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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for January 2nd, 2009

Obama in no rush for fiscal package?

Posted by WARREN MOSLER on 2nd January 2009


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Obama Has No Timetable for Stimulus Package

by Steve Leisman

President-elect Barack Obama does not have a timetable to develop and pass an economic stimulus package, according to one of his aides on the transition team.

Still, Obama wants to get a plan in place as soon as possible given the deteriorating economy, this person said.

Wait until the December unemployment report comes out…

However, it is important to get the stimulus plan right in order to get the maximum impact from the effort.

What’s that all about? Lower multiple fiscal adjustments just mean you can do more of them.

It’s about aggregate demand, not governments ability to pay.

Previously, there had been talk of a Jan. 20 deadline for passage of an economic plan. But this is looking increasingly unlikely.

Wonderful…


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Posted in Articles, Obama | 3 Comments »

EU Daily | Europe Manufacturing Recession Worsens in December

Posted by WARREN MOSLER on 2nd January 2009


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Highlights
Europe Manufacturing Recession Worsens in December
Nowotny Says ECB’s Liquidity Measures Need Time to Take Effect

Right, time to wait for a US fiscal response large enough to help the eurozone as well as the US.

Merkel hints at German tax cuts
Spain Manufacturing Contracted at Record Pace in December
German Home Foreclosures Fell 3.7% in 2008, Sueddeutsche Says
Sarkozy Says He’s Ready to Do More to Spur Economy
European Bonds Fall as Gains by Stocks, Low Yields Deter Buyers


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Posted in Articles, News Highlights | No Comments »

Macro effect of government MBS purchases

Posted by WARREN MOSLER on 2nd January 2009


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The fed buying mortgages at, say, 5% and paying nothing on the balances it credits to pay for the purchases increases fed ‘earnings’/decreases private sector earnings,

So at the ‘income level’ it’s a tax that reduces aggregate demand.

Only to the extent private sector debt increases more than that due to lower interest rates is the macro outcome positive.


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Posted in Uncategorized | 4 Comments »

Foreign dollar bond issuance increasing

Posted by WARREN MOSLER on 2nd January 2009


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Not a lot yet, but $65 billion is something and counts as USD deficit spending as they are presumably borrowing to spend.

The Fed swap lines outstanding of something over $600 billion probably do not yet represent ‘borrowing to spend’ but there is no way to tell from current data.

Both, however, can be considered ‘selling USD’ in the FX markets, with the swaps preventing a possible forced dollar buying more than driving a selling of dollars.

‘Original Sin’ Returns as Emerging Markets Plan Bonds (Update3)

By Lester Pimentel

Dec. 31 (Bloomberg) — Developing nations plan to sell the most dollar-denominated bonds since 2005, reversing a shift into local debt, as commodities prices fall, foreign reserves diminish and emerging-market currencies weaken.

International sales may rise 68 percent to $65 billion next year, according to estimates by ING Groep NV. Mexico raised $2 billion in a Dec. 18 offering. Peru’s Finance Minister Luis Valdivieso met with investors in New York, Boston, London and Madrid this month to drum up interest for the country’s first foreign sale in almost two years.

Governments are growing more dependent on international markets after the six-month drop in raw materials reduced earnings from exports and caused budget deficits to widen. Dollar borrowing will increase foreign-exchange risk, a pattern that led countries across Latin America to default in the 1980s, saidRicardo Hausmann, director of the Center for International Development at Harvard University in Cambridge, Massachusetts.

“Countries will be forced to issue in dollars,” said Hausmann, a former Venezuelan planning minister who called developing nations’ reliance on foreign markets the “original sin” in a 1998 article in Foreign Policy magazine. “Debt structures will deteriorate again.”


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Posted in Articles | 7 Comments »

Gasoline consumption up again

Posted by WARREN MOSLER on 2nd January 2009


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We are still very close to the edge of available supply.

And the OPEC cuts are supporting Saudi efforts to bring price up without losing too much production.

Oil Surges 14 Percent on Lower-Than-Forecast Fuel Supply Gain

By Mark Shank

Dec. 31 (Bloomberg) — Crude oil rose, trimming a record annual decline, after a government report showed a smaller-than- expected gain in U.S. fuel stockpiles.

OPEC Production Cuts

Oil may rebound next year to average $60 a barrel as the Organization of Petroleum Exporting Countries makes record production cuts to counter the deepest economic slump since World War II, according to the median of estimates by 33 analysts surveyed by Bloomberg. That would be a 45 percent gain from today’s price.

Refineries operated at 82.5 percent of capacity last week, down 2.2 percentage points from the week before and the lowest since the period ended Oct. 10 when the Gulf Coast was recovering from hurricanes Gustav and Ike. Analysts forecast a 0.5 percentage-point increase.

