Stephen Roach doesn’t mince words. He calls monetary policy during the bubble years “reckless and irresponsible” and he thinks politics is thwarting any meaningful regulatory reform, a view I also hold. I think the point of Roach’s attack is that a lot of finger-pointing has been directed at Wall Street and even Main Street. But, policy makers share much of the blame. This is a point I tried to make in a post “Forget about Goldman” from this past summer.
Moreover, as Roach indicates, the concept that a central planner (which a central bank most certainly is) can allow bubbles to form and then clean up after the mess- is on it’s face absurd. But, clearly the Federal Reserve and other central banks are doing their level best to re-create the conditions which led to a near-financial collapse.
The money quote comes just about 4:45 through the eleven minute clip below:
Central bankers say trust us. We know what we’re doing. I don’t trust them one bit. They got us into this mess in the first place.
As for Asia, Roach sees a bright future. However, he warns that it has risen on the back of an unsustainable export-led macro-policy by selling things to people in the West who can’t afford them. With continued private-sector deleveraging in the west likely, this dynamic has ended.
(video embedded below)
As an aside, Roach also correctly adds that the recent protectionist tariff administered by President Obama was not the result of tire manufacturers’ lobbying. Four of five of the Chinese importers are subsidiaries of U.S. firms. Obama did this to gain credibility and support from unions, a key Democratic constituency in the health care debate and in the run-up to the mid-term elections.
I should also point out that much of the U.S. trade deficit comes from such arrangements, where a U.S. company imports goods from its own foreign subsidiary.
"[The Fed] is bigger than the Congress, [it] has more power than the Congress. The Fed Chairman probably is more powerful than our president, and yet we refuse to look at it. The time has come for us to look at the Fed" ZH quoting RP.
The economist David Rosenberg makes the headline statement in today’s missive that “It’s not liquidity driving the market”. Rather than guess at his motivations – let’s have a look at how liquidity is driving the market.
First up, define liquidity as referring to the relative ease with which an asset can be sold. Typically, selling an asset for cash is the most expedient way to realise an asset’s value. In a sense, cash is the most liquid of assets (as a store of value its pretty darn good most of the time and everyone is happy to use it as a medium of exchange). For this reason, cash is at the very heart of the liquidity concept.
When there is an abundance of liquidity for a given asset, selling it can be achieved quickly and with minimum price disturbance to that asset. When there is an abundance of liquidity in an economy as a whole, there is lots of cash available to buy assets – it is relatively easy to sell assets across the risk spectrum.
From this definition, the impact of liquidity on markets seems straightforward. To get a sense of how it can be measured, a former roomie of Mr Rosenbeg, Stephen Roach, points to a useful indicator:
My favorite gauge of the quantity dimension of liquidity is the so-called “Marshallian K” — the difference between growth in the money supply and nominal GDP. In essence, this measures the surplus of money that is not absorbed by the real economy.
When the money supply is growing faster than nominal GDP, then excess liquidity tends to flow to financial assets. On the flip side, if money supply is growing more slowly than nominal GDP, then the real economy absorbs more available liquidity.
Under this model, asset price inflation will be the result of excess liquidity. For example have a look at some research from BCA on the correlation of the US$ gold price with the Marshallian K and then as compared to CPI:
Now while David makes the point that the Fed’s most recent pumping of the monetary base has had little impact on broader money aggregates (as bank lending continues to contract at record rates), by taking a step back from the four week data we can see that the Fed has provided the system with a mountain of cash (charts from…
Bernanke, Geithner, and others have stated the biggest mistake in this depression was the failure to rescue Lehman. I have long disagreed, instead declaring the Bankruptcy of Lehman was one of the few things the Fed got right, even if by accident.
As my colleague Jeremy Warner puts it, Lehman no more caused the economic convulsions of the last year than the assassination of an Austrian prince caused the First World War. There was the little matter of a rising Germany then, and a rising China now. Both scrambled the international system, albeit in different ways.
As of last week, the ABX index of sub-prime mortgage debt showed that AAA-rated securities from early 2007 were trading at 28 cents on the dollar – AA was at 4 cents, near all-time lows. No one can say that $2 trillion (£1.2 trillion) of sub-prime and Alt-A debt is still trading at panic levels, exaggerating losses. The dust has settled. What we can see is that creditors will never recoup their money.
