We did not mean that you should short bonds. Rather there is still time to make money on the long side. At least until the Fed stops supporting the market.
Rather, we meant that it's time to issue bonds. Those of you who have not done so, should consider issuing long dated debt securities.
Interest rates are headed up, and this is the time to take advantage of the opportunity.
* * * * * J B K * * * * *
San Francisco
As consumption increases this year, we could easily see GDP go higher.
Inflation is still low - so far. The Big Ugly is still coming though.
Read the whole report. It'll cheer you up.
Stay long the stock market. Get rich.
* * * * * J B K * * * * *
San Francisco
Feb. 26 (Bloomberg) -- The U.S. economy expanded at a 5.9 percent annual rate in the fourth quarter, more than the government reported last month, reflecting stronger business investment and a greater contribution from inventories.
The rise in gross domestic product, which exceeded the median forecast of economists surveyed by Bloomberg News, marked the best performance in more than six years, the Commerce Department said today in Washington. Inventories added 3.88 percentage points to GDP, more than previously reported, and investment in software and equipment grew at the fastest pace in almost a decade.
http://www.bloomberg.com/apps/news?pid=20601068&sid=al3FNswDlTkw
The problem with the Fed not regulating banks, is the difficulties of the Fed seeing the complete picture and acting quickly.
There is a real danger here Congress will blunder and foil any chance the Fed has of managing the money supply.
Oh, and Dodd? He's one of the ones who caused the Fed to blunder so badly.
* * * * * J B K * * * * *
San Francisco
Bernanke, 56, has said moving the powers to another agency would make it tougher for the central bank to act as the lender of last resort and conduct interest-rate policy. Dodd, a Connecticut Democrat, has said the Fed did an "abysmal" job supervising banks before the financial crisis.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayBArJ_YleFM&pos=5
There must be a flood of money coming into the US stock market.
* * * * * J B K * * * * *
San Francisco
Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis.
The big bets are emerging amid gatherings such as an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge-fund managers argued that the euro is likely to fall to "parity"—or equal on an exchange basis—with the dollar, people close to ...
Greece plans to issue a 10-year bond next week, after the government announces a new austerity package that will reduce spending between €2 billion and €2.5 billion ($2.7 billion to $3.4 billion), people familiar with the situation said. The government hopes to raise €3 billion to €5 billion from the offering.
This'll be fun.
I've got a bet that the new securities yield 100 basis points more by this time next week.
* * * * * J B K * * * * *
San Francisco
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.DJ3JHmieCU&pos=3
Not much to see here. Standard part of the business cycle.
* * * * * J B K * * * * *
San Francisco
Compare US monetary reporting to any other country and you'll see why the US is the favored place to invest the majority of your assets.
We all dabble in emerging markets, but our money lives in the US.
* * * * * J B K * * * * *
San Francisco
"On matters related to the conduct of monetary policy, the Federal Reserve is already one of the most transparent central banks in the world," Bernanke said in prepared remarks to the House Financial Services Committee. He plans to appear tomorrow before the Senate Banking Committee.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4Vhl8tdMr70&pos=2
Home prices also fell.
This is still ugly.
* * * * * J B K * * * * *
San Francisco
Rising foreclosures are the main threat to a sustained housing recovery. A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to make their house payment or sell, according to a RealtyTrac Inc. forecast last month. Last year there were 2.82 million foreclosures, the most since the Irvine, California-based company began compiling data in 2005.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHbZ6tSN73jM&pos=3
The Fed uses Treasury's money to buy the assets on its books and transfers the assets to the treasury.
This way the assets don't re-enter the market, pushing up interest rates.
At least until Treasury sells them.
Good enough, so far. As long as Treasury keep the assets.
Now, what to do with the remaining $1.2 trillion in securities?
* * * * * J B K * * * * *
San Francisco
The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.
Officials sought to dispel the notion that the move marks a step toward tightening credit now.
http://online.wsj.com/article/SB10001424052748703503804575083920751605784.html?mod=WSJ_WSJ_US_News_6
More inflationary pressures.
The Fed is in a bind. When they start selling, rates are going up.
* * * * * J B K * * * * *
San Francisco
Feb. 22 (Bloomberg) -- Corporate investment will contribute to stronger growth in the U.S. and the economy will start to add jobs early this year, a survey of business economists showed.
Spending on equipment and software by companies is expected to increase 7.2 percent this year, up from the November survey's projection for a 4.2 percent gain, according to the median estimate of 48 economists surveyed by the National Association for Business Economics. Purchases will rise even more next year, jumping 8.6 percent.
Corporate spending will help drive economic growth of 3.1 percent this year and 3.2 percent in 2011, economists said. That will help make up for weakness in consumer spending, which accounts for about 70 percent of the economy, as the nation pulls out of the worst recession since the 1930s.
http://www.bloomberg.com/apps/news?pid=20601068&sid=a__WFKqq1xzA
The large banks have too much financial firepower to stand on the sidelines when potential profits sit ripely for the picking.
