Monthly Archives: September 2011

TRICHET: WE STAND READY TO SUPPLY UNLIMITED LIQUIDITY

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He’s got this part right, and it would nice if the Fed took notice and acted likewise for it’s banking system.

The way I say it is the liability side of banking is not the place for market discipline.

Also note, banks don’t need capital to function.
In fact, up until not that long ago most euro banking was by ‘national’ banks
which means they have no private capital.

Directly or indirectly,
regulators shut banks down, not markets.

See my banking proposals at:

Proposals for the Banking System, Treasury, Fed, and FDIC (draft)

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Senator Warner, Democrat, announces bipartisan group of 38 senators to encourage super committee to “go big” on deficit reduction

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posting..

Senator Warner announces formation of bipartisan group of 38 senators to encourage super committee to “go big” on deficit reduction
~ Warner leads new Senate coalition of 19 Republicans, 18 Democrats & 1 Independent ~
Senator Warner today announced that he has organized a bipartisan coalition representing more than one-third of the members of the U.S. Senate to encourage the members of the congressional “super committee” to seek the broadest possible bipartisan agreement to address the nation’s deficits and debt. This group of 38 Senators — 19 Republicans, 18 Democrats and one Independent — builds upon Sen. Warner’s yearlong efforts, along with Sen. Saxby Chambliss (R-GA), to craft a deficit and debt framework as the two co-founders of the Senate’s bipartisan “Gang of Six.”

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econ recap- Fed driven sell off

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As previously suggested, the Fed doing anything would cause markets to believe it’s all going bad out there.

However, the US economic news still looks like modest improvement,
so I still suspect the reaction to the Fed will be temporary, and start wearing off around noon Eastern time today.

q3 still looking up from q2 which was up from q1.

And gasoline prices now moving lower help the consumer a bit more,
so q4 should be up more than q3.

With GDP sequentially better all year, makes sense to me that earnings in general will continue to grow.

Employment not doing much as there is still some underlying productivity growth
which also helps keep unit labor costs in check.

This means stocks still be in their ugly trading range, with the lower bound somewhere around current levels.

Though potential external shocks remain.

With the ECB again writing the check today by buying Italian and Spanish bonds
the current situation is in fact operationally sustainable, and I suspect what we are seeing
is the resolution. The ECB buys as needed in conjunction with imposing austerity,
and the euro zone muddles through with flat to modestly negative growth and deficits higher than they’d like.
Note too, that the ECB buys bonds are relatively high yields, and pays relative low rates of interest on the clearing balances it creates
to make the purchases. This results in a profit for the ECB that adds to their stated capital and their stated capacities.
So as long as they keep buying there’s no default and not only no losses, but rising ECB profits.
And there’s no inflationary consequences because none of this increases actual spending by the national govts.
All it does is allow them to fund their austerity budgets as dictated by the ECB.

China continues to decelerate and so far avoid reporting a hard landing,
and while the jury is still out on that score, trade and demand growth is slowing.
They know how to increase demand but are holding back due to concerns of inflation.

Commodities are finally selling off and heading towards their marginal costs of production,
just as the textbooks describe, as global tight fiscal keeps demand in check.

And with seemingly no one in any position of responsibility understanding how their monetary systems work,
and instead carrying on as if they were all operating under some sort of fixed exchange rate constraint,
the odds of an acceleration in aggregate demand any time soon remain remote.

Initial jobless claims dropped by 9,000 to 423,000 the week ended Sept. 17, as expected. Continuing claims fell by 28,000 to 3,727,000 in the week ended Sept. 10. The four-week moving average of new claims, a more reliable indicator of the labor market’s recent performance, rose by 500 to 421,000

 
FHFA House Price Index Up 0.8 Percent in July

 
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in August to 116.2 (2004 = 100), following a 0.6 percent increase in July and a 0.3 percent increase in June.

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Proposal for the Fed- start a euro depository account for member banks

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The Fed has an account at the ECB.

And while banks can have accounts at the ECB, they are not currently segregated from the bank’s balance sheets.
In other words, if you have a euro deposit with a US bank, and the bank fails, you become a general creditor and could lose all of your euro.

This proposal would work as follows:

The Fed would act as agent for its member banks,
allowing them to open euro accounts at the Fed,
with the Fed keeping those euro in its euro account at the ECB.

These accounts would be segregated from the member bank’s balance sheet, so that any bank insolvencies
would not be a factor with regard to these segregated euro deposits.

