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Chart of the Day: Permanent Zero and Personal Interest Income

Edward Harrison — Fri, 27 Jan 2012 22:22:38 +0000

If you are a retiree, you're not happy these days. Five years ago, you were getting a decent return on your fixed income investments. But since then, the Fed has trashed the fixed income market by reducing interest rates to zero percent for "an extended period". The thinking is that this will get people to take on more credit. But the reality is that a lot of people are stuffed to the gills with existing credit and are not creditworthy. The Fed is pushing on a string

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Chart of the Day: Gold reacts to FOMC rate easing

Edward Harrison — Wed, 25 Jan 2012 18:00:19 +0000

The Fed has come out 9-1 in favor of rate easing i.e. capping medium-term treasury rates. The interesting bit is that while the Fed did the exact same thing in August out to two years, this announcement takes permanent zero out to nearly three years. That's rate easing. Some people call it financial repression. And it's gold bullish

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Developments continue to be bullish for Mexico

Win Thin — Wed, 25 Jan 2012 17:30:12 +0000

Given what we see as a basically hands off policy with regards to the exchange rate when MXN is appreciating, we see more potential upside for MXN compared to, say, BRL, where Brazilian authorities are clearly going to work against further currency strength. Others in Latin America are concerned with currency strength, including Colombia. As such, going long MXN vs. BRL or COP would be a good alternative too. On the other side, Banxico has installed circuit-breakers to help boost peso liquidity during times of stresses as part of an effort to prevent disorderly downside movement in the peso

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What has the Fed done to avoid the US becoming the next Japan?

Guest Author — Mon, 09 Jan 2012 14:15:00 +0000

Imagine being on the FOMC and in the mainstream paradigm. In 2008 you moved quickly to make sure the US would not become the next Japan. What do you have to show for it, 3 years later

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Monetary and Fiscal Policy for Sovereign Currencies

Randall Wray — Mon, 09 Jan 2012 13:30:48 +0000

This week we begin a new topic: functional finance. This will occupy us for the next several blog posts. Today we will lay out Abba Lerner’s approach to policy

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PBOC Easing To Continue In 2012

Win Thin — Sun, 08 Jan 2012 02:20:48 +0000

With the Chinese New Year holiday period approaching, it becomes a bit harder to discern PBOC’s policy intentions. It typically adds liquidity aggressively ahead of the holidays, but this year it comes at a time when the central bank is embarking on what we see as a protracted easing cycle

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ECB/Fed Support for the European Banking System – 750 billion USD, and counting …

Claus Vistesen — Wed, 04 Jan 2012 23:00:54 +0000

It is my view that the ECB is now the only thing between the economy and widespread bank failures, but I also concur that the consequence of this is a permanent outsourcing of the interbank market in Europe to the ECB's balance sheet and, quite possibly, Fed's USD swap lines

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The ECB Long-Term Repo Operation is about price not quantity

Guest Author — Wed, 21 Dec 2011 16:16:17 +0000

To it’s credit, the ECB has been pretty good on the liquidity front all along. I’d give it an A grade for liquidity vs the Fed where I’d give a D grade for liquidity. Back in 2008 the ECB was quick to provide unlimited euro liquidity to its member banks, while the Fed dragged its feet for months before expanding its programs sufficiently to ensure its member banks dollar liquidity. And the FDIC did the unthinkable, closing WAMU for liquidity rather than for capital and asset reasons

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Bond vigilantes and the currency relief valve

Edward Harrison — Wed, 21 Dec 2011 15:49:20 +0000

The last post by Randall Wray below is an interesting one because it points out how the world has changed since the end of the gold standard and why the sovereign debt crisis is centered in the euro zone. While I have an Austrian bias overall, for me, MMT is the best way to think about nonconvertible floating exchange rate systems as distinct from fixed exchange rate, currency board, pegged and convertible systems. The difference is policy space and what I would call the bond vigilante relief valve

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Is Finland Really A Closet Member Of The Eurozone Periphery?

