Musings On Deflation

TO BE NOTED: From Zero Hedge Via Self Evident:

Hugh Hendry Musings On Deflation

Posted by Tyler Durden at 3:16 PM

hat tip root Sphere: Related Content

John Bougearel of Structural Logic

TO BE NOTED: From Zero Hedge:

Guest Post: The Proposed Grayson-Glass-Steagall Act Of 2009

Posted by Tyler Durden at 9:25 AM

Submitted by John Bougearel of Structural Logic

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market's recent action keeps flustering quant managers who are constantly attempting to rejigger models and signals

TO BE NOTED: From Zero Hedge:

"The Future Of Factor Diversification

Posted by Tyler Durden at 10:52 AM

Innovative Quant Solutions out with a brief looking at the future of quant factors and whether it even makes sense to diversify these at all in 2009. This is a very critical question as the market's recent action keeps flustering quant managers who are constantly attempting to rejigger models and signals, and the recent market action demonstrates that virtually all classes of quant managers have either converged on the same profitable strategies, or have been blown out of the water so badly, that many are in danger of terminally unwinding.

As is so often the case, with all managers chasing the same stragies and ending up on the same side of the trade, leaves two major open questions:

1) who is on the other side of the trade?
2) what happens when the herd shifts from one side of the boat to the other?



Data courtesy of www.innovativequant.com Sphere: Related Content"

as the ability to raise cash has fallen, actual cash holdings must rise

From Naked Capitalism:

"Guest Post: Chasing The Shadow Of Money

Submitted by Tyler Durden of Zero Hedge

For readers who have the time and interest to follow up on the topic Zero Hedge commenced yesterday discussing money liquidity and the shadow banking system, the best place to start is with Friedrich Hayek's seminal Prices and Production, published in the depression days of 1935. Curiously Hayek discerned the critical role of the shadow banking system long before the advent of securitization, derivatives and other products that today have caused the monetary supply problem to reach a screaming crescendo. A very salient sample is presented below:

"There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.

In particular, it is necessary to take account of certain forms of credit not connected with banks which help, as is commonly said, to economize money, or to do the work for which, if they did not exist, money in the narrower sense of the word would be required. The criterion by which we may distinguish these circulating credits from other forms of credit which do not act as substitutes for money is that they give to somebody the means of purchasing goods without at the same time diminishing the money-spending power of somebody else. This is most obviously the case when the creditor receives a bill of exchange which he may pass on in payment for other goods. It applies also to a number of other forms of commercial credit, as, for example, when book credit is simultaneously introduced in a number of successive stages of production in the place of cash payments, and so on. The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided."

Publish at Scribd or explore others: School Work Books Non-fiction money public

Great 500+ page read for a Sunday afternoon. As for some more generic, brief (and modern) thoughts, I provide a few personal observations.

First, a run through the orthodox framework.

A basic account of money supply starts with the monetary aggregates that matter most for CPI inflation: in the case of the US this includes cash balances in aggregates such as the M2 (total deposits) or MZM (zero maturity money/cash plus bank claims and money market funds). The traditional recent definition of "available stock" of money consists of the cash notional of money printed by the central bank (outside money) and how much the banking system has created by making loans (inside money). Of course, due to the deposit multiplier effect, the inside money is much bigger than outside money. For the purposes of this narrative, the impact of securitization and derivatives (tier 3 and 4) will not be discussed currently as the complexity involved would take a big turn for the uglier. It will, however, be a topic pursued in the future.

The chart below shows the relative composition of inside money (mostly deposits) was almost ten times the outside money (monetary base) prior to the recent crisis.



Furthermore, as the historical chart demonstrates below, while rare, it has occurred, most notably during the Great Depression, that the broader money stock and monetary base moved in opposite directions.



A looking at the other side of the equation: demand, is the desired cash balances held by the public. Money demand rises via transactions demand with a growing economy, and falls when interest rates rise as zero-yielding cash becomes less attractive. Some math: money demand is the inverse of the velocity of money. If MV=PY (where M is money stock, V is velocity and PY is nominal GDP), then (1/V) = (M/PY), which is the level of money stock relative to nominal GDP. For households, 1/V can be represented as the desired money holdings as a share of nominal income. If a household decided to increase their money holding to 9 months of income from 6 months (a process occuring pervasively in the current environmen tof job and otherwise insecurity and lack of trust), V would fall to 1.33 from 2x.