Instead, Congress and Volcker should craft a plan to rescue Fannie and Freddie. After all, they're the ones that caused this mess, not the banks.
* * * * * J B K * * * * *
San Francisco
Feb. 22 (Bloomberg) -- Five former U.S. Treasury secretaries who have served both Republican and Democrat presidents have jointly called on Congress to implement the so- called Volcker Rule to limit the size and trading of banks.
Banks that benefit from public support via access to the Federal Reserve and the Federal Deposit Insurance Corp. shouldn't "engage in essentially speculative activity unrelated to essential bank services," John Snow, Paul O'Neill, Nicholas Brady, George Shultz and W. Michael Blumenthal wrote in a letter published by the Wall Street Journal.
http://www.bloomberg.com/apps/news?pid=20601108&sid=axJA1O4r98Aw
Here's what the S&P 500 looks like.
Within two months, he'd proven me correct, causing the largest collapse in the stock market since the great contraction of 1929-33.
During his tenure, he blundered through more incompetent policies than any man should be allowed, and on his way out the door, he caused another stock market crash, as big as the great contraction.
The only question is, why did it take so long for the world to figure out he's an idiot?
* * * * * J B K * * * * *
San Francisco
A decade ago, everyone wanted a piece of Alan Greenspan. The Federal Reserve chairman had the economy riding so high, then-presidential candidate John McCain famously quipped that if the man died, he wanted to have him stuffed and put up on the wall at the Federal Reserve. And all over the world, ordinary people really did put Greenspan on their walls, in the form of Erin Crowe's oil portrait of his familiar, wrinkly visage. But now that the Greenspan bubble has burst along with the housing bubble he created, these people are shamefacedly hiding said portraits away in the same place they keep their Nixon buttons and Idi Amin bobblehead dolls.
http://nymag.com/daily/intel/2010/02/alan_greenspan_portraitist_tur.html
Following a massive increase in PPI (see story in prior posts) the Fed had no choice but to raise the cost of short-term loans, and begin to flatten the yield curve in the hope of curtailing bank lending.
The Fed is currently faced with a potential explosion in the money supply, and further increases in prices, the longer banks hold hundreds of billions of excess reserves.
As credit-worthy borrowers begin to reveal themselves through their earnings reports, banks will take notice, and make loans to individuals and businesses, increasing the money supply and inflationary pressure.
The only question now is, will the curve flatten?
Or, will the increase in long rates outpace the Fed's willingness to raise short rates?
* * * * * J B K * * * * *
San Francisco
Feb. 19 (Bloomberg) -- The Federal Reserve Board sent its most explicit signal yet that the emergency supply of liquidity to financial markets is done and the most aggressive monetary policy easing in its 96-year history will eventually reverse.
Chairman Ben S. Bernanke and his colleagues at the Board of Governors raised the rate charged to banks for direct loans by a quarter-point to 0.75 percent, effective today. It was the first increase in the discount rate since June 2006.
The Fed portrayed the decision as a "normalization" of lending that would have no impact on monetary policy, repeating in a statement in Washington yesterday that its benchmark federal funds rate would stay low for an "extended period." The assurances didn't stop investors from increasing bets that the Fed would tighten policy in the fourth quarter. The dollar rose and U.S. stock futures fell after the announcement.
http://www.bloomberg.com/apps/news?pid=20601068&sid=amj4X4IWKCys
Inflation jumps to 1.4%.
The next issue is, when will bonds start their long climb to 6%?
For too long, the Fed has supported the long end of the curve and now it has a problem.
The Fed is trapped between a solidly stalled economy, and powerful, potential money growth.
As the data show, the collision produces inflation before it produces growth.
So much for the excess capacity argument. Even with excess capacity, inflation grows.
Next stop on the bond contract: 114.00, down from 116.00 today.
After that support level is broken, the bonds are heading to 105.00 and eventually, par.
Tactic: shorten maturities of assets and lengthen maturities of liabilities.
* * * * * J B K * * * * *
San Francisco
Feb. 18 (Bloomberg) -- Wholesale prices in the U.S. accelerated more than anticipated in January, led by a jump in the costs of energy, light trucks and pharmaceuticals.
The 1.4 percent rise in prices paid to factories, farmers and other producers followed a 0.4 percent increase in December, according to figures from the Labor Department in Washington. Excluding food and fuel, so-called core prices rose 0.3 percent, exceeding the median forecast in a Bloomberg News survey.