Foreclosures reached 358,000 in August alone. More Americans are being evicted each month than during the entire Depression year of 1932.
We know why the bubble occurred. Call it Greenspanism. Central banks rescued assets each time there was a hiccup, but let booms run unchecked. They pulled "real" rates ever lower, creating addiction to monetary stimulus. Larger doses were required with each cycle, until we hit zero, and it is still not enough. Debt burdens rose to records across the OECD.
Couldn’t they see that this was cheating: stealing from the future? No, they were seduced by "inflation targeting" – watch goods, ignore assets – just as cheap imports from China rendered the doctrine obsolete. It always takes ideology to consummate massive error.
China is trying to plug the gap, belatedly, by ramping up credit 70pc this year, but it will take a cultural revolution to induce the Chinese to spend. The liquidity is leaking into stocks, metals, and property.
The Great Game can continue only as long as deficit countries – currently, US (-$628bn), Spain (-$109bn), Italy (-$62bn), France (-$58bn), Britain (-$53bn), Greece (-$42bn), and east Europe – are willing to bankrupt themselves buying Asian goods. Obviously, this is absurd.
Absurd is correct.
China, in spite of all those misguided souls who believe otherwise, is…
After a bit of prodding I decided to go back and expand a bit on the "Weekend Chart To Ponder" posting.
Be warned: this is a far more esoteric undertaking than the previous, and may make your eyes glaze over. Nonetheless I believe it is important, as it sets forth some "boundary conditions" that, when analyzed against current economic trends and behavior, are likely to lead you to inescapable (and perhaps ugly) conclusions.
Expanding this chart was particularly difficult to do because The Fed doesn’t make it easy to find the data I was looking for - specifically, total outstanding borrowings on mortgages. Their "Flow of Funds" report shows changes, but that’s not sufficient - I need total numbers outstanding. Fortunately The Census Bureau keeps track of that data - albeit with a bit of a lag (they don’t have 2008 yet.)
Just to reiterate for those who didn’t catch this up front - these numbers are expressed as percentage changes and are all per-capita.
The latter is important and often ignored - a rising population of course can support a larger (total) amount of credit outstanding, but at the same time it mutes GDP growth. That is, if you have 100 million people in the nation and double it (to 200 million) GDP doubling doesn’t actually improve anyone’s lot in life - the per-capita GDP is the same. Ditto for total incomes, and total debt - rising debt is bad, but only if it is rising per-capita.
Many people have asked why I didn’t include inflation in these numbers. There are a number of reasons, the most-important of which is that it doesn’t matter when one is comparing against incomes. There is also the problem of defining inflation - exactly what do you include and what do you not? Government statistics are notoriously inaccurate - for instance, they did not define the rise in house prices from 2003-2007 as "inflation", since they use a thing called "owner’s equivalent rent" in the computations - a farcical measure for the majority of Americans, since the majority own their homes. Then there are what are called "hedonic" adjustments; the simplest explanation of "hedonics" is that when steak becomes too expensive the government substitutes hamburger, since both are meat and contain protein (yeah, really.)
We can fight over "inflation" numbers all day and all we’ll generate is heat, not enlightenment. The…
Christopher Whalen’s Institutional Risk Analytics came up with his second quarter 2009 stress test results today, and the results aren’t pretty.
Whalen says that the US banking industry is still sinking steadily and neither the Obama Administration nor the Federal Reserve seem to have any more bullets to fire at the “deflation monster.” While there was some improvement in the previous quarter, we are now back to stress patterns of 2008.
With the Fed having spent all the liquidity to prop up the Street’s toxic asset waste pile, Main Street employers , private investors and smaller banks must now go begging for capital and liquidity in a market where the government is the only player left.
The notion that the Fed can even contemplate reversing the massive bailout for the OTC markets, this to restore normalcy to the monetary models that supposedly inform the central bank’s deliberations, is ridiculous in view of the capital shortfall in the banking sector and the private sector economy more generally.
Not surprisingly, Whalen rated Citi, “the queen of the zombie dance party ,” F for the quarter, down from C in the first quarter due to a deterioration in score for loan defaults.
Credit losses at C could require additional injections of capital a la Fannie Mae and Freddie Mac even with the flow if subsidies that has increased C revenue greatly from 2008 run rates.