Edward Hugh — Mon, 19 Dec 2011 02:36:20 +0000

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

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China: Lots of news, signifying nothing new

Michael Pettis — Sun, 18 Dec 2011 02:24:51 +0000

I don’t think there is a whole lot to say about this week’s numbers beyond what I have been saying for the past several months. Nothing substantial has really changed. China’s external account is worsening, and will continue to worsen since global imbalances have no choice but to adjust. Growth in China is slowing but remains relatively rapid, and as unhealthy as ever, but there is little likely to be done to improve the quality of growth until 2013. Beijing will continue veering back and forth between stomping on the credit accelerator and stomping on the credit brakes as the only way they can manage the economy

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Norway Surprises and Ongoing Funding Woes

Marc Chandler — Wed, 14 Dec 2011 18:45:05 +0000

By cutting 50 bp in one swoop, the Norges Bank hopes to get ahead of the curve. This is part insurance against addition headwinds, but also responds to the recent data indicating an economic slowdown

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The EU’s Camouflaged Bazooka

Global Macro Monitor — Fri, 09 Dec 2011 22:25:39 +0000

Many were disappointed that the EU Summit didn’t conclude with a hard number backstop for the ‘zone’s sovereign debt rolling over next year. We believe if you scratch the surface the bazooka is there

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Draghi Turns On Spigots, but Still a Drag

Marc Chandler — Thu, 08 Dec 2011 15:30:39 +0000

The ECB delivered the much expected 25 bp rate cut, though the decision was not unanimous. There was some immediate disappointment by some players positioned for the outside chance of a 50 bp move. The ECB addressed the liquidity and collateral measures to address the credit crunch. The ECB will provide two 3-year refi operation, which will replace the previous long-term repo operations (LTRO). Participating banks will have the option to return the funds after one year

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Pending EU Summit May Curb Response to ECB

BBH — Thu, 08 Dec 2011 12:45:00 +0000

The dollar is trading slightly firmer ahead of today’s ECB rate decision and tomorrow’s summit. We expect the ECB to cut by 25bps, with a possibility of a 50bps cut; look to fade knee-jerk reaction. Australia’s employment much weaker than expected; Singapore imposes news taxes on homes

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Official Action and Why Italy is Still at the Vortex

Marc Chandler — Wed, 30 Nov 2011 14:45:00 +0000

The EU Summit is the last opportunity of the year, and some observers say the last opportunity period, for action that will begin seriously addressing the crisis. Tomorrow France's Sarkozy is expected to present his proposals tomorrow and Germany's Merkel Friday. Germany and French proposals to expedite a fiscal union are important, but watch what Italy does. Before the summit, Italy will likely announce a new package of austerity that will take several important steps toward what Merkel and Sarkozy have in mind that are necessary for fiscal union

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News Links: Are Americans really shopping until they drop?

Edward Harrison — Tue, 29 Nov 2011 14:30:59 +0000

Analysis: Are Americans really shopping until they drop? | Reuters One glance at the numbers for the first big weekend of holiday shopping and you might think Americans are flush with cash and spending it freely. But a deeper look at the data reveals it would be wrong to suggest that conspicuous consumption is back

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You couldn’t inflate, even if you wanted to

Guest Author — Sun, 27 Nov 2011 01:30:35 +0000

So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblance of national government solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to

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Foreign news: Belgium gets austerity, EU prepares for Eurobonds, Netherlands says breakup inevitable, Spain to get IMF bailout

Edward Harrison — Sat, 26 Nov 2011 15:13:32 +0000

Foreign-language economic and finance links for 26 November

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News Links: Downgrade watch begins as debt panel concedes defeat

Edward Harrison — Tue, 22 Nov 2011 14:30:54 +0000

Downgrade watch begins as debt panel concedes defeat – The Hill’s On The Money Credit rating agencies reiterated Monday that the U.S. is at risk of a downgrade following the announcement that the supercommittee has failed. Standard & Poor’s warned lawmakers not to try and roll back the $1.2 trillion in automatic cuts set to

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Brazil: Outlook Vulnerable To Developed Market Developments

Win Thin — Fri, 18 Nov 2011 19:12:45 +0000

Brazil stands out now for being one of the few in EM to be cutting rates. We think most in EM will be cutting rates by Q1 2012 due to the deteriorating global growth outlook, and so BRL will still likely continue to enjoy a big yield advantage over other EM currencies next year. The current account and budget deficits remain very manageable, with inflows of FDI more than covering the former. There are many reasons to remain constructive on BRL, but the DM story unfolding suggests that we are months away from clear sailing for

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Warren Mosler’s Big Fat Greek MMT Exit Strategy

Randall Wray — Thu, 17 Nov 2011 16:26:20 +0000

It is beginning to look like a Greek exit is ever more likely, which means that the end of the EMU could be near. Even if exits and a break-up are not inevitable, countries should have a plan on the shelf. It is clear that Germany is going to insist on the maximum austerity it can squeeze from nations facing a run on their debt. Hence, if nothing else, an exit strategy is required for negotiations. The best strategy would be for all the so-called PIIGS to band together with a believable threat to exit together. That could finally break the logjam. I’m not optimistic about that. In any event, it is time to examine proposals for dissolution. Warren Mosler has formulated what looks like a nice, clean exit strategy that EMU members can adopt. I am reprinting here with his permission

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Spain Another Pain

Marc Chandler — Wed, 16 Nov 2011 15:00:04 +0000

Pressure is mounting on Spain. The 10-year yield today is essentially back to where it was when the ECB broadened its sovereign bond purchase scheme to include Spanish and Italian bonds. On Oct 27, the 10-year yield was near 5.33%. Today it is 100 bp higher. This is not a very conducive environment for tomorrow's new benchmark offering (up to 4 bln euros of bonds that mature in 2022)

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What if foreigners dump government bonds?