The member bank must deposit all of these client euro deposits at the Fed.

Functionally, it would be as if the bank’s euro depositors had direct access to the Fed’s euro account at the ECB.

Therefore there need be no capital requirements associated with these accounts.

These accounts would allow global investors access to ‘risk free’ euro deposits.

Currently they must hold deposits in euro banks, national govt. debt, corporate debt, or actual euro cash.

This will help stabilize the euro financial structure and provide a bit of income from service fees for US member banks.

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my Dec 30 2010 post revisited

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COMMENTS ON MYSELF IN CAPS:

Karim on Jobless Claims Data and Year End Comments

Posted by WARREN MOSLER on 30th December 2010

Agreed with Karim, the relatively modest recovery remains on track.

Left alone, I see GDP in the 3.5%-5.5% range for next year, and possibly more.

***WRONG ON THAT! THOUGH FOR REASONS SUBSEQUENTLY DISCUSSED IN THE SAME POST.

AND THE SURPRISE EARTHQUAKE NOT HELPING MATTERS AFTER WHAT TURNED OUT TO BE A MUCH WEAKER FIRST QUARTER

Though they didn’t add much, the latest tax adjustments did take away the down side risk of taxes going up at year end.

***TRUE, AND ON A LOOK BACK THE REMOVAL OF ‘WORK FOR PAY’ MAY HAVE BEEN A FAR STRONGER NEGATIVE THAN THE POSITIVE OF THE PARTIAL CUT IN FICA

I do, however, see several negatives with maybe up to 25% possibilities each, meaning collectively the odds of any one of them happening are a lot higher than that.

The new Congress is serious about deficit reduction. The risk is they will be successful, and it seems they even have the votes to get a balanced budget amendment passed.

***THOUGH NOT A LOT OF ACTUAL TIGHTENING YET, THIS HAS BEEN A STRONG INFLUENCE.

China could get it wrong in their fight against inflation and cause a pretty severe slump. In fact, I can’t recall any nation that didn’t cause a widening of their output gap in their various fights against inflation.

***THIS IS HAPPENING AS WELL.

LAST NIGHT’S NEGATIVE MANUFACTURING NUMBER CONTINUES THE PATTERN OF WEAKNESS

The ECB’s imposed austerity in return for funding at some point reverses the current modest growth of that region. Not to mention the small but real risk the ECB decides to not buy any more member nation debt in the secondary markets.

***THIS HAS ALSO TURNED OUT TO BE THE CASE WITH AUSTERITY NOW TAKING OVERALL GDP GROWTH TO NEAR 0, AND THE ECB COMING IN ONLY AS COLLAPSE IS THREATENED.

While a less important economy for the world, the UK austerity looks ill timed as well.

***ALSO CAUSING SERIOUS DOMESTIC WEAKNESS.

The Saudis could continue to hike their posted prices which could reduce US demand for domestic output. The spike to the 150 level in 08 was a significant contributor to the severity of the financial collapse that followed.

***THIS DIDN’T HAPPEN, AS THE SAUDIS INSTEAD ANNOUNCED A RANGE OF $80-90 WHICH WAS ACHIEVED FOR WEST TEXAS DUE TO LOCAL SUPPLY ISSUES, BUT WITH BRENT AND THE REST OF THE WORLD HOVERING AROUND THE $110-115/BARREL RANGE THAT PRICE IS A HIGHER TAX ON GLOBAL CONSUMERS.

There are also several lesser factors I’ve been listing the last few weeks that could cause aggregate demand to disappoint.

*INTERESTINGLY, MOST QUARTERLY FORECASTS FOR 2011 STARTED OUT AT AROUND 4%, ONLY TO BE REVISED DOWN UNTIL THE ACTUAL RESULTS CAME IN ABOUT HALF THAT.

THEN, IN LATE JULY IF I RECALL CORRECTLY, THE GOVT. REVISED DOWN THE ALREADY REVISED DOWN RESULTS SUBSTANTIALLY FURTHER, WITH Q1 NOW REPORTED AT ONLY .5%, Q2 1%, AND Q3 NOW FORECAST FOR ABOUT 1-1.5%.

On the positive side is always the possibility of a private sector credit expansion taking hold.

***SO FAR ONLY A MODEST INCREASE IN CONSUMER CREDIT EXPANSION.

Traditionally that would be borrowing to spend on housing and cars.

