Re: Crude oil inventories update

Posted on January 26, 2009 @ 12:36 pm (Monday) by WARREN MOSLER

(email exchange)

Thanks, should be more than enough given the small drop in actual demand.

>
>   On Mon, Jan 26, 2009 at 9:59 AM, David wrote:
>
>   Tanker tracking suggests an OPEC11 production of 26.1 mbpd in January,
>   compared to the target of 24.85 mbpd, with Saudi Arabia, Venezuela and
>   Nigeria leading the cutbacks. However, this represents a cut of only
>   2.9 mbpd from the agreed cut of 4.2 mbpd (a compliance of 69%), which is
>   somewhat under the estimated 3.5 mbpd cut needed to balance the market in
>   the near term. But it should easily balance the tightening market further out,
>   especially if compliance improves.
>

The contango in the futures market continues to come in, as does the spread between WTI and Brent.

The RBOB contango also coming in, indicating gasoline supplies are also tightening.

This indicates spot supplies are tightening- the OPEC cuts are ‘working’.

Most consumption indicators show crude consumption to be about flat or only down slightly year over year.

The great Mike Masters inventory liquidation that began in July may finally have run its course.

And the Saudis are back to being price setter.

I would strongly recommend any fiscal adjustment that increases aggregate demand be accompanied by policy that immediately and substantially reduces crude oil and gasoline consumption.

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Re: fixing the banks and the economy

Posted on January 26, 2009 @ 8:52 am (Monday) by WARREN MOSLER

[Skip to the end]

(email exchange)

Comes down to the fundamentals of banking and public purpose.

Presumably it serves public purpose for banks to have private equity capital as a ‘first loss’ piece to ‘protect’ government from loss due to deposit insurance.

Either it does or it doesn’t suit public purpose to do that at any give point in time.

‘Injecting’ government capital to act as a first loss piece to protect government from loss due to deposit insurance is nonsensical as government is in a first loss position either way.

Nationalizing means government is in a first loss position all the time.

So functionally, if a bank is insolvent due to insufficient (private) capital, and the government wants it to continue as a going concern, all it has to do is continue to insure the liabilities as it currently does, and permit the institution to continue operations desired by government without sufficient private capital ratios.

Government can also set a ‘cost’ for doing this if it’s concerned about private shareholders and uninsured creditors ‘profiting’ for these measures.

Etc.

But at the macro level banking is not viable without government doing job one of sustaining aggregate demand via getting the fiscal balance right. Or at least sufficient to muddle through.

Lending makes no economic sense to a for profit institution with falling asset prices and falling incomes.

So a full payroll tax holiday and a $300 billion no strings attached transfer to the states restores aggregate demand and stabilizes asset prices.

Delinquencies fall and the ‘toxic waste’ turns AAA, as everyone wonders what all the fuss was all about.

And a national service job for anyone willing and able to work that includes health care elevates life to a new level of prosperity which should have been considered normal all along.

>
>   On Fri, Jan 23, 2009 at 11:39 PM, Russell wrote:
>
>   George Soros, in a comment in today’s Financial Times, “The right and wrong
>   way to bail out the banks,” takes issue with the idea of reviving TARP 1.0 in
>   new dress and suggests another approach for dealing with the banking crisis:
>
>   According to reports in Washington, the Obama administration may be close to
>   devoting as much as $100bn of the second tranche of the troubled asset relief
>   programme funds to creating an “aggregator bank” that would remove toxic
>   securities from the balance sheets of banks. The plan would be to leverage
>   this amount up 10-fold, using the Federal Reserve’s balance sheet, so that
>   the banking system could be relieved of up to $1,000bn (ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬770bn, Ãƒâ€šÃ‚Â£726bn)
>   worth of bad assets…..
>
>   [T]his approach harks back to the approach originally taken ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ but eventually
>   abandoned ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ by Hank Paulson, the former US Treasury secretary. The
>   proposal suffers from the same shortcomings: the toxic securities are, by
>   definition, hard to value. The introduction of a significant buyer will result, not
>   in price discovery, but in price distortion.
>
>   Moreover, the securities are not homogeneous, which means that even an
>   auction process would leave the aggregator bank with inferior assets through
>   adverse selection…..
>
>   These measures ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ if enacted ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ would provide artificial life support for the
>   banks at considerable expense to the taxpayer, but would not put the banks
>   in a position to resume lending at competitive rates….
>
>   In my view, an equity injection scheme based on realistic valuations, followed
>   by a cut in minimum capital requirements for banks, would be much more
>   effective in restarting the economy. The downside is that it would require
>   significantly more than $1,000bn of new capital. It would involve a good
>   bank/bad bank solution, where appropriate. That would heavily dilute existing
>   shareholders and risk putting the majority of bank equity into government
>   hands.
>

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Re: Goldman on the fiscal package

Posted on January 23, 2009 @ 7:24 pm (Friday) by WARREN MOSLER

[Skip to the end]

(email exchange)

>
>   On Thu, Jan 22, 2009 at 5:46 PM, Michael wrote:
>
>   Bullet points from the GS report, what do you think of their assessment?
>

Pretty good up to a point.