Raw materials costs rose the most in more than three years as factories boosted production to meet demand of a growing global economy. Capacity utilization below its two-decade average and a lack of job growth may limit the ability of suppliers to pass on those costs, allowing the Federal Reserve to keep interest rates near zero to help bolster the economy.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aVp4c86EAwJA
He fails to understand the root causes of the recent collapse in the mortgage market, and consequently makes irrelevant suggestions that inflation is the solution to incompetence.
Instead of arguing that the Congress and the Administration failed in their tasks, he suggests that future problems be dealt with by future explosions in high-powered money, and that we just live with the coming inflation.
This is what you get when you take the advice of someone who has never sat on a trading desk, never risked his own money on his decisions, and never faced the consequences of failure.
I've listened to pompous ignoramuses like this my entire career, and have made lots of money betting against them.
* * * * * J B K * * * * *
San Francisco
IMF Survey online spoke to Olivier Blanchard, one of the authors of Rethinking Macroeconomic Policy, about the reasons for publishing the paper now and what he hopes to achieve. Blanchard, who joined the Fund in 2008 from the Massachusetts Institute of Technology, is Economic Counsellor of the IMF and head of the Research Department.
IMF Survey online: Why are you publishing this paper, which essentially attempts to lay out the contours of a new macroeconomic policy framework, now?
Blanchard: As the crisis slowly recedes, it's time for a reassessment of what we know about how to conduct macroeconomic policy. It was tempting for macroeconomists and policymakers to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy. We did not resist temptation. The crisis naturally forces us to question our earlier conclusions and that's what we are trying to do in this paper.
http://www.imf.org/external/pubs/ft/survey/so/2010/INT021210A.htm
The real tightening will come when the monetary base declines.
Raising interest rates is just another boondoggle.
* * * * * J B K * * * * *
San Francisco
Bernanke said "one possible sequence" of the exit strategy involves first testing tools for draining reserves "on a limited basis." Then, "as the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates," he said.
'Firming' Policy
The Fed would then execute the "actual firming of policy" by raising the interest rate on bank reserves, Bernanke said. Congress granted the Fed the power in October 2008 as part of the law creating the $700 billion Troubled Asset Relief Program.
"Changes in the interest rate will be broadly telegraphed," said Anthony Crescenzi, senior vice president at Pacific Investment Management Co. in Newport Beach, California, which runs the world's biggest mutual fund. "The first thing that will happen is that there will be a language change, taking 'extended period' out" of the Fed's public policy statement.
"By the time we see scaled-up operations" to drain reserves, "they will seem like an afterthought," Crescenzi said.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aAd6B9SHcOzo
There is no need for this.
All primary dealers have relationships with Money Market funds and the deals could go through them.
The Fed's dealer network just got a lot bigger.
* * * * * J B K * * * * *
San Francisco
Feb. 11 (Bloomberg) -- The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions.
The central bank is looking to the money-market mutual fund industry which manages $3.2 trillion in assets because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York.
Money-market funds may welcome the opportunity to trade with the Fed after the financial crisis reduced the supply of safe assets in which they can invest. In one example of demand for such assets, auctions on four-week Treasury bills have attracted an average of $5.47 in bids for every dollar sold this year, compared with an average of $3.77 last year, according to Bloomberg data. Yields on the four-week bill were quoted at four basis points at 3:47 p.m. in New York trading from 18 basis points a year ago.
http://www.bloomberg.com/apps/news?pid=20601068&sid=a4dF3zbh_YUs
This is what the markets have been waiting for.
* * * * * J B K * * * * *
San Francisco
Freddie Mac said yesterday that it would buy "substantially all" loans with payments late by 120 days or more from its securities in the next month. Fannie Mae said later that it will "increase significantly" its buyouts, setting a less aggressive timeline. The value of Freddie Mac's delinquent loans is $70 billion, while Fannie Mae has $130 billion of the debt, according to Citigroup Inc. data.
"This is going to be a wad of cash coming into the fixed- income markets and it's not immediately clear where it's going to be reinvested," said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aiUaoec0WvwA
It shows just how much high-powered money there is in the system.
In their program to maintain a low currency value, China has purchased dollars from its exporters with newly created cash.
All this cash is now in the system.
The only way to cool lending is to increase the reserve's banks must keep in their vaults.
The important point here is the Fed might choose the same tactic here in the US.
* * * * * J B K * * * * *
San Francisco
By JOE McDONALD, AP Business Writer Joe Mcdonald, Ap Business Writer – Fri Feb 12, 6:49 am ET
BEIJING – China ordered banks Friday to increase reserves for a second time in a month to cool a credit boom without resorting to interest rate hikes that might derail a recovery in the world's third-largest economy.
Chinese leaders worry that a stimulus-driven torrent of lending is fueling a dangerous bubble in stock and real estate prices. They also are concerned that the flood of money surging through the economy is adding to inflation.
