Credit Writedowns

By Warren Mosler (as posted on the 10th) Also see other similar arguments from Credit Writedowns’ on how quantitative easing really works. Background information first, answer later- The Fed sets the fed funds target at their regular meetings, and lets the market then determine the term structure of rates. That term structure of rates is therefore largely a function of [...]

By Warren Mosler In the context of this ‘everyone’s out of paradigm’ world, it makes sense for Japan’s MOF (Ministry of Finance) to buy dollars vs yen. But it makes no sense to do this as a coordinated effort with other nations also buying dollars vs yen. It does make sense for the MOF to ask the G7 for permission [...]

By Warren Mosler As previously discussed, the US should outlaw the use of libor by its banking system. It makes no sense to allow US dollar rate setting for our banks to be set overseas by the BBA. Setting our banking system’s dollar rates is the Fed’s responsibility. And, to further make the point, note the word ‘expect’ in this [...]

As promoters of MMT, we are all very keen on Abba Lerner, who was one of the first to articulate the foundations of the approach. Lerner believed that the government should maintain the level of aggregate spending in the economy (either by reducing taxes, increasing its own spending or a combination of the two) at the rate consistent with full employment. We agree. This is the overarching goal. How we get there is, as I said, a matter of (political/social) choice.

As part of the US policy response to the global crisis, the Dodd-Frank Financial Reform Act calls for regulators to identify systemically risky financial firms – the sort that took the US financial crisis global. But how to identify these firms remains unclear. Some claim the task is impossible. This column begs to differ and names the 10 most systemically risky financial firms in the US.

China is grappling with rising inflation. This column argues that the Chinese government, instead of focusing on micro-managing the economy, should grant its central bank room for further reform of its monetary policy. To make more efficient use of the interest-rate instrument, China’s policymakers will need to further loosen the dollar peg.

This is the first of a two-part economic forecast by John Mauldin published on 8 Jan and 15 Jan 2011. The second part will appear shortly. In this issue: How Did We Do on 2010? Russia and the Roots of World Inflation The US Will More than Muddle Through December Unemployment Better than Headline A Very Fluid Economy How Did [...]

We are now seeing almost all our sell signals go off and we recommend clients hedge portfolios and reduce market exposure. We have advised clients in the past to hedge their portfolios and reduce exposure when all our sell signals have gone off. The last two times all our sell signals were activated was in January and April. In both cases the stock market performed very poorly one month out. We have continued to add new tools to our buy and sell signals. As the following chart shows, the sum of our signals is flashing a warning sign.

These signals typically lead to stock market sell-offs and forecast poor returns one month forward. I could do several letters from people I highly respect who suggest that hedging your portfolio might be wise as we go into the New Year. But this has given you a sense of what I am reading. As for actual timing? This market has been skewed by QE2. Things can remain irrational for longer than we would think. I would urge some real caution. As the guys at Variant note, there will be some opportunities to buy back in.

Interview with Michael Whalen In this issue of The Institutional Risk Analyst, we speak to Michael Whalen, Emmy award winning composer and new media observer, about the outlook for the business of creating and delivering content.  Since graduating from Berklee College of Music, Michael has taught a business for music class that has saved thousands of young artists from making [...]

The following is an excerpt from David Rosenberg’s recent Lunch with Dave daily research piece highlighting Ten Themes for 2011. These themes are quite a bit different than the ones we highlighted just days ago from former colleague Richard Bernstein – much more cautious on the near-term future.

Muddling through isn’t working. This column argues that troubled Eurozone nations should simultaneously open restructuring talks while continuing to service their debts normally. Germany, France, and other core Eurozone nations would have to stand ready to recapitalise the banks most exposed to the restructured debt. The ECB would then stabilise the banking system and the EFSF would stabilise sovereign debt. This big bang could be prepared in a weekend; the market already seems to be pricing it in.

Despite its large size relative to the small Irish economy, the bailout of Ireland is not working. Risk premiums continue to rise. This column argues that part of the problem lies in a seemingly innocuous provision in the rescue facility that is to replace the current European Financial Stability Facility in 2013. The argument is tricky, but the heart of the problem is the insistence that rescue financing be senior to private debt while simultaneously ruling out rescheduling of short-term debt.