***CAR SALES WERE GROWING REASONABLY WELL UNTIL THE EARTHQUAKE SET THEM BACK, AND THEN POLICY RESPONSE TO THE EARTHQUAKE WAS TOO WEAK TO SUSTAIN AGGREGATE DEMAND.

Federal deficit spending has done its job of restoring incomes and monetary savings, and will continue to do so.
Financial burdens ratios are down, car sales are showing some modest growth, and housing looks to have at least bottomed. And both are at low enough levels where there could be a lot of growth and they’d still be very low, especially housing.

*FEDERAL DEFICIT SPENDING DOES CONTINUE TO BE SUFFICIENT TO KEEP GROWTH MODESTLY ABOVE 0, AND UNEMPLOYMENT, THOUGH FAR TOO HIGH, HAS AT LEAST STOPPED RISING.

I don’t see inflation as a risk (unless crude spikes a lot higher), nor deflation (unless one of the above shocks kicks in).

And I do see the ‘because we think we could be the next Greece we’re turning ourselves into the next Japan’ theme continuing, as it seems highly unlikely to me we will get back to, say, the 4% unemployment level for a very long time, if ever, until there’s a paradigm change regarding fiscal policy.

*THE TERM STRUCTURE OF RATES IS FALLING IN A JAPAN LIKE WAY, REAL ESTATE CONTINUE TO BEHAVE VERY JAPAN LIKE, AND STOCKS SEEM TO BE IN AN UGLY, JAPAN LIKE TYPE OF TRADING RANGE.

The full employment budget deficit might be up to 4% of GDP or higher, and our current tax structure probably still delivers a cycle ending surplus at full employment.

*THOUGH AT THIS RATE IT WILL BE A LONG TIME BEFORE THAT GETS TESTED.

BUT, MORE IMPORTANT, IT MEANS A FULL FICA SUSPENSION WOULD BE LIKELY TO BE PERMANENT.

In other words, with our current tax structure and size of govt, full employment remains unsustainable.

Lastly, my feel is that there’s about a better than even chance of an equity and commodity sell off. Stocks as well as commodities look like they are pretty much pricing in all the good economic news, some of which is bogus, like QE being inflationary, as previously discussed. There could also be dollar strength which would contribute to equity and commodity weakness. And the stock and commodity weakness would also work to bring the term structure of rates lower as well, particularly as rates seem to have gone higher recently more due to supply factors during a holiday week and maybe year end selling than anything else. The forwards ED forwards don’t look to me to be at all low with respect to mainstream expectations of future fed rate settings. And it also looks like the annual portfolio rebalancing will be that of selling stocks which went up last year and buying bonds which went down, to get all the portfolio ratios back in line with marching orders from higher ups.

*THIS WAS ALSO DISCUSSED IN MY POST ON THE QE BUBBLE, WHERE I SUGGESTED ALL THAT MOVED BASED ON QE HAD DONE SO OUT BY ‘MISTAKE’ AS MARKET PARTICIPANTS BELIEVED QE ACTUALLY WORKS TO INFLATE, ETC, WHEN IN REALITY QE IS AT BEST A DEFLATIONARY TAX.

THAT ‘UNWIND’ CONTINUES TO PLAY OUT WITH GOLD PERHAPS BEING THE LAST OBJECT OF INVESTORS HEDGING AGAINST ‘INFLATION’ TURNING SOUTH SOON AFTER IT WAS REALIZED THAT CHAVEZ’S GOLD DID EXIST AND WAS BEING SHIPPED BACK TO HIM.

DEFLATIONARY FISCAL POLICIES TEND TO TAKE AWAY SPENDING POWER TO THE POINT WHERE SPECULATION IN GENERAL LOSES ITS FUNDING AND ECONOMIC FORCES OF SUPPLY AND DEMAND TEND TO DRIVE PRICES TO AND BELOW MARGINAL COSTS OF PRODUCTION IN A VERY TEXT BOOK LIKE MANNER.

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Fed

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I thought the path of least resistance was for the Fed to not do anything,
on the grounds the economy was improving sequentially,
core was still up a bit, etc.
and thereby support positive expectations for modest growth

And that if they did anything to try to help they’d be signaling the economy needed help
which would cause concern that the economy was bad enough
for the Fed to try to do something to help.

So that’s what happened.
The Fed made a positive gesture,
indicating it was trying to help,
which signaled they think the economy needs the help.
So stocks sold off and bonds went down in yield.