Randall Wray — Tue, 15 Nov 2011 14:00:00 +0000

when government deficit spends, some of the claims on government will end up in the hands of foreigners. Does this matter

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Ominous

Global Macro Monitor — Mon, 14 Nov 2011 20:51:44 +0000

This shouldn’t be happening after this weekend’s good political news. The spread widening is weighing on France who will be on the hook for their banks who are heavily exposed to European sovereigns. Where are you

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Gross, El-Erian on Europe, Strategy, Treasuries

Edward Harrison — Mon, 14 Nov 2011 19:00:00 +0000

PIMCO’s Mohamed El-Erian and Bill Gross spoke exclusively with Bloomberg Television’s Tom Keene today from the company’s headquarters in Newport Beach, CA about Europe’s crisis, PIMCO’s investment strategy and Treasury yields. Video here

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India getting hit by European slowdown

Edward Harrison — Fri, 11 Nov 2011 15:30:02 +0000

Over the past couple of days I have noticed a lot of posts on the FT’s emerging markets blog about a growth slowdown in India that is occurring as a direct result of the worsening outlook in Europe

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Euro zone breakup is inevitable

Edward Harrison — Thu, 10 Nov 2011 14:00:20 +0000

I continue to predict that Europe will move to change its constitution to include greater fiscal integration but also include explicit mechanisms for countries to leave the euro area

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Credible lenders of last resort use price, not quantity signals

Edward Harrison — Mon, 07 Nov 2011 03:15:25 +0000

Let’s talk about credible government bond backstops for a bit

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Full Text: ECB says Europe has “high uncertainty and intensified downside risks”

Guest Author — Thu, 03 Nov 2011 14:30:48 +0000

"Based on its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by 25 basis points."

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Sixty percent of China’s rich want to leave the country

Edward Harrison — Thu, 03 Nov 2011 02:51:28 +0000

Sixty percent of the rich Chinese people have said they intended to migrate from China in a recent poll. What would that mean for FX reserves, interest rates and the economy

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What will the Fed do tomorrow?

Marc Chandler — Tue, 01 Nov 2011 15:15:56 +0000

The Federal Reserve holds a two day meeting that concludes near midday tomorrow. It will likely be the first meeting in a while where there is not change in the composition or size of the balance sheet and no fresh initiatives, like cutting the rate of interest paid on excess reserves, or guidance. The tweaks in the communication are likely to be modest at best

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Turkey: On restoring central bank credibility and EM vulnerability

Win Thin — Thu, 20 Oct 2011 18:00:50 +0000

The Turkish central bank took a turn back to orthodox policy today despite leaving the benchmark 1-week repo rate unchanged at 5.75%. It dropped the language from several previous meetings about potential easing. The bank did hike the overnight lending rate from 9% to 12.5% and the late liquidity borrowing rate from 12% to 15.5%. These hikes are meant to tighten liquidity by raising the cost of borrowing from the central bank, but we do not think it is enough to change the outlook for the lira yet. What’s needed to restore central bank credibility is a more pronounced tightening in monetary policy, and yet policy-makers are not ready to do this due to slowdown fears

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Chart of the day: Italian bonds back over 6%

Edward Harrison — Thu, 20 Oct 2011 15:00:10 +0000

This chart shows how the Italians have suffered in the sovereign debt crisis. It is as if the ECB never bought bonds

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A year later everyone is catching on about Fed policy and net interest margins

Edward Harrison — Tue, 18 Oct 2011 20:00:13 +0000

Last November, in anticipation of QE2, I wrote a post called “How Quantitative Easing and Permanent Zero are Toxic To Bank Net Interest Margins”. The gist of the post was that if the ‘extended period’ for low rates was too long, net interest margins would suffer, especially during a recession. I was looking at Japan and their economic policies and seeing low yields and super-low net interest margins killing bank earnings. Now that we are seeing more movement down on net interest margins (BofA and Wells Fargo both showed margin compression for example), the mainstream media is finally catching on to the connection between Fed policy and net interest margins. You heard it here first though

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