This is, in simple terms, the standard approach. As the bolded section of Hayek's quote demonstrates, however, it does not go far enough. What he is trying to convey, is that the economy, like any other constantly shifting "ecosystem" can create its own media of exchange in order to "economize" on the use of inside and outside money for use in the purchasing of assets. Once assets themselves can serve as collateral, allowing for leverage purchases, they also take on money-like properties. And, herein lies the rub, when financial assets serve as collateral for borrowing to purchase yet more assets (margin purchasing), this kind of shadow money becomes especially potent in driving asset price overshoots and bubbles. The chart below demonstrates the various parts of the credit cycle from the perspective of shadow money.



A good form summary of a credit bubble is presented below, compliments of Credit Suisse:

It starts with some genuine investment opportunity almost always related to a real improvement in technology or fundamentals. As strong price performance turns into a boom, optimistic investors desire to buy more on margin. They leverage up, usually using the buoyant asset itself as collateral. Lenders are all too willing to benefit by funding these purchases – after all, in the worst case, they will be holding valuable collateral. Borrowing terms such as haircuts, loan-to-value ratios, or margin requirements get easier. New money flows in, and associated financial assets begin to take on money-like attributes.

As buying on leverage accelerates, prices and credit conditions blow past what is warranted by fundamentals. There is a monetary expansion in the broad sense of shadow money, but when the bust comes this is quickly reversed. Lending conditions tighten, collateral prices plummet, and highly leveraged optimists are wiped out. Now cash is king; investors do not want houses, stocks, tulips or asset-backed commercial paper. To accommodate this demand for cash the government/central bank must quickly and forcefully expand the monetary base or else the increase in money demand can lead to a painful general deflation.

Meanwhile, the sudden disappearance of good collateral in the financial system has created a dangerous de-leveraging that could feed on itself. The government may respond by increasing its own debt, since public collateral in the forms of treasury bills and such do still have funding liquidity, and by flooding the market with government paper the leverage collapse can be better managed. In this example effective money (meaning shadow money plus the conventional money stock) falls sharply, but it would have fallen much more without aggressive policy actions.

As shadow money is a pro-cyclical, boom-time phenomenon, serving as a medium of exchange to finance a bubble, it affects asset prices directly, but only indirectly affects goods and services prices. An approach to estimate shadow money is calculating the immediate cash embodied in various debt securities: this can be done using asset haircuts in repo markets as well as current market values at FMVs in four points in time: early '07, 2008 Pre Lehman, 2008 Post Lehman, and currently.

If the market had outstanding securities worth $100 billion and repo haircuts of 5%, then effective money would be $95 billion. If prices fell 50% and repo haircuts rose to 20%, effective money would be ($100* 0.5)*(1-20%) = $40 billion. Some asset haircuts are presented below in the attempt to determine effective money.



The exhibit below estimates the size of effective US money stock as a sum of inside and outside money as well as shadow money, broken by private and public.



A simplified breakdown of public and private effective money stock is presented on the next chart.



Lastly, in order to demonstrate the dramatic outflow in private shadow money in the immediately pre/post Lehman economy, and just how effectively subdued the public shadow money response has been in dealing with the pull back of the private sector. Credit Suisse estimates that since 2007 the shadow money in private debt securities (IG, HY bonds, non-agency RMBS, CMBS and ABS) has fallen by 38% or $3.6 trillion to $5.9 trillion, mostly due to a drop in market values, a scarcity of new issuance and, most importantly, a huge increase in repo haircuts. To compensate for this, public shadow money represented by treasuries, agency bonds and agency RMBS, has risen by $2.8 trillion, driven by an unprecedented ramp up in treasury and MBS issuance, and an increase in relevant asset prices.



It is immediately obvious that the expansion of public shadow money is no match for the massive contraction seen in the private side. In this light, the question of the efficacy of the QE rollout and other public shadow money expansion has a tinge of futility to it, and not just in terms of money supply inflection points. The continued risk aversion by banks means inside money contraction, and not outside money expansion, is the threat. Not just the wilful allowance of rising inflation by policy makers, but, much more relevantly, a recovery in loan creation is needed. As Keynes noted, in assessing money demand, in addition to interest rates and growth, the subject of "liquidity preference" is critical - the desire by the public to hold (often abnormally large) cash balances as buffers in times when bad economic outcomes are feared, such as currently. As liquidity preference is a mass psychology phenomenon, it is impossible to quantify and predict. A huge increase in cash demand at a time of weak growth is a rare, dangerous and deflationary occurrence, and tends to occur exactly at financial crises such as this one. The administration's, and the media's, massaging of mass psychology through the constant and repeated message that all is well, in order to rekindle the liquidity preference by the general public, makes all the sense in the world, as absent its intangible "benefit" the road to recovery is doomed from the onset.