Beijing declared China had emerged from the global crisis after economic growth rebounded to 10.7 percent in the final quarter of 2009. But authorities say the global outlook is still uncertain, and analysts expect them to try to avoid rate hikes even as they start winding down their stimulus.
Banks were ordered Friday to increase reserves by half a percentage point — to 16.5 percent for large lenders and to 14.5 percent for smaller institutions. Rural lenders that serve farmers were exempted to guarantee adequate credit for agriculture.
http://news.yahoo.com/s/ap/20100212/ap_on_bi_ge/as_china_economy
Had they done this last year, we'd all be in better shape.
* * * * * J B K * * * * *
San Francisco
WASHINGTON — Government controlled mortgage finance company Freddie Mac said Wednesday it will buy back an unspecified amount of troubled loans contained in securities it has already sold to investors.
The McLean, Va.-based company said Wednesday it would repurchase mortgage loans in which borrowers have missed at least four months of payments. It did not disclose how much it would spend.
Freddie Mac guarantees the mortgage securities it sells. The company said buying the delinquent loans back would cost less than making those guarantee payments.
http://www.google.com/hostednews/ap/article/ALeqM5ijIi6w5NvMhRea2ZM1Ll7NdpryNQD9DPD2QG0
The beginning starts by paying interest on excess reserves, discouraging lending by banks.
Two points.
1. This will have some effect on reducing lending, but eventually will lag as banks realize they can earn more by lending.
2. The economy will not expand as quickly as it would if lending rebounded normally.
In summary, the stock market won't like this, and inflation will.
* * * * * J B K * * * * *
San Francisco
WASHINGTON (AP) -- Prepare for the end of record-low interest rates, Federal Reserve Chairman Ben Bernanke says. Just not yet.
Higher rates on credit cards, home equity loans and some mortgages will follow the Fed's eventual pullback of the trillions it injected into the economy. Savers will benefit, though. As rates gradually climb, certificates of deposit and savings accounts will finally pay more.
Bernanke indicated Wednesday that the Fed is still months away from raising rates or draining most of the stimulus money it injected to rescue the financial system.
It will take six months for this to shake out.
In the meantime, the stock market will be worried.
On top of this, the Federal Reserve will start selling assets.
* * * * * J B K * * * * *
San Francisco
Feb. 8 (Bloomberg) -- A gauge of corporate credit risk climbed to the highest in three months amid investor concern that "contagion" from rising government deficits in Europe may spread to other assets.
Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, rose 5.25 basis points to a mid-price of 107 basis points, according to broker Phoenix Partners Group. The index is at its highest since it was 107.02 basis points on Nov. 3, CMA DataVision prices show. The gauge typically increases as investor confidence deteriorates.
http://www.bloomberg.com/apps/news?pid=20601068&sid=a5YbzrznOjaU
Had the Fed not done what they did, we'd be in a world of hurt right now.
* * * * * J B K * * * * *
San Francisco
Feb. 2 (Bloomberg) -- The U.S. economy came "very close" to collapsing into a second Great Depression and the government had no alternative to bailing out financial firms, former Treasury Secretary Henry Paulson said.
"There was a time when the credit markets had essentially frozen and when blue chip industrial companies were having trouble raising money," Paulson said in an interview today on Bloomberg Television. "I knew then we were on the brink."
"We easily could have had unemployment of 25 percent," he said. "That would have meant millions of additional jobs lost, millions of additional homes lost, trillions more lost in savings. It would have been terrible."
http://www.bloomberg.com/apps/news?pid=20601087&sid=axCgjHqNkaw0
Banks continued to tighten the terms of loans they did make, and demand for both business and household loans weakened further over the past three months, the Fed said today in its quarterly survey of senior loan officers.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aU6NaKYS5PZI
If Wells was running a matched book, interest rate issues would be irrelevant. Perhaps this is an attempt to eliminate long dated assets.
Perhaps these were credit risk issues, too, but with credit risks improving, and hedgible, this too is puzzling.
We need more information before drawing any conclusions.
* * * * * J B K * * * * *
San Francisco
Feb. 1 (Bloomberg) -- Wells Fargo & Co., unlike its three biggest competitors, is so convinced interest rates will rise that it sacrificed as much as $1 billion last year cutting back on fixed-income investments.
The nation's fourth-largest bank, whose biggest shareholder is Warren Buffett's Berkshire Hathaway Inc., reduced investments in mostly fixed-income securities by $34 billion in 2009's second half, company filings show. JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. boosted their holdings by an average of $35.5 billion.
By scaling back on the so-called carry trade, in which banks borrow in overnight lending markets at rates near zero and invest in higher-yielding securities, San Francisco-based Wells Fargo aims to protect against losses when rates rise. The three other lenders increased investments on the theory that profit will outpace any future losses.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aM.IPx7G5hAw&pos=11