Refiners often shut units for maintenance, also known as turnarounds, in late January and February as heating-oil demand falls and before gasoline use rises.

‘Ample Crude’

“We have ample crude-oil supplies and a minor surplus in supplies of the products,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “If we have a heavy turnaround period, the surplus in products could soon turn into a deficit.”

U.S. fuel consumption during the four weeks ended Dec. 26 averaged 19.9 million barrels a day, down 3.7 percent from a year earlier, the report showed.

3.7% is tiny, and the year over year drop has been declining.

Demand has to be surprisingly high given the extreme weakness of the US economy.

And while the lower prices are helping sustain demand, demand never did fall off that much.


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Posted in Articles, Oil | 1 Comment »

Crude Graph

Posted by WARREN MOSLER on 2nd January 2009


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Crude Open Interest (n/a)

 
Inventory liquidation over?

Happy New Year!


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Posted in Oil | No Comments »

Fed MBS Purchase Plan

Posted by WARREN MOSLER on 2nd January 2009


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These quotes are not from Warren:

Yesterday the Fed announced that it will be starting its $500b Agency MBS Purchase Plan in early January. The mortgage market has been waiting for some clarity on this issue since it was first announced on Nov-26th.

Although mortgage dollar prices are high, mortgage valuations are still wide, (OAS levels, Static Spread to Swaps, Cumulative performance vs. Hedges, etc…see attached .pdfs). Mortgages typically perform well at the start of the year as banks and other real-money investors create a January effect for the sector. Yesterday’s late-day announcement should kick-start this process and I expect the basis to perform well over the next couple weeks.

Below is the FAQ from the NYFed Website:

My bulletpoints are:

  • The agency MBS program will involve the outright purchase of up to $500 billion in agency MBS by the investment managers on behalf of the Federal Reserve by the end of the second quarter of 2009.
  • Purchases will be guided by commonly referenced market indices. (AW – this means that the managers are suppose to buy the representative index – NOT just the coupons closest to par – see table at end of email for the current coupon distribution).
  • Purchases are expected to begin in early January, 2009.
  • The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal.
  • The investment managers are BlackRock Inc., Goldman Sachs Asset Management, PIMCO and Wellington Management Company, LLP.
  • The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. (AW – and does include Hybrid ARMs or Private Label Fixed Rate securities)
  • The investment strategy may involve the use of dollar rolls as a supplemental tool to smooth market supply and demand.
  • The Federal Reserve’s agency MBS program is separate and distinct from the U.S. Treasury’s program but both programs are aimed at fostering improved conditions in mortgage markets.
  • Each investment manager will be required to implement ethical walls that appropriately segregate the investment management team that implements the Federal Reserve’s agency MBS program from other advisory and proprietary trading activities of the firm

FAQs: MBS Purchase Program

The following frequently asked questions (FAQs) provide further information about the program to purchase agency mortgage-backed securities (agency MBS) that was announced by the Federal Reserve on November 25, 2008. This agency MBS program will be managed at the direction of the Federal Open Market Committee (FOMC) by the Federal Reserve Bank of New York (New York Fed). The New York Fed has selected four investment managers to help implement the agency MBS program.

Effective December 30, 2008

General

What is the policy objective of the Federal Reserve’s program to purchase agency mortgage-backed securities?
The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.

Why is it necessary for the Federal Reserve to transact in the agency MBS market via external investment managers?
The operational and financial characteristics of MBS purchases are significantly more complicated than those associated with the assets that have traditionally been purchased by the Federal Reserve. The Federal Reserve has chosen external investment managers as a means of implementing the MBS program quickly and efficiently while at the same time minimizing operational and financial risks.

Because of the size and complexity of the agency MBS program, a competitive request for proposal (RFP) process was employed to select four investment managers and a custodian. The investment managers are BlackRock Inc., Goldman Sachs Asset Management, PIMCO and Wellington Management Company, LLP. The selection criteria were based on the institution’s operational capacity, size, overall experience in the MBS market and a competitive fee structure. The contract for a custodian is not yet final.

What securities are eligible for purchase under the program?
Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. Eligible assets may be purchased or sold in specified pools, in “to be announced” (TBA) transactions, and in the dollar roll market.

What is the investment strategy that will be employed?
Investment managers will employ a passive buy and hold investment strategy in accordance with investment guidelines prescribed by the Federal Reserve. Purchases will be guided by commonly referenced market indices. The agency MBS program will involve the outright purchase of up to $500 billion in agency MBS by the investment managers on behalf of the Federal Reserve by the end of the second quarter of 2009. The New York Fed will adjust the pace of its purchases based on input from the investment managers about market conditions and the impact of the program. The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal.