But is even this propaganda machine doomed, in a more subversive way? As households whose HELOCs have been cut or whose home equity has diminished, firms whose commercial property has collapsed in value, and banks whole ability to borrow in collateral markets to raise cash has fallen, all face the same problem: as the ability to raise cash has fallen, actual cash holdings must rise. And, unfortunately for the Obama administration, this is not a temporary hoarding, this is a permanent rebalancing in the trillions of dollars order of magnitude. As money demands skyrockets, the velocity of money plummets.

In the pro-cyclical boom of 2002-2007 many components of everyday lives became a derivative of the shadow money system: repo lending became critical to credit creation; home equity extraction became a key means to smooth consumer spending during period of low or no income; off-balance sheet funding of various assets became a major earnings generator for commercial banks. Yet the process appears not to have affected money demand and supply: regular bank loan growth was limited, keeping money stock from soaring, and money demand was held back by beliefs in easy availability of borrowing against collateral. Most dangerously, economic policy, first through Greenspan then Bernanke, was complicit in allowing the boom by emphasizing price level inflation and not effective money. With regular M2 and MZM money supply and demand effected only indirectly by the credit boom and a massive output gap following the 2001 recession, it was never an issue that inflation would soar. A similar credit boom occurred with no inflation in the 1920s also, another period where a major collateralized credit pyramid was built virtually on top of a reasonably stable money stock. The reason, then, as now, key decision-makers did not notice a massive credit pyramid was being built, is because traditional money indicators, which this post argues are essentially useless in the context of today's much more sophisticated from a money and liquidity perspective economy, were fairly stable. If there is one "crime" for which the most two recent chairmen of the Fed should be held in ridicule in hsitory books, it is precisely this. And yet while Greenspan may be somewhat forgiven due to his less academic nature, Bernanke, who was a depression "specialist", should have seen our current predicament coming from miles. That he failed to do so is why future historians and market pundits will not spare him the criticism of being among the primary culprits for the current, multi-generational crisis. In the meantime, the propaganda issuing from every media source is to be expected (and in some ways welcomed) - it merely demonstrates that the administration finally grasps the severity of the problem, and the need for confidence to rematerialize, even if it is through the current meme of Green Shoots (whose very existence is flawed flawed upon more than a cursory examination, whether it is due to seasonal factors, subsequent economic data adjustments, or outright misrepresentations).

Yet now that any hope of a preventative approach has failed and we are stuck with the consequnces, what happens? In order for there to even be hope of recovery, money stock has to rebound. Not only Bernanke, or Geithner, but Obama himself has now demontrated that he is on the same page with regard to explanding the shadow money stock (while presumably providing better oversight and supervision).

For now, the immediate focus should be on whether confidence can return: in collateral, in lending, in risk taking, in entrepreneurship. In the meantime, any talk of inflation is premature. The deflationary shock has to wear off first, and in many asset classes it has not even accelerated yet.

It is ironic that shadow money and credit are not just the dynamo that drives the free market, but also its Achilles heel. While most of the time they serve a useful purpose, currently their purpose is a destructive one as long as they continue to trendline away from recent asymptotes. If history is any indication, the overshoot to the downside will likely be just as severe as the upside overshoot was protracted. In that case, nothing the Fed does can accelerate inflation. Also, while possible that Bernanke has something up his sleeve, it is improbable.

Thus while the market continues trading on a sepculative basis and conjecture rooted in the casino psychology that has gripped equity markets (and recently credit markets as well), the long term picture is much less sanguine as the excesses of the credit cycle from the past 60 years wear off and not only asset prices but also repo haircuts find a new equilibrium.

What is certain is that the near-term economy will be driven in spurts and starts as mass psychology shifts from one extreme to another. The next catalyst in my view will be the interplay of the impact of stimulus spending coupled with the failure of the green shoots materializing into anything worthwhile. And while this will make the life of daytraders interesting, the traditional buy and hold approach to asset accumulation must be delayed indefinitely, until the critical equilibrium discussed above is achieved. Until that happens, anyone who claims the economy is headed in the right direction (either much higher or much lower), is merely spreading their own agenda or has an opinion that is fundamentally not rooted in actual facts.

Thanks to Credit Suisse for primary observations and ideas and hat tip to Gunther."

Me:

Don said...

"as the ability to raise cash has fallen, actual cash holdings must rise. And, unfortunately for the Obama administration, this is not a temporary hoarding, this is a permanent rebalancing in the trillions of dollars order of magnitude. As money demands skyrockets, the velocity of money plummets."