Agree the deficit probably should be larger to restore full employment.

It goes bad where highlighted below:

>
>   The US economy urgently needs a large dose of fiscal stimulus to counter a sharp
>   retrenchment in private-sector spending. Consumers are cutting back in a way not
>   seen since World War II, and businesses are following suit. Based on current equity
>   prices, current credit spreads, and the trend in home prices, we expect the
>   private-sector balance between income and spending to rise from 1% of GDP in
>   mid-2008 to about 10% by the end of 2009, an annualized increase of 6% of GDP.
>
>   To fill this hole in demand, the federal government should become the spender of
>   last resort, as monetary easing cannot do the job alone. We reckon that the
>   appropriate level of stimulus is $600 billion (bn) at an annual rate, or 4% of GDP,
>

Could be. Maybe more.

>
>   with the remaining 2% filled by a narrowing in the current account deficit.
>

Increased domestic demand and higher crude prices could increase the trade gap, which would be highly beneficial, reduce demand, and therefore allow us to run deficits that much higher.

>
>   Moreover, with prospects for cyclical recovery in the private sector looking dim,
>   this stimulus should stay in place through 2010 and be withdrawn only gradually
>   thereafter. The bill recently introduced in Congress, priced at $825bn over two
>   years, is a major step in the right direction but is apt to prove insufficient if our
>   estimates are correct. On the five-year view customarily used to score such
>   programs, we could justify stimulus totaling $2 trillion.
>

Agreed!

>
>   While stimulus will boost the federal deficit, it is important to recognize that the
>   deficit will rise sharply even if nothing is done. Our projection of the private-sector
>   balance implies a deficit of about $1 trillion in 2009, a figure that looks roughly
>   consistent with the Congressional Budget Office (CBO) baselineÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Â$1.2 trillion for
>   fiscal 2009ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Âwhen adjusted for differences in economic outlook, accounting, and
>   timing. Moreover, since the deficit must ultimately be financed either by private
>   domestic saving or net foreign inflows, the net budget cost of stimulus can be
>   reduced if the package avoids measures that mainly boost saving.
>

There’s nothing ‘wrong’ with measures that increase savings and therefore require higher deficits. He’s afraid of deficits per se.

>
>   Likewise, much of the prospective surge in federal debt that terrifies many market
>   participants is already baked in the recessionary cake. While stimulus will aggravate
>   this increase, the United States starts from a fairly comfortable federal debt ratio
>   of just over 40% of GDP at the end of fiscal 2008, lower than the G7 average. And
>   those who worry about a lack of demand for all this debt should not overlook US
>    households and businesses as potential customers.
>

Lack of demand is never an issue.

>
>   After all, it is their efforts to repair balance sheets that has caused the need for
>   stimulus; with risk aversion running high, it stands to reason that they will shoot
>   a few bucks the government’s way to help it do their spending for them.
>
>   However, the long-term budget imbalance remains serious.
>

Not applicable.

>
>   Thus, any program must feature measures that not only have quick and powerful
>   effects but also expire as soon as the need for stimulus has passed. To balance
>   these competing objectives, the package should focus on infrastructure and
>   investment but also include carefully targeted tax cuts, enhancements of benefit
>   programs, and aid to state and local governments as a bridge to these projects,
>   many of which take time to develop.
>

OK.

>
>   Assuming that the final package is in the range now under consideration, we
>   estimate that the federal deficit will reach $1.425 trillion in FY 2009, or 10% of
>   GDP (based on CBO’s accounting for TARP and GSEs). While the scale of the
>   package driving this change has risen sharply in recent months, so has the rate
>   at which the economy is losing momentum. Accordingly, we have not changed
>   our economic outlook, though of course this remains subject to review.
>

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Re: UK currency heading south

Posted on January 22, 2009 @ 9:10 am (Thursday) by WARREN MOSLER

[Skip to the end]

>
>   On Thu, Jan 22, 2009 at 12:06 AM, Russell wrote:
>
>   Warren:
>
>   Is the UK going BK.
>

Many private sector agents, but not the government. There is no such thing in local currency, and the FX debt is private, not public.

When government takes over a bank and declares it insolvent, the holders of foreign currency debt can become shareholders, general creditors in liquidation, or simply wiped out if not senior enough.

There is no reason for government to pay any FX.

>
>   They are going to have to nationalize the banks and take interest rates to zero.
>

Looks like they will be making those choices.

>
>   The Pound is probably going to get par with the USD.
>

There’s an ‘inventory liquidation’ of pounds going on, as players exit, as well as private sector agents short USD and other FX covering.

The low price of crude had dried up the dollar income of the rest of the world as our trade gap shrinks, leading to a dollar short squeeze.

(Russian and mid east oil dudes who were selling their dollar revenue for the pounds they were spending on London flats and entertainment when oil was high, have cut back on the way down.)

