Chart of the Day: Operation BRIC Twist

Operation Twist didn’t work in Russia, India or Brazil and it’s not working in the

Was the IMF programme in Iceland successful?

According to the IMF, Iceland has graduated from its Fund-supported programme with unqualified success. This column begs to differ

What They Are Doing?

The quantity of debt grows as the quality recedes. The problem of bad loans is no longer just the pre-2008 mortgages, CDOs, and LBOs. Debt issued after the bust is defaulting, such as Greek sovereign bonds, issued in June 2010. Some securities are born to part investors from their money, but it’s remarkable the extent and variety of such instruments issued in 2011. The world choked on similar bonds and derivatives only three years ago, many of which are still held at false prices on financial institutions’ books

Fed Outgunned, EMU Outflanked

The auxiliary objective of QE by the Fed is to weaken the USD. Herein lies the rub. Quite simply, with the recent announcement by the BOE of another round of QE worth £75 billion, with the ECB now willingly or unwillingly being forced into increased support of peripheral debt markets and with the BOJ also pledging more stimulus, the Fed is starting to look like the conservative central bank in the G4. Even if Merkel and Sarkozy, and rightly so, appear most concerned with putting pressure on Italy, the most significant issue remains Greece which is now in default a fact that was un-sanctimoniously confirmed by the leaked bailout document which has the Troika admitting that the medicine they were mandated to administer would only make the patient worse and not better

Scott Sumner: What Can Asset Prices Tell Us About The Great Recession?

As the US is well short of full employment and the economy is at a low ebb, there has been considerable discussion about what the Fed should do, especially given the lack of fiscal support for the economy. I have a view here, but I am not expressing it in this post. I may at some future date. Rather, I want to highlight a view that I think is gaining currency. Bill Gross says that the Fed is going to target nominal GDP. This idea is something that Scott Sumner and David Beckworth have been promoting for some time. Other economists like Brad DeLong are getting onboard now.

I suggest you watch the video of Scott Sumner below to understand some of the thinking behind this policy prescription because it is something we could well see the Fed taking on

Turkey: On restoring central bank credibility and EM vulnerability

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

Manufacturing inflation in a wage deflationary environment

How does manufacturing CPI inflation benefit an economy in which incomes are falling? When inflation rises and incomes are stagnant or falling, the economy rolls over

Bruce Bartlett wants the Fed to target nominal GDP

I don’t see stimulus though, neither fiscal or significant monetary stimulus either. So that leaves me predicting slowing without policy stimulus until recession hits, at which point the loss of demand will blow the deficit out even more. And then we will have to see what the political appetite for policy responses will be since the banking system and the economy will both be under enormous stress much as they were in 2008-

BOE and ECB: What It Means and What is Next

The Bank of England, which has a penchant for surprising the market, chose not to wait for the quarterly inflation report to provide cover, and announce GBP75 bln additional bond purchases over the next four months. We forecast sterling to finish the year near $1.50. However, in the near-term there is scope for additional position adjusting. A move above the $1.5500-50 area could target $1.57 before sellers re-emerge.

The ECB focused on liquidity measures, including a 12- and 13-month long-term refi operations and 40 bln euro covered bond purchases. The ECB did not cut rates as many had expected. Short-term European rates back up smartly, with the euribor futures strip yields rising 9-13 bp. We expect the euro to finish the year near $

Chutes and Ladders: Preview of BOE and ECB Meetings

The outcome of the Bank of England meeting will known first. Based on the dovish cast to the Sept BOE minutes and some recent comments, within the context of generally soft economic data, there is speculation that the BOE can resume its asset purchases program with a GBP50 bln purchase over the coming few months. This seems to be the consensus.

If the ECB does cut rates this week, the euro may respond positively as it may be associated with boosting risk appetite, especially ahead of the US jobs report, where the private sector is expected to have created about 90k jobs, half of which may be accounted for by returning strikers. A failure to cut rates may be euro negative on grounds that the crisis in the periphery is likely to worse, without easier monetary policy. Indeed both the ECB rate hikes this year triggered new widening in peripheral spreads over bunds

The Global Double Dip and the French Bank Run

At some point soon, maybe tomorrow, I will be writing an update to two posts: The Fake Recovery and The recession is over but the depression has just begun. The gist of those two posts is still operative and also very relevant, namely that the problems which created a global panic in 2008 are still with us waiting for economic weakness to reassert themselves. When that weakness comes, bad things will happen. I think that about sums it up. We are about at that point right now

Operation Twist Brings No One to the Dance Floor

USD continues to surge amid safe haven demand; EUR breaks below 1.35, EM currencies drop 1-2.5%. The Fed delivered “Operation Twist” but bleak economic outlook continues to weigh on sentiment. Czech CB remains put, South African CB expected to do the same; Brazil unemployment and inflation