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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 7th, 2010

Thoughts/Response to Bill Gross Piece

Posted by WARREN MOSLER on 7th January 2010

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Well stated and agreed!!!

A few highlights(mine), below:

On Thu, Jan 7, 2010 at 8:57 AM, Lando, Joseph wrote:

In a bit of a surprising philosophical shift, Bill Gross came out yesterday strongly bearish and firmly in the camp of the deficit hawks: Link . My reaction:

1. Any major tightening of financial conditions due to a spike in rates right now, particularly back-end rates, would just be met with more QE anyway. That much was certainly clear in the Fed Minutes yesterday.

2. Given a battle between the fundamental input of deflation and the technical factor of supply, deflation will win hands down. And though many seem to disagree, the data and the Fed and our own economists still think risks are tilted the other way. This input is making the 100-200bp difference in 10yr yields. Supply issues make the ‘1-2 standard deviations rich/cheap’ (speaking in Sudoku terms) differences of 20-30bps. Which wins?

3. I actually think the technicals are the other way. New supply of private label AAA securities is down 1T MORE than Treasury supply is UP. De-levering is, BY DEFINTION, a reduction in the overall supply of investible term fixed income assets. Here’s a picture from a couple months ago from our Global Markets group.

4. The yield curve is offering more yield enhancement than EITHER vol OR credit spread to the investment community. Not to mention Treasuries are 0% weighted (AND state/local tax-advantaged). Where do you think banks will turn to generate NIM? At some point, they will change their behavior. Look at CURVE vs both VOL and CREDIT regression below. Perhaps most notably…

5. The deficit hawk premise is flawed to begin with. Government buys a bridge, bridgebuilder buys a coat, coatmaker deposits or saves the money…it’s a closed loop in which deficit spending CREATES the precise funding for the deficit itself. All that moves around is DURATION as the need for 10yr savings or 30yr savings is swapped around vs the demand for say, overnight savings (like T-bills or banks reserves). Deficits in the US (unlike a Muni or a EU power or a Corporation) don’t have a problem funding. The ‘problem’ is if the Treasury wants to issue 30yr paper and people only really want 5yr paper. Actually, the market sells off when the sum of all borrowers’ duration is longer than the sum of all the lender’s preferences/liabilities. Not when there is a mismatch in AMOUNT. The AMOUNT is the same! Which takes us to…

6. Japan.

7. I also respectfully but strongly disagree with Gross’ interpretation of QE. The Fed has actually been swapping the bank and fixed-income universe OUT of their term treasuries and mortgages and into cash. By definition they have actually been crowding OUT overall NIM in the universe. And generating revenue for the Treasury. It’s actually an investor tax not a bailout. When they step away, those (and by parity zero-sum principles they are there) who were swapped out of their investments and into cash will swap back into term duration. Asset transfers themselves are zero sum. Additionally, in getting mortgage rates down, the Fed has been TEMPERING the pace of de-levering by ensuring mortgage refi’s can continue. They ‘made happen’ many of the mortgages that they bought. It’s a very self-regulating supply universe. If they slow down, there are just plain fewer mortgages being originated for people to buy, and the pace of overall deleveraging picks back up, and well…it’s not bearish, for sure.

8. Actually I hope 10s go to 4.25 because that just means there will be more to make in the big rally that I think starts in 6 weeks or so when the data turns back from fiscal stimulus withdrawal, and the Treasury’s ‘extension of average maturity’ program – what is TRULY the cause of the steepening of the yield curve – tapers off. For now, am only tactical in the back-end.

But that’s why we all have a market and life, as ever, will remain interesting in fixed income this year.


Posted in Banking, Deficit, Inflation, TREASURY | 8 Comments »

bank ‘hoarding of cash’

Posted by WARREN MOSLER on 7th January 2010

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Agreed. And as I’ve been saying since day one. The transmission mechanism he references isn’t broken. It never existed.

The reason banks are ‘hoarding cash’ is that the Fed has exchanged reserve balances for securities it bought in the market place.

The Fed determines reserves/’hoarding’ and not the banks.

From Dave Rosenberg: Look at the charts below and you will see how little effect the policy stimulus is exerting leaving the government continuing with demand-growth policies, such as extended and expanded housing tax credits, and the Fed, Treasury and the FHA doing all it can to keep the credit taps open … and for marginal borrowers at that. So the charts below show what, exactly? That the transmission mechanism from monetary policy to the financial system and the broad economy is still broken fully 2½ years after the first Fed rate cut. Cash on bank balance sheets as a share of total assets is at a three-decade high.

Bank lending to households and businesses has contracted more than 7% from a year ago, an unheard-of rate of decline unless you want to go back to Japan in the 90s or the U.S.A. in the 30s.


Posted in Banking, Fed, Housing | 7 Comments »

China Guides Bill Yields Higher

Posted by WARREN MOSLER on 7th January 2010

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I would expect the higher rates to support aggregate demand through the interest earned channels in the nations that hike rates.