And the worlds portfolio managers and army of trend followers are piling in with their shorts.

While this is a ‘one time’ event, it’s a big one!

The pound has looked over valued to me on an anecdotal purchasing power parity basis for quite a while. Last time I was there seemed even at one to one with the dollar prices would still be way too high over there.

Fundamentally, apart from anecdotal purchasing power parity, the pound looks OK. Fiscal has been tight for a while and isn’t all that loose yet, though they are talking about larger deficits. Prices are in check, with asset prices falling. And borrowing to spend is way down, probably for a while. But the same is true for the US, so there’s no bias there.

Net net, the pound was an indirect beneficiary of the high oil prices, and getting hurt by the fall.

British pound

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Re: MCDX Update

Posted on January 21, 2009 @ 10:37 am (Wednesday) by WARREN MOSLER

[Skip to the end]

(email exchange)

Lots of good shorts here- if you have the staying power!

>
>   On Wed, Jan 21, 2009 at 9:55 AM, Jason wrote:
>
>   MCDX11 5yr…255/265 (unched)
>   IG11 221-223
>

10 YR MUNI CDS MARKETS UPDATE 01/21/2009

CA	400/450	A1/A+
NYC	285/335	Aa3/AA
FL	190/240	Aa1/AAA
MI	325/375	Aa3/AA-
NV	315/365	Aa1/AA+
NJ	225/275	Aa3/AA
NYS	235/285	Aa3/AA
TX	140/170	Aa1/AA
OH	190/240	Aa1/AA+
VA/SC/NC/UT/GA	110/160
IL	190/240	Aa3/AA
MA	190/240	Aa2/AA

CA 400/450 A1/A+ ****

This spread implies 56% probability of default in 5yrs and 87% probability in 10yrs assuming 80% recoveryÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¦

SeriouslyÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¦ State GO & recovery would probably be >95%

Assuming the federal government actually would allow them to failÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¦

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An email exchange with Martin Wolf regarding Obama deficits

Posted on January 15, 2009 @ 6:57 pm (Thursday) by WARREN MOSLER

[Skip to the end]

(an email to Martin Wolf, FT columnist)

From your recent article:

The bigger point, however, is not that the package needs to be larger, although it does.

Agreed.

It is that escaping from huge and prolonged deficits will be very hard.

Why the notion of ‘escape’?

With convertible currency and a floating foreign exchange policy, all that matters is sustaining demand to support output and employment.

Why does the size of the deficit matter?

As long as the private sector seeks to reduce its debt and the currentÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Â°account is in structural deficit, the US must run big fiscal deficits if it is to sustain full employment.

Fine, so what? There is no operational constraint to doing this. And as long as it’s ‘filling a hole’ in domestic demand, what difference does it me?

That leads to the third point Mr Obama’s advisers must make. This is that running huge fiscal deficits for years is indeed possible.

Of course it’s not.

But the US could get away with this only if default were out of the question.

Forced default is out of the question.

The US government makes any and all USD payments via data entry into its own spreadsheet. What are the possible default conditions?

And when a government security matures, the Fed debits the holder’s security account and credits its bank reserve account.

The risk of too much deficit spending is inflation, not solvency, and when filing a hole in domestic demand, the inflation risk is no more than it normally is when the private sector has the same amount of aggregate demand for any other reason.

Warren Mosler

And the Wolf responds..

>
>   On Thu, Jan 15, 2009 at 5:09 PM, Martin Wolf wrote:
>
>
>   Inflation is default.
>

I respectfully do not agree.

Default is failure to make payment as agreed.

There is no zero inflation contract.

In fact, most every currency has inflation most years.

>
>   Surely that is obvious to everybody.
>

Credit default contracts don’t include inflation, nor does any other default provision.

>
>   When the economy finally recovers, the government will end up with a very large debt.
>

It will be some % of GDP that you may consider ‘very large’.

>
>   Such debt is owed to bond-holders and serviced by taxpayers.
>

In the first instance it is serviced by crediting accounts on the Fed’s own spread sheet.

If aggregate demand is deemed too high at that time future governments may opt to raise taxes.

If future govts desire to alter the distribution of real output to those then alive they will be free to do that via the usual fiscal and monetary measures.

>
>   Politicians who are elected by the latter will want to default on liabilities to the former
>   (particularly if many of them are foreigners) and provide taxpayers with goodies, instead.
>

Very possible!

>
>   A burst of inflation is how they have always done it.
>

Yes.

>
>   End of story.
>

As above. If you mean to say deficits will cause inflation, then do that.
Default is the wrong word for an international financial column.
Surely that’s obvious to everyone.

>
>   I suggest you study the history of Argentina or indeed of the post-first-world-war inflations.
>

And you can study what the ratings agencies have considered to be defaults.

All the best,
Warren

>
>   Martin Wolf
>

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And the Wolf responds..

Posted on January 15, 2009 @ 6:09 pm (Thursday) by WARREN MOSLER

[Skip to the end]

(email exchange – in response to previous email)