasurys, stocks, commodities, etc., when he told Congress . . . well, no one seems sure of what he really said, or at least what he meant.

So it goes when central bankers take it upon themselves to save the world economy...

The Fed's policy is intended to reassure business and investors about monetary stability, but you wouldn't know it from the response to Mr. Bernanke's testimony yesterday on Capitol Hill. The economy has been doing better of late and fourth-quarter growth was revised upward yesterday to 3%, but Mr. Bernanke was downbeat and seemed to suggest unemployment won't keep falling. Rising oil prices are a problem, he added, but any burst of inflation will be "temporary."

Would he rule out another round of bond purchases, a QE3? No, but he didn't foresee another round anytime soon either.

What this means for policy, who knows? But the dollar promptly rose, gold plunged $90 an ounce, silver took a bath, stocks fell despite other good economic news, and Treasury yields rose.

It seems that some investors had been hoping for even more monetary stimulus, and so they had to cover their long bets on riskier assets like gold when Mr. Bernanke disappointed them. Stocks, which have also been riding the liquidity wave, respond as much to monetary portents these days as they do to news about the economy.

The larger point is the inherent instability of growth rooted in easy money. For a time, and especially in a crisis or recession, monetary policy can supply vital liquidity and arrest a collapse of confidence. But sooner or later as growth recovers, the easing has to stop before it begins to produce even more instability.

2--Disquiet within ECB laid bare after cash injection, Reuters

Excerpt: Some European Central Bank policymakers are alarmed that a dramatic loosening of lending policy stemming from a 1-trillion-euro wave of cash unleashed into the financial system will fuel imbalances in the euro zone and stoke inflationary pressures.

Led by Bundesbank chief Jens Weidmann, who was previously a top advisor to German Chancellor Angela Merkel, they are pushing for the central bank to think about an exit strategy after it fed banks 530 billion euros on Wednesday in the second of two cheap, ultra-long funding operations.

The signs of internal division add weight to what sources have already told Reuters: that the central bank does not intend to offer any more cheap three-year cash. The chances of interest rates dropping below their record low one percent also appear to be diminishing....

In his letter, Weidmann called for a return to collateral rules as they had been before the crisis, the FAZ said.

Weidmann had already expressed concern that "too generous" supply of liquidity could create risky incentives for banks, which could in turn store up future inflation risks.

3--Don’t Lose Sleep over China’s Fewer Treasury Holdings, credit writedowns

Excerpt: Revisions to the holdings of US Treasuries have set the chins wagging. The key focus is on China’s holdings of Treasuries.

While the new data revised sharply higher June 2011 Chinese holdings to $1.307 trillion from $1.165 trillion the data points to a sharp decline in the second half of last year. Holdings peaked at $1.315 trillion in July and finished the year near $1.152 trillion. There are several reasons why observers and investors should not be very concerned about the report.

1. The $163 bln decline in China’s Treasury holdings $103.4 bln took place in December alone. This is preliminary and subject to revisions. The revisions also mean that China has about $50 bn more Treasuries that the TIC data previously suggested before revisions.

2. It appears that China may have shifted some funds from Treasuries to Agencies, especially given the persistent speculation of a new round of Fed asset purchases to be focused on mortgage-backed securities.

3. The decline in China’s holdings has been more than offset by other buying. The revised figures show foreign investors own about $5 trillion of Treasuries as of the end of last year compared with $4.4535 trillion at the end of 2010. Over the period China’s holdings fell a little more than $8 bln. Japan’s holdings rose $176 bln in 2011, all coming in the second half. Russia’s holdings were revised sharply higher, though were flat on the year. Belgium, France, and Ireland holdings were revised higher.

4--Is Risk Rising in the Tri-Party Repo Market?, NY Fed

Excerpt: At the New York Fed, we follow the repo market closely and, with some of my colleagues, I’ve tried to keep readers of this blog informed about how the market works, how it’s being reformed, and what risks remain. We’re always encouraged when others share our interest in this market, so we read a recent Fitch report—“Repo Emerges from the ‘Shadow’”—closely (the report is available at At first glance, the report is a bit worrisome, as it argues that the repo market has recently seen a large increase in riskier types of collateral. So we decided to take a close look at some data to see if we could validate this finding. In this post, I use data made publicly available by the Tri-Party Repo Infrastructure Reform Task Force (the Task Force) to show that there is in fact no evidence of a broad-based increase in riskier types of collateral. The Task Force’s objective in publishing the data was to give a comprehensive view of the market, so the data represent 100 percent of the market’s volume. In contrast, the Fitch study is based on data from a sample of prime funds, representing only 5 percent of the market’s size.

