Author Archives: WARREN MOSLER

Re: Is $700 billion a big number

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(an email and an article)

On Dec 23, 2007 5:37 PM, Russell Huntley wrote:
>
>
>
> For a very bearish take on the credit crisis, see: Crisis may make 1929 look
> a ‘walk in the park’. The article includes a $700 billion loss estimate from
> the head of credit at Barclays capital:
>
> Goldman Sachs caused shock last month when it predicted that total crunch
> losses would reach $500bn,

Yes, could be. Rearranging of financial assets.

leading to a $2 trillion contraction in lending
> as bank multiples kick into reverse.

I don’t see this as a consequence. Bank lending will go in reverse only if there are no profitable loans to be made.

With floating exchange rates, bank capital in endogenous and will respond to returns on equity.

This already seems humdrum.
>
> “Our counterparties are telling us that losses may reach $700bn,” says Rob
> McAdie, head of credit at Barclays Capital. Where will it end? The big banks
> face a further $200bn of defaults in commercial property. On it goes.

Been less than 100 billion so far. Maybe they are talking cumulatively over the next five years?

>
> UPDATE: My main interest in this article was the quote from Barclays
> Capital. There has been a growing agreement that the mortgage credit crisis
> would result in losses of perhaps $400B to $500B; this is the first estimate
> I’ve seen significantly above that number.
>
> I noted last week that a $1+ trillion mortgage loss number is possible if it
> becomes socially acceptable for the middle class to walk away from their
> upside down mortgages.

Historically, people just don’t walk out onto the streets. They are personally liable for the payments regardless of current equity positions, and incomes are still strong, nationally broader surveys show home prices still up a tad ear over year.

Yes, some condo flippers and speculators will walk. But demand from that source has already gone to zero – did so over a yar ago, so that doesn’t alter aggregate demand from this point.

And that doesn’t include losses in CRE, corporate
> debt and the decrease in household net worth.

Different things, but again, the key to GDP is whether demand will hold up, including exports.

And probably half of aggregate demand comes directly or indirectly from the government. Don’t see that going negative. And AMT tax just cut fifty billion for 2008 will help demand marginally.

>
> The S&L crisis was $160B, so even adjusting for inflation, the current
> crisis is much worse than the S&L crisis (see page 13 of this GAO document).

That was net government losses? Shareholders/investors lost a lot more?

And a $1 trillion per day move in the world equity values happens all the time.

Q4 GPD being revised up to the 2% range. This has happened every quarter for quite a while.

Yes, it can all fall apart, but it hasn’t happened yet. And while there are risks to demand, negative GDP is far from obvious. Those predicting recessions mainly use yield curve correlations with past cycles and things like that.

Interesting that the one thing that is ‘real’ and currently happening is ‘inflation’, which the fed doesn’t seem to care about. And it won’t stop until crude stops climbing.

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Repo Mkts and TAF

Posted on by

(an interoffice email)

On 12/21/07, Pat Doyle
wrote:
>
>
>
> It is becoming apparent that the funding pressures for year end are ebbing.
> The ease in pressure has a lot to do with the TAF and coordinated CBK
> interventions. The Fed is getting the cash to the people who need it.
> Discount window borrowings have been slowly climbing as well approx 4.6bb
> now. The Fed statement that they will provide this TAF facility for as long
> as needed is easing concerns amongst banks and providing a reliable source
> of funding for “hard to fund” assets.

Should have done this in August!
>
>
> There is and has been a lot of cash in the markets still looking for a home.
> Balance sheets are slowly cleaning up but balance sheet premiums (repo) will
> remain stubbornly high as long as the level 3 type assets remain on
> dealer/bank balance sheets.
>
>
>
> The current spread between the 1×4 FRA vs. 1×4 OIS is 57bps..

This looks like a good play – seems unlikely LIBOR will be at a wider spread than the discount rate. Load up the truck?