This sounds to me like your saying that a Flight to Safety does just that. Money ends up in safe investments. However, this is real money. So some people have money.

"For now, the immediate focus should be on whether confidence can return: in collateral, in lending, in risk taking, in entrepreneurship. In the meantime, any talk of inflation is premature. The deflationary shock has to wear off first, and in many asset classes it has not even accelerated yet."

Shouldn't we attempt to attack the Fear and Aversion to Risk and the Flight to Safety with disincentives to save and incentives to invest? I'm not sure how we would know that they work until we try them.

As for QE, if short term interests rates are low, and longer term rates begin to go up, then you have a disincentive to save and a longer term signal of confidence. That seems good to me. It won't work on its own, but with rising stocks, a short term sales tax decrease, tax incentives for investment, and some govt spending, you can at least have a plan to attack the problem. It doesn't strike me as a priori false or doomed to fail.

As for the casino, I never get that analogy, since there's a winner: namely, the casino. The money doesn't disappear.

Don the libertarian Democrat

one can only dread what this valuation (of secured debt) implies for both CRE and all other REITs (especially their ludicrous equity valuations)

TO BE NOTED: From Zero Hedge:

"GGP Auction Final Results

Posted by Tyler Durden at 2:09 PM

The GGP final auction clearing price was 44.25: fifth (L)CDS auction in a row that the inside market was surpassed by the final price. As the results indicate, the weighted average price was 42.58, with the lowest average bid provided by JPM at 38.44 and highest (not surprisingly) by fully CRE-pregnant Deutsche Bank at 44.23. Bid to cover is minuscule at 8.06%.

And speaking of DB, they literally gobbled up the auction, with virtually the entire selling interest allotted to the German bank: one wonders, in addition to Las Vegas and every other major collapsing metropolitan market, where else DB might have significant CRE exposure (marked who the hell knows where). As a reference point, of the 20 million in selling interest, DB had $120 million in limit orders above the inside market. Can you spell axed?

Indicatively, I provide the recent trending of GGP TL/A as provided by SMintelligence. Someone is very interested in not letting this price seem like a mere result of a short squeeze. Absent the DB "abovemarket" order flood, the auction may have well cleared markedly lower. Yo, DB CDS trading desk, how much LCDS did you sell and need badly to cover? Is the $120 a rough but fair estimate?

But even at a 44ish price clearance for secured claims, one can only dread what this valuation (of secured debt) implies for both CRE and all other REITs (especially their ludicrous equity valuations)"

ripfest tighter in bond land, and in many instances, in loans as well

TO BE NOTED: From Zero Hedge:

"Loans Versus Bonds Relative Value: Week Of May 7

Posted by Tyler Durden at 9:20 AM

Heat seeking in both bonds and loans was the dominant theme, with the usual suspects continuing to rip. Comparing current levels on garbage credits like Neiman Marcus, Sealy and TRW with their spreads 3 months ago and one can only question the sanity of even the credit market. Unlike last week when there were just three Fox Two instances, targeted at Huntsman, Graham Packaging and Neiman Marcus, this past week's IR-signature tracking selection is broader and even junkier.

"Solid" names like Compucom, Huntsman, Neiman Marcus, Sealy and TRW continued their ripfest tighter in bond land, and in many instances, in loans as well, while Aeroflex loans where the best relative secured performer. The only bonds widening in the entire 30 name universe were those of Michael Foods, and Constellation Brands - obviously consumer staples have every right to be seen as the riskiest last week when the rolling squeeze among garbage credits was doing all it could to flatter the equity markets.



Sphere: Related Content

You can’t make a borderline-solvent bank healthy by increasing its liabilities, only by decreasing them

From Reuters:

"Felix Salmon

a good kind of contagious

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May 4th, 2009

Wrong blogs are better than bad journalism

Post a comment (1)

Posted by: Felix Salmon

Tags: blogonomics, journalism

In traditional journalism, you publish what you know for sure as quickly as you can while being assiduous about maintaining accuracy at all times. In financial markets, traders run with rumors and gut feelings and outright guesses on a regular basis, on the basis that they’ll change their mind (or, more to the point, their position) if they turn out to be wrong. And one of the reasons why traders like blogs — and why many journalists don’t like blogs — is that blogs tend to me more traderish than traditional journalism: they’ll run with stuff before it’s nailed down, without checking it, in the full knowledge that it might be wrong. How far they go in that direction depends entirely on the blog, which is one reason why blog readers need to be critical readers: you can’t read a blog and simply know, based on the reputation of the parent institution, that you can trust it implicitly.