Let me first provide a short overview of the Fitch report. It collects data from a sample of financial transactions of the ten largest U.S. prime money market mutual funds. Based on these data, Fitch makes several observations about haircuts and the type of collateral financed in the market. I want to focus on the observation that there’s recently been a gradual recovery in the share of riskier collateral financed through repos and, in particular, a large increase in the share of “structured finance” collateral—a type of collateral that had almost completely disappeared from the market during the financial crisis. This is a key finding of the report, which was published in a recent Financial Times article....

In conclusion, I don’t want to overstate the safety of the tri-party repo market or understate the usefulness of the Fitch study. The recent release of the final report of the Task Force shows that much work remains to be done to reduce systemic risk in this market. Nevertheless, available evidence indicates that, in aggregate, the composition of collateral being financed in the tri-party repo market is not decreasing in quality. This suggests that the real news from the Fitch report is not about the tri-party repo market, but may be more about how prime funds are reacting to a low-yield environment by reaching for yield and taking on riskier collateral. Given that these funds have little capacity to hold on to these assets in a stress event—and may therefore have strong incentives to run from these trades at the first sign of dealer stress—this practice is problematic from a systemic risk perspective, and deserves greater scrutiny by policymakers.

5--Foreclosure report, RealtyTrak

Excerpt: RealtyTrak reports that sales of homes that were in “some stage of foreclosure or bank owned” accounted for 24% of all U.S. residential sales during Q4 2011. This is an increase from 20% in Q3, but down from 26% of all sales in Q4 2010.

Total foreclosure-related sales in 2011 were 907,138 — down 2% from 2010. The average sales price of homes in foreclosure or bank owned was $164,944 in Q4, down 5% from Q4 2010.

The average price of a foreclosure-related sale was 29% below the average price of a non-foreclosure sale in Q4. That “foreclosure discount” is smaller than Q3 (34%) and down from 35% foreclosure discount the prior year. (see charts)

6--Secret Commerce Department Report Shows the Economy May be Faltering, CEPR

Excerpt: Actually, it wasn't secret, it's right here on the Census Bureau's website, but for some reason no one in the media thought it was worth reporting a drop in durable goods orders of 4.0 percent in January. I am always the first to say that we should not make too much of any single report. Monthly data are often erratic and if one report seems out of line with most other data, odds are that the report was driven by some flukish factor or just sampling error.

Nonetheless, this is a big drop that can't be explained by the usual suspects. New orders excluding transportation (airplane orders are especially erratic) fell by 3.2 percent. Excluding military goods, new orders fell by 4.5 percent, so this is not a result of the peace dividend. The weather goes the wrong here since January was unusually warm this year meaning that businesses were not shut by snow storms. New orders for non-defense capital goods (i.e. investment) fell by 6.3 percent, or 4.5 percent if we exclude aircraft.

In short, this is an unambiguously bad report. My view is that it is probably an anomaly. We will perhaps see upward revisions in the second report for January or a big bounceback in the February numbers. But, this report definitely deserved some attention. It might seem rude to spoil the celebrations over our 3.0 percent growth rate last quarter, but that is what reporters are supposed to do.

7--IMF Says Global Economy Still Facing Major Risk From European Debt Crisis, Bloomberg

Excerpt: The global economy faces “major downside risks” as its recovery continues to be threatened by stresses in the euro area, the International Monetary Fund said in a report prepared for the Group of 20 nations.

The world economic expansion will slow to 3.3 percent this year from 3.8 percent in 2011, according to the surveillance report prepared for the meeting of G-20 finance ministers and central bank governors in Mexico City Feb 25-26. The euro economy is forecast to contract 0.5 percent this year, compared with growth of 1.6 percent in 2011.

The overarching risk remains an intensified global ‘paradox of thrift’ as households, firms, and governments around the world reduce demand,” the Washington-based IMF said in the report. “This risk is further exacerbated by fragile financial systems, high public deficits and debt and already-low interest rates.”

“Advanced economies are experiencing weak and bumpy growth, reflecting both the legacies from the crisis and spillovers from Europe,” according to the report...