The investment strategy may involve the use of dollar rolls as a supplemental tool to smooth market supply and demand. A dollar roll is a transaction involving the sale of agency MBS for delivery in the current month and the simultaneous agreement to repurchase substantially similar (although not the same) securities on a specified future date.

Does the agency MBS program expose the Federal Reserve to increased risk of losses?
Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve’s exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve’s exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.

When will the purchases begin?
Purchases are expected to begin in early January, 2009.

Who will the investment managers trade with and who is eligible to sell agency MBS to the Federal Reserve under the program?
Initially, the investment managers will trade only with primary dealers who are eligible to transact directly with the Federal Reserve Bank of New York. Primary dealers are encouraged to submit offers for themselves and for their customers.

Will the agency MBS held by the Federal Reserve through this program be eligible for lending through the Treasury Securities Lending Facility (TSLF) or the daily System Open Market Account (SOMA) securities lending operations conducted by the New York Fed?
There are no plans for the agency MBS held by the SOMA to be available for borrowing through the TSLF or the daily securities lending program.

How will purchases under the agency MBS program be financed?
Purchases will be financed through the creation of additional bank reserves.

What is the legal basis for the agency MBS purchase program?
Purchases of agency MBS in the open market, under the direction of the FOMC, are permitted under section 14(b) of the Federal Reserve Act.

How is the Federal Reserve’s agency MBS purchase program related to the U.S. Treasury’s efforts to purchase agency MBS?
The Federal Reserve’s agency MBS program is separate and distinct from the U.S. Treasury’s program but both programs are aimed at fostering improved conditions in mortgage markets.

How will holdings under the agency MBS program be reported?
Balance sheet items related to the agency MBS purchase program will be reported after settlement occurs on the H.4.1. statistical release titled “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” There will be an explanatory cover note on the release when the new items appear for the first time. However, these data may be published well after trade execution due to agency MBS settlement conventions. In addition, the New York Fed will publish the SOMA agency MBS activity in more detail on its external website on a weekly basis.

What measures will the Federal Reserve take to ensure that an investment manager implementing the MBS program will not have an unfair advantage relative to other market participants due to the information it receives about the MBS program?
Each investment manager will be required to implement ethical walls that appropriately segregate the investment management team that implements the Federal Reserve’s agency MBS program from other advisory and proprietary trading activities of the firm. The New York Fed will monitor each investment manager’s compliance with this requirement.

Where should questions regarding the MBS purchase program be directed?
Questions regarding the MBS program should be directed to the New York Fed’s Public Affairs department: 212-720-6130.

Barclays MBS Index Coupon Composition, (formerly Lehman MBS Index):

Note that FN4.5′s only make up 3% of the index. And as of Nov08 there were only 682mm in Fannie and Freddie 4.0′s in the index, (doesn’t even show up in the table).

Barclays MBS Index Coupon Composition, (formerly Lehman MBS Index)

Index Weightings
Weight Dollar
Security Notional Dv01 Duration %
30yr 4.5′s 80,214,746 2.73 21,893 3%
30yr 5.0′s 742,379,086 1.89 140,298 21%
30 yr 5.5′s 1,269,364,289 1.53 194,428 29%
30yr 6.0′s 916,825,242 1.45 132,649 20%
30yr 6.5′s 285,236,709 1.73 49,275 7%
30yr > 85,527,469 2.09 17,844 3%
30 YRS 84%
15yr 4.0′s 46,683,356 2.20 10,282 2%
15yr 4.5′s 181,841,523 1.82 33,116 5%
15yr 5.0′s 181,468,076 1.53 27,765 4%
15yr 5.5′s 85,474,092 1.40 11,984 2%
15yr 6.0′s 39,301,895 1.47 5,786 1%
15yr > 6,464,359 1.81 1,171 0%
15 YRS 14%
20yrs 124,911,590 1.55 19,322 3%
20YRS 3%
TOTAL 4,045,692,432 1.65 665,812 100%


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Posted in Articles, Fed | No Comments »

2009-01-02 USER

Posted by WARREN MOSLER on 2nd January 2009


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ISM Manufacturing (Dec)

Survey 35.4
Actual 32.4
Prior 36.2
Revised n/a

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ISM Prices Paid (Dec)

Survey 20.0
Actual 18.0
Prior 25.5
Revised n/a

 
Karim writes:

  • Weaker than expected across the board. Prices paid and production data imply further sharp falls in CPI and GDP in period ahead.
  • Export orders data and anecdotals on Europe and Asia imply the same for rest of G3.

Pretty much sums up what happened in December in general.


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Posted in Daily | No Comments »