1×2 FRA vs.
> 1×2 OIS is 40bps. Spot 1mos LIBOR VS 1MOS FFs is 4.86 vs. 4.25 or 61bps.
> These spreads still represent continued unwillingness to lend in the
> interbank market and also illustrate a steeper credit curve.
>
>
>
> Turn funding has not changed substantially. While funding appears to be
> stabilizing, balance sheets are still bloated and capital ratios are still
> under pressure therefore balance sheets will remain expensive in repo land.
>
>
>
> From another bank;
>
> Mortgages over the year-end turn traded at 5.25 today, which we still feel
>
> is a good buy here considering the amount of liquidity the fed has been
> dumping
>
> into the system as of late (via the TAF and standard RP operations) and the
>
> expectation that they will continue to do so on Dec 31. Treasuries also
> traded
>
> over the turn traded today at 2.50, the first treasury turn trade we’ve seen
> in
>
> quite some time.
>
>
>
>
>
> Yesterday Tsy GC O/N’s backed up from the low 3s to 3.70. The FED has been
> actively trying to increase the supply of treasuries in the repo markets.
>
>
>
> AGENCY MBS repo has been steadily improving. 1mos OIS vs 1mos AGCY MBS has
> gone from a spreads of 63bps last week to 15bps last night. And spreads to
> 1month LIBOR have widened by 33bps AGCY MBS from L-23 12/13 to L-56 12/20.
> Again LIBOR still showing the unwillingness of banks to lend to each other.
>
>
> -Pat
>
>
>
>
> Patrick D. Doyle Jr.
>
> AVM, L.P. / III Associates
>
> 777 Yamato Road
>
> Suite 300
>
> Boca Raton, Fl. 33431
>
> 561-544-4575
>
>

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2007-12-21 US Economic Releases

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2007-12-21 Personal Income

Personal Income (Nov)

Survey 0.5%
Actual 0.4%
Prior 0.2%
Revised n/a

OK number.

2007-12-21 Personal Spending

Personal Spending (Nov)

Survey 0.7%
Actual 1.1%
Prior 0.2%
Revised 0.4%

Nice bounce back from a low number also revised up. Makes the two month average about 0.75%. This will cause further upward revisions of Q4 GDP.

2007-12-21 PCE Deflator YoY

PCE Deflator YoY (Nov)

Survey 3.4%
Actual 3.6%
Prior 2.9%
Revised 3.0%

Back to my favorite quote from September, ‘If the fed doesn’t care about inflation, why should I?’

Wonder what it takes for the fed to care?

2007-12-21 PCE Core MoM

PCE Core MoM (Nov)

Survey 0.2%
Actual 0.2%
Prior 0.2%
Revised n/a

2007-12-21 PCE Core YoY

PCE Core YoY (Nov)

Survey 2.0%
Actual 2.2%
Prior 1.9%
Revised 2.0%

Core at or though fed’s upper bound.

2007-12-21-u-of-michigan-confidence.gif

U. of Michigan Confidence (Dec F)

Survey 74.5
Actual 75.5
Prior 74.5
Revised 2.0%

People still watching CNBC.

2007-12-21 Inflation Expecations - 1 Year Ahead

Inflation Expectations – 1 Year Ahead

Survey n/a
Actual 3.4%
Prior 3.2%
Revised n/a

One of the fed’s indicators – don’t like this action as they think once it elevates it’s too late.

2007-12-21 Inflation Expecations - 5 Years Ahead

Inflation Expectations – 5 Years Ahead

Survey n/a
Actual 3.1%
Prior 2.8%
Revised n/a

As above – once it elevates it’s too late.

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2007-12-20 US Economic Releases

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small 2007-12-20 GPD Annualized

GDP Annualized (3QF)

Survey 4.9%
Actual 4.9%
Prior 4.9%
Revised n/a

small 2007-12-20 Personal Consumption

Personal Consumption (3QF)

Survey 42.8.9%
Actual 2.8%
Prior 2.7%
Revised n/a

2007-12-20 GDP Price Index

GDP Price Index (3QF)

Survey 0.9%
Actual 1.0%
Prior 0.9%
Revised n/a

Above numbers as expected.

small 2007-12-20 Core PCE QoQ

Core PCE QoQ (3QF)

Survey 1.8%
Actual 2.0%
Prior 1.8%
Revised n/a

This is now at the upper bound of the fed’s comfort zone.

2007-12-20 Initial Jobless Claims

Initial Jobless Claims (Dec 15)

Survey 335K
Actual 346K
Prior 333K
Revised 334K

Creeping up.

Fed gets concerned if it gets over 375K.

2007-12-20 Continuing Claims

Continuing Claims (Dec 8)

Survey 2610K
Actual 264K
Prior 2639K
Revised 2634K

Creeping up as well, but not yet a major concern.

2007-12-20 Leading Indicators

Leading Indicators (Nov)

Survey -0.3%
Actual -0.5%
Prior -0.5%
Revised n/a

Pretty much in line with expectations.