Euro area members benefiting from financial assistance programs should stick to the agreed consolidation efforts,” the report said. “Developments in the euro area have shown that market confidence can be quickly lost, with damaging consequences for growth and financial stability

8--'The ECB's Policies Are Anything But Harmless, der Speigel

Excerpt: The center-right Frankfurter Allgemeine Zeitung writes:

"Government financing may not be the goal of the ECB's money glut. But the side effect of the massive sums that the bank has released for the second time at the unusual lifespan of three years is that interest rates have sunk on the bond markets. Most countries can now finance their debts at tolerable conditions again. That also stabilizes the banks, which is thoroughly pleasing to the central bank. This is because it aims to eliminate every doubt about the financing of solvent banks with the emergency loans. It has achieved this, in addition to hindering an accelerated downward spiral of emergency asset sales."

"But what may have a short-term calming effect can also complicate the recovery of the currency zone through the lowered interest rates on the market. This is because falling risk premiums and cheaper financing conditions could lead some politicians to the erroneous belief that spending policies financed with even more debts is still possible. The ECB must counteract this by creating a timely shortage of money and credit."

The center-left Süddeutsche Zeitung writes:

"Mario Draghi is a clever politician. Yes, one can call the president of the European Central Bank a politician because he behaves much differently than the classical central bank definition of a currency watchdog. Draghi isn't concentrating on inflation, as this definition requires, but on saving the euro -- the job of the politicians."

"To his credit, Draghi's policies seem to be helping the euro. … However, these successes don't distract from the immense risks of his policies. … Draghi must try to hinder a new financial bubble at all costs. But, as experience shows, that is difficult."

"It will become quite difficult if lots of ECB money wanders into the economy through commercial banks as loans to companies and through other means. This could create the danger of an artificial boom that would drive prices up -- later crippling the economy and devaluing savings accounts. … But the ECB can extract the money from the market again, though this is no simple process. Mario Draghi, who wants to be a politician rather than a normal central banker, is on a dangerous path."

The Financial Times Deutschland writes:

"Nobody can calm the markets better than the ECB. The three-year tender has already shown that. No rescue packet, no austerity package and no crisis summit has as much persuasive power as the money-slingers in Frankfurt. Since the euro boon in December, the situation has calmed noticeably and confidence has returned. This will surely be strengthened by yesterday's long-awaited and generous new round of loans from the ECB."

"It's also clear that the loose policies of the ECB are anything but harmless. After all, it wants the money to be invested, perhaps in government bonds, which would be much to the satisfaction of finance ministers -- perhaps. Alternatively, the money could be invested in other assets, such as mining, real estate or shares. But the confidence inspired by the ECB goes hand in hand with an increased willingness to take risks. That doesn't necessarily amount to an investment bubble, but it could become one. In that case, if the bubble were to burst, we would have to start crisis management over again from scratch."

The left-leaning Berliner Zeitung writes:

"The ECB is giving the banks what they want. … The credit institutes are practically getting this massive sum as a gift and will be able to profit from it accordingly. Is it risky? Hardly. The danger of galloping inflation is not slight. Because even when Germany wishes to see it differently, Europe remains deep in the crisis."

"Is the ECB credit useful? Yes. Because if the already shrinking demand from society as a whole also led to bank failures, a new financial crisis would be near. In this regard, the ECB had no other choice than to generously supply the banks. Through this, there is a decrease in some of the intensity of the euro crisis, which isn't actually a (pure) debt crisis but, rather, a general crisis of confidence in the banking system. To boost confidence, the euro zone has pumped (more than €1 trillion) through the ECB and into the financial sector -- a huge sum that is quite necessary. Indeed, as the global financial system is currently set up, everything relies on the flourishing business of banks."

9--The income gap--Wages not keeping pace with prices, Mish (graph)

10--ISDA: Suckers Wanted, The Big Picture

Excerpt: “The International Swaps and Derivatives Association said on Thursday that based on current evidence the Greek bailout would not prompt payments on the credit default swaps.”

Here is a question for the crowd: Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called derivatives?

The claim that Greece has not defaulted — despite refusing to make good on their obligations in full or on time — is utterly laughable.

In order to get paid on a default, you need a committee to evaluate whether or not failing to make payments is a — WTF?!? — default? Even more ridiculous, the committee is composed of biased, interested parties with positions in the aforementioned securities?

ISDA: After this shitshow, why on earth would anyone EVER want to own an asset class that requires you to determine payout? Indeed, why should ANYONE ever buy a derivative again?

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