He also raises the question as to why serious people on the buy side are still seeing value in the doomed bank which is “halfway in the grave via the loss sharing agreement with the FDIC."
Whether or not there is value inside C is not the issue; it is just not kosher, to us, for a manager to put investment grade investors into a situation that is basically a restructuring, with the government as the largest, senior creditor - and one in which the ultimate liabilities are as yet to be quantified.
Last week the Wall Street Journal ran an article about how trust securities sank Guaranty Financial Group and six family-controlled Illinois banks in early July.
Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history. Guaranty’s woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation’s worst lenders.
Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank’s capital.
Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions.
Many analysts and bankers are increasingly worried that the boomerang effect that killed Guaranty will cripple many small and regional banks already weakened by losses on home mortgages, credit cards, commercial real-estate and other assets imperiled by the recession.
Thousands of banks and thrifts scooped up securities tied to the housing market or other financial institutions in the past decade. Such investments were alluring because they seemed certain to outperform Treasury bonds, municipal bonds and other humdrum holdings that dominated the securities portfolios at most banks for generations.
As of March 31, the 8,246 financial institutions backed by the FDIC held $2.21 trillion in securities — or 16% of their total assets of $13.54 trillion.
The problems also underscore how the boom in securitization of loans instilled a belief that risks could be controlled, an idea embraced first by financial giants like Citigroup Inc. and Merrill Lynch & Co. and then smaller institutions reaching for higher profits.
"We saw them as a safe investment, and now we wish we didn’t have them," says Robert R. Hill Jr., chief executive of SCBT Financial Corp, a Columbia, S.C., bank with 49 branches. The bank has less exposure than some other small institutions, with the crippled securities representing about 10% of its investment portfolio.
The overall impact on the U.S. banking industry’s second-quarter results isn’t clear, because disclosure of losses and even the types of securities owned vary widely from bank to bank. Some obscure their troubled holdings in a vague line item titled "other" in financial statements.
"The very depth of the problem is very difficult for us…
Bill Dudley, who is merely Bernanke’s propaganda mouthpiece, provides his two cents on the economic recovery and the Fed’s engorged balance sheet.
"The economy should be boosted by three factors: 1) a modest recovery in housing activity and motor vehicle sales; 2) the impact of the fiscal stimulus on domestic demand; and 3) a sharp swing in the pace of inventory investment. In fact, if the inventory swing were concentrated in a particular quarter, we could see fairly rapid growth for a brief period."
You are right Bill about cause and effect, however all three items have yet to demonstrate any impact, aside from their "fudged" presentation. As for inventory - everyone is awaiting the GDP report: should provide for a good read.
Also, some shocking truth from the NY Fed ChairmanPresident:
Third, the Federal Reserve is taking on some interest-rate risk in terms of its balance sheet. The excess reserves have an overnight maturity. These liabilities are being used to purchase longer-term assets. In principle, if short-term interest rates were to move up very sharply, the cost of funding could eventually exceed the return on the Fed’s assets. The bigger our balance sheet, the greater the amount of interest-rate risk we are assuming.
We have examined this issue in detail. Suffice it to say, it is conceivable that the Federal Reserve’s net-interest margin could be pinched in certain evironments—say if the economic recovery turned out to be very robust. But our analysis shows that it is extremely unlikely that the Fed’s net-interest margin will turn negative. In part, that is due to the fact that the balance-sheet risk associated with the interest-rate mismatch is offset to a large degree by the fact that the cost of much of the Fed’s liabilities—the amount of currency outstanding—is zero. So when short-term rates rise, the cost of a significant portion of the Fed’s liabilities is unaffected.
Good to know what exactly the Fed will never let interest rates do. Not to mention that there are roughly $300 trillion in derivatives betting alongside Bill’s bet against interest rate Black Swans. It will be truly entertaining to watch what happens if China really does stop playing ball and the entire scenario has to be reevaluated while hundreds of billions in net derivative exposure comes crashing down.
The fascinating inflation-deflation debate goes on. Here, Mish responds to Gary North’s Pushing on a String (reprinted in our Favorites earlier today).