2007-12-20 Philadelphia Fed.

Philadelphia Fed. (Dec)

Survey 6.0%
Actual -5.7%
Prior 8.2%
Revised n/a

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it’s about price, not quantity

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It’s about price, not quantity.

CB’s don’t alter net reserve positions – they ‘offset operating factors’ and set interest rates.

Fed to redeem $14.02 bln of bill holdings Dec. 27

Thu Dec 20, 2007 11:20am EST

NEW YORK, Dec 20 (Reuters) – The U.S. Federal Reserve said on Thursday it will redeem the full amount of maturing Treasury bill holdings, amounting to $14.02 billion on Dec. 27.

The redemption, a move to drain liquidity from the banking system, will take place via the Federal Reserve’s System Open Market Account or SOMA.

“The Federal Reserve Open Market Trading Desk will continue to evaluate the need for the use of other tools, including further
Treasury bill redemptions, reverse repurchase agreements and Treasury bill sales,” the Fed said in a statement on the New York Fed’s Web site. (Reporting by John Parry; Editing by James Dalgleish)

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Commercial paper outstanding continues to fall

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Seems to be unwinding in an orderly fashion as lending continues to flow back to the banking sector.

UPDATE 1-US commercial paper in biggest weekly drop since Aug

Thu Dec 20, 2007 10:41am EST

NEW YORK, Dec 20 (Reuters) – The size of the U.S. commercial paper market suffered its biggest weekly shrinkage since late August, after credit market turmoil first erupted, the Federal Reserve reported on Thursday.

The overall U.S. commercial paper sector shrank $54.7 billion to a total $1.784 trillion outstanding in the week ended Dec. 19; a
development that was likely to increase concerns that strains in short term lending markets are intensifying at year end.

“The data are likely to add to anxieties about credit conditions,” wrote Tony Crescenzi, chief bond market strategist, Miller, Tabak & Co. in New York in an email note.

The U.S. asset-backed commercial paper market, which has been hard hit by its exposure to subprime mortgage securities gone bad in the U.S. housing slide, shrank for a 19th straight week.

The asset-backed commercial paper segment, which had once helped to fuel the housing boom, fell $27.5 billion to $763.5 billion following last week’s $10.3 billion fall. The size of the ABCP market is the smallest since August 2005.

Unsecured commercial paper issuance by financial firms contracted by $28.6 billion the week ended of Dec. 19, a reversal from the $9.0 billion rise in the previous week.

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SOV CDS

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From: ABNAMRO CREDIT SALES (ABN AMRO)
At: 12/20 5:18:53

10YR 5YR
BELGUIM 19/21 11/15
FRANCE 10/12 6/9
GERMANY 8/10 4/7
GREECE 29/31 22/24
ITALY 29/31 21/23
PORTUGAL 26/28 20/22
SPAIN 25 1/2/27 1/2 19/21
UK 9/11 5/8
USA 8/11 5/8

In the Eurozone, it’s probably the case that if one goes, they all go, and the shorter the better as if they don’t go bad, market will continue to think they never will and you’ll be able to reload reasonably. That’s why I bought two-year Germany a while back at maybe two cents. Don’t know where that is now.

And by buying the least expensive, you can buy more of it for the same price.

US and UK look way overpriced, as Japan was. No inherent default risk for the US, though congress could elect to default for political purpose, which happened in 1996 (?), when Ruben tricked them into not defaulting.

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AMT tax reduction passes

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Looks like it adds about $50 billion to 2008 after tax incomes.

Demand can use all the help it can get right now!

Congress Gives AMT Relief For 20 Million Taxpayers

Congress acted in its final hours Wednesday to block growth of the alternative minimum tax, putting off an economic hardship affecting more than 20 million taxpayers and avoiding what would have been a political black mark for both parties.
AP
——————————————————————————–
The House voted 352-64 for a one-year fix of the AMT, a four-decade tax originally meant only to touch super-rich tax dodgers but now hitting millions of middle- and upper-middle income level households. Without that fix, an annual ritual of Congress, those subject to the tax would have risen from 4 million in 2006 to about 25 million in 2007, with the average levy of $2,000 a taxpayer.

“What we are hearing across the country today is a collective sigh of relief,” said Rep. Eric Cantor, R-Va.

The legislation now goes to President Bush, who says he will sign it because, bowing to White House and GOP demands, it does not include tax increases or other new sources of revenue to pay for the $50 billion cost of the tax relief.

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