Also, much of China’s lending by state owned/sponsored banks may be thinly disguised fiscal transfers that support demand. Cutting back by raising lending standards would then reduce demand. They apparently have a lot of excess capacity. The question is whether they increase demand to use it up, or slow down investment.

China Guides Bill Yields Higher, Seeking to Curb Record Lending

By Bloomberg News

Jan. 7 (Bloomberg) — China’s central bank sold three-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 is controlling the record expansion in lending and curbing price increases.

Stocks fell across Asia and oil declined on concern growth will slow in China, the engine of the world economy’s recovery from its worst recession since World War II. The People’s Bank of China offered 60 billion yuan ($8.8 billion) of bills at a yield of 1.3684 percent, four basis points higher than at last week’s sale, according to a statement.

“It’s definitely a signal that the central bank is tightening liquidity,” said Jiang Chao, a fixed-income analyst in Shanghai at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “The rising yield is used to prevent excessive growth in bank lending.”

Premier Wen Jiabao said on Dec. 27 that last year’s doubling in new loans had caused property prices to rise “too quickly,” while surging commodity costs were increasing inflationary pressure. Guiding market rates higher may be a prelude to raising reserve requirements or benchmark interest rates, said Shi Lei, a Beijing-based analyst at Bank of China Ltd., the nation’s third-largest lender.

The MSCI Asia Pacific Index of regional stocks fell 0.5 percent and oil for February delivery slid 0.7 percent after 10 days of gains. Copper for three-month delivery dropped 0.7 percent. The Shanghai Composite Index fell 1.9 percent, led by Bank of China Ltd. and Industrial & Commercial Bank of China Ltd.

Tightening in Asia

“We expect some tightening of monetary policy in Asia in the first half,” said Norman Villamin, Singapore-based head of investment analysis for Asia Pacific at Citigroup Private Bank. “Markets will struggle to go higher.”

Australia’s central bank raised borrowing costs by a quarter percentage point on Dec. 1 to 3.75 percent after similar moves in November and October. The Bank of Korea, which meets tomorrow, will probably raise its benchmark rate one percentage point to 3 percent by end-2010, according to a Bloomberg survey of economists. By contrast, the Federal Reserve target rate is close to zero and policy makers last month discussed increasing asset purchases should the economy weaken.

Policy makers will seek “moderate” loan growth while managing inflation expectations, the People’s Bank said yesterday in a report on its annual work meeting. The government has told lenders to pace lending, while tightening mortgage rules for second-home purchases. Liu Mingkang, the top banking regulator, wrote in an opinion piece in Bloomberg News this week that “structural bubbles threaten to emerge” in the economy.

Bill Sales

Guotai Junan’s Jiang said the yield on benchmark one-year bills will climb in open-market operations next week. The central bank resumed sales of those bills on July 9 after an eight-month suspension to help drain cash from banks.

The central bank is set to withdraw 137 billion yuan from the financial market this week, the biggest since the week ended on Oct. 23, according to data compiled by Bloomberg News.

China’s one-year interest-rate swap, the cost of receiving a floating rate for 12 months, rose 10.5 basis points to 2.24 percent. A basis point is 0.01 percentage point.

The central bank kept the benchmark one-year lending rate at a five-year low of 5.31 percent last year after five reductions in the last four months of 2008. It may rise to 5.85 by the end of 2010, according to a Bloomberg News survey of 29 economists in November.

Lending Boom

“There’s no doubt that lending has been excessive and that explains why policy makers are starting to be more cautious about lending this year,” said Qu Hongbin, chief China economist for HSBC Holdings Plc in Hong Kong.

Qu estimates new loans will be limited to 7 trillion yuan in 2010. Banks extended an unprecedented 9.21 trillion yuan of loans in the first 11 months of 2009, compared with 4.15 trillion yuan a year earlier.

The People’s Bank said it would curb volatility in lending and monitor the property market, while reaffirming a “moderately loose” monetary policy. The statement contrasted with the start of 2009, when the central bank targeted “appropriate” increases in lending and said monetary policy would play “a more active role in promoting economic growth.”

Consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of declines. The central bank is on alert for inflation after economic growth accelerated to 8.9 percent in the third quarter of 2009, the fastest in a year.

Property Prices

Housing Minister Jiang Weixin said yesterday that the nation will limit credit for some home purchases to reduce property-market speculation. Prices across 70 cities rose at the fastest pace in 16 months in November, gaining 5.7 percent from a year earlier, led by Shenzhen, Wenzhou and Jinhua.

The central bank didn’t state a 2010 target for growth in M2, the broad measure of money supply, after overshooting a 17 percent goal last year. The actual rate was more than 25 percent for most of 2009, rising to a record 29.7 percent in November.

“Growth will probably slow this year as tight credit will dampen the demand side,” said Zhang Ling, who helps oversee about $7.21 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “That will dash investors’ hopes of another year of fast growth.”


Posted in BRIC, China, Interest Rates | No Comments »