What do you think? Will it be inflation, hyperinflation, stagflation, deflation, no-flation - or some combination-flation? Please post thoughts in the comments section below. - Ilene
Gary always writes an interesting column. Indeed, there is too much to excerpt that I suggest reading it. Gary has many of his facts correct, yet still manages to come to the wrong conclusion.
CONCLUSION
The Federal Reserve can re-ignite monetary inflation at any time by charging banks a fee to keep excess reserves with the FED.
Anyone who predicts an inevitable price deflation does not understand that the present scenario is the product of legitimately terrified bankers and the Federal Reserve’s Board of Governors. At any time, the FED can get all of the banks’ money lent. But the FED knows that this will double the money supply within weeks. This will create mass price inflation.
This is the central fact in the inflation vs. deflation debate. Until the deflationists answer it with a unified voice, they will remain, as their predecessors remained, people with neither a theoretical nor a practical case for their position.
So, the FED waits. Meanwhile, the Federal government’s share of the economy rises relentlessly because of the deficits. This is not going to change in the next few years.
We are seeing Keynesianism’s last stand. When it fails, the FED will force the banks to lend. Then we will see mass inflation.
Mass deflation? Forget about it.
Yes, the bankers are terrified, not just in the US but globally.
However, Gary’s hypothesis "the Federal Reserve can re-ignite monetary inflation at any time by charging banks a fee to keep excess reserves with the FED", is just that, a hypothesis, and I believe a very poor one at that.
Bernanke’s idea to pay interest on reserves will slowly recapitalize banks over time. This is why he desperately wanted to do so. To suggest he is about to charge interest on deposits is silly.
The key fact now is there are not enough credit worthy customers for banks to want to lend, or for that matter willing borrowers looking to expand debt. Thus, if banks had to pay interest on reserves, rather than causing mass inflation, the Fed would cause mass panic.
This represents my personal opinion, not the views of the SEC or its staff.
I am not going to spend time here talking about how the price of gold is off-the-wall, that it is not just a bubble in the making, but a bubble waiting to burst. I don’t want to waste your time on that point.We all know it is a bubble.
George Soros has said “The ultimate asset bubble is gold”. Many of the top asset managers, such as Tudor and Paulson, are piling on; Paul Tudor Jones recently said gold “has its time and place, and now is that time.” The banks are echoing this view with their research. Goldman has a research piece that looks f...
We know you are busy, we also know you are hell bent on intercepting IOI manipulation as per Mr. Jon Kroeper's recent media appearances. Which is why we kindly request that you get back to us at your earliest convenience with information on how many of the IOIs disclosed below are, in fact, "natural." We will make this a recurring topic on Zero Hedge until such time as you respond to our information request. You can contact us at outsourcefinra@zerohedge.com
Small Caps and Tech continued their good form. Technicals continue to support the move higher for Small Caps (Russell 2000) with new highs for the MACD and +DI line. The Russell 2000 would have to give up 25 points (or 4%) just to test breakout support at 650.
The prior underperformance of the semiconductors was undone with today's 2% gain.
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Tuesday was good and bad for the Oxen Report. Our short sale of the day worked very well for us. I chose Ultrashort Proshares Oil and Gas for our short sale of the day due to my expectation...
BPOP - The ‘popular’ bank popped up on our screens this afternoon after a large-volume risk reversal was established on the stock. The massive trade was likely the work of an investor with knowledge of commercial banks as approximately 60,000 contracts were exchanged on BPOP amid a more than 12% rally in shares of the underlying to $2.60. It appears the trader purchased 30,000 now in-the-money October 2.5 strike calls for an average premium of 33 cents apiece. He funded the purchase of the calls by selling 30,000 puts at the January 2.5 strike for 43 cents each. The investor received a net credit on the transaction of 10 pennies per contract. The motivation is perhaps that this individual is swimming with the rising tide of financial names today and expects a far larger...
Let's take a look at Insider Buying and Selling over the last week or so. These are screen shots from Finviz - the significant buys against a green background first and significant sells against the pink background second. All the buys fit into my screen shot but the sells did not. Click here to see all the sells.
Note that the largest buy in the group, for KITD was at a price of 9.73 (KITD is currently at 11.54). The buy was part of an Equity Offering rather than an open market purchase. Tuzman Kaleil Isaza's (KITD's Chairman and Chief Exec. Officer) history of buys is http://www.insidercow.com/more from Insider
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(