But also as previously suggested,
it will soon wear off and be forgotten,
with the only lingering memory being their isn’t much the Fed can actually do to help.

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ECB allowing corporate accounts threatens Germany

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First, I don’t have confirmation this is happening the way it’s being reported.

But if it is, it opens the door for German rates to rise with credit concerns.

Without direct ECB accounts, holders of euro balances have only credit sensitive options as depositories for their funds.
These include euro banks, where deposit insurance is only via their national govt., corporate liabilities including debt and equities, and national govt. debt.

With nowhere else to go, and Germany perceived as the safest of the lot, and therefore German yields have plunged relative to other debt instruments as risk perceptions have escalated.

However, if private companies can bank directly at the ECB, Germany can quickly lose it’s TINA (there is no alternative) status, and instead be valued as an alternative to an actual ‘risk free’ depository- the ECB itself- putting Germany in the same boat with the other member nations.

Additionally, the time seems right for a new (private sector) euro member bank to emerge that’s a pure ‘depository bank’ with its assets limited to deposits at the ECB, charging its depositors a fee for this service, much like a money market fund. This, too, would have the same effect on Germany.

So while Germany is the strongest of the euro member nations, it is none the less not the issuer of the euro, and has debt ratios that are far higher than what markets would ordinarily fund for non issuers of a currency. However, as long as it continues as the ‘investment of last resort’ for holders of euro rates can remain far lower than otherwise.

Siemens Shelters Up to $8 Billion at ECB
Published: Tuesday, 20 Sep 2011 | 12:46 AM ET

 
Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

 
The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

 
In total, Siemens has parked between 4 billion euros ($5.4 billion) and 6 billion euros at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

 
Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

 
It was not clear from which bank Siemens withdrew its deposits. A person familiar with BNP Paribas said, however, that it was not the bank involved.

 
Siemens and the ECB declined to comment.

 
The company’s move came almost a year after Europe’s largest engineering conglomerate prepared itself for a future financial crisis by launching its own bank, an unusual move for an industrial group outside the car sector, where companies run big car financing and leasing businesses.

 
In an interview last December, Roland Châlons-Browne, chief executive of Siemens’ financial services unit, said its banking business would enable the group to tap the central bank for liquidity and deposit cash at the ECB.

 
“In the case of another financial crisis, we will be able to broaden our flexibility and take out risk with our own bank,” Mr Châlons-Browne said at the time.

 
Siemens does not only use the ECB as a haven; it also gets paid a slightly higher interest rate than it would get from a commercial bank.

 
The ECB paid an average interest rate last week of 1.01 percent for its regular offers of one-week deposits, under which it withdraws from the financial system an amount of liquidity equivalent to the amount it has spent on eurozone government bonds.

 
That compares with an average overnight interest rate paid by eurozone banks of 0.95 percent.

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GOP Leaders Warn Bernanke About Further Fed Action

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“The food was terrible and the portions were small”
Comment from the post war Catskill resorts

So now the Fed’s being warned about shooting more blanks:

GOP Leaders Warn Bernanke About Further Fed Action
Published: Tuesday, 20 Sep 2011 | 6:13 PM ET

 
Top Congressional Republicans Tuesday took the unusual step of telling the Federal Reserve to refrain from further “intervention” in the economy on the eve of a policy decision by the U.S. central bank.

 
The group, which included the top two Republicans in both houses of Congress, said the Fed’s policies have been ineffective at supporting economic expansion and boosting employment.

 
“It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate,” the group said in a letter to Fed Chairman Ben Bernanke.

 
The letter was signed by House Speaker John Boehner, Majority Leader Eric Cantor, Senate Minority Leader Mitch McConnell and Senate Minority Whip Jon Kyl.

 
With economic prospects fading dramatically after a damaging U.S. debt downgrade in August and an escalation of European financial turmoil, the Fedhas made clear it is intent on taking further steps to lift growth.

 
Although officials at the central bank differ on how best to address the economy’s woes, analysts expect Bernanke to muster a consensus behind a plan to rebalance the Fed’s portfolio to push down longer-term interest rates.

 
Officials hope that by weighting the central bank’s bond holdings more heavily toward longer-term debt they can spur mortgage refinancings and push investors into stocks or corporate bonds and away from safe-haven Treasurys.

 
The Fed is expected to announce its decision at about 2:15 p.m. on Wednesday.

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