For instance: this afternoon, a meme took hold in the blogosphere, started by Zero Hedge, and picked up by the likes of Clusterstock, that there had been some kind of unconscionable bullying of Chrysler holdouts by the White House. Wonderfully, the blog entries caused some real reporting from Dealbook, which got on-the-record denials of any such bullying from both sides. The denials don’t mean that negotiations never got heated at any point of course, but they do mean, I think, that the charges of fascism are maybe a bit overblown.

Blogs can also be sloppy: Clusterstock’s Henry Blodget, for instance, in asking for banks’ senior creditors to be part of any recapitalization by converting their debt to equity, says this:

The best way would have been to seize the banks and restructure them. Since Geithner has opted against the route, however, the next best way would be to convert unsecured bank debt to equity, not just the taxpayers’ preferred stock (the taxpayers’ preferred stock should have been senior to all the bondholders, but that’s spilt milk at this point).

But this just makes no sense: if the taxpayers’ preferred stock had been senior to all the bondholders, it wouldn’t have been preferred stock at all: it would have been a liability of the banks, not equity, and would have done no good whatsoever. You can’t make a borderline-solvent bank healthy by increasing its liabilities, only by decreasing them.

While I’m at it, I should also explain why Blodget’s broader argument is also flawed. He writes, of the plan to convert preferred stock to equity:

The banks will still have the same amount of crap assets on their balance sheets, and they’ll have no more capital available to absorb these losses when they hit. The only thing that will change is that the taxpayer will now get hit first as these losses flow through, instead of getting hit second, as is the case now.

But that’s a huge change, because when common stock holders get hit first, the banks can continue to operate quite happily. If a bank ever reaches the point at which its preferred stock holders get hit, on the other hand, it will pretty much automatically get taken over by the FDIC or otherwise cease to exist in its former form. So converting preferred stock to common really does strengthen a bank and make it more likely to be able to survive future asset write-downs.

Still, I’d much rather read inflammatory or even just plain wrong stuff on blogs than have to wade through execrable nonsense like Vanessa O’Connell’s 2,700-word article on discount shopping in the WSJ magazine. She’s great at (under)stating the bleeding obvious:

According to America’s Research Group, shoppers now view 70 percent off as a great sale, versus the 40-to-50-percent discounts of the past. At the 70 percent level, it’s extremely hard for traditional retailers to make a profit.

But more seriously, she’s also great at blithely parroting numbers without any indication of what they mean:

With carefully managed flash sales of top designer names—from Marc Jacobs to Missoni—it has amassed one million members within 18 months of launching, and the company says it’s on track to multiply its annual revenue to about $80 million, up from less than $7 million.

“On track”, of course, can mean anything — or nothing. If the company wants to give the WSJ its sales numbers, it should give the WSJ its sales numbers. If it doesn’t want to give out those numbers, that’s also fine. But if it doesn’t give out its sales numbers, the WSJ shouldn’t treat it as though it has revealed something interesting or important all the same. Especially when the journalist goes on to contradict herself on much less important numbers pertaining to the company later on in the piece:

Once you are invited to join the online sample sales at Gilt Groupe, get ready. To work up excitement, Gilt blasts an 11:50 a.m. email to its massive member list, with images of some of the designer clothes, shoes and accessories that will be offered at the noon sale time. At 11:59 a.m., there are typically somewhere between 30,000 and 50,000 people on the site, waiting for the clock to tick. Most of the merchandise sells out within the hour…

By 11 p.m., more than half of the women’s styles that went on sale at noon are generally sold out.

So, how long does it take for most of the inventory to be sold? One hour, or eleven? Did O’Connell, or her editors, bother to check? It seems not — despite the luxury of long lead times on the magazine.

The problem here, of course, is that because the piece is appearing in a fluffy lifestyle magazine, rather than in the newspaper proper, no one particularly cares about the content — it’s mainly just there to look glossy and help sell watches. Which is never going to be much of an issue on a blog. If you’re reading something on a blog, it’s not because it was commissioned as a high-concept way of filling the feature well, but rather because someone genuinely has something to say and wants to communicate it. You might need to approach with skepticism — but you should do that with all journalism, not just blogs. And if you’re reading critically, you can generally get much more insight from blogs than you can from carefully-circumscribed journalism. They might sometimes be wrong — but at least they’re provocative, interesting, and useful. Which is more than can be said for just about anything in the WSJ magazine.

Journalism can be fantastically good, of course — as can blogging. But when it’s bad, journalism, even in a well-respected publication, can be just painful — more so than just about anything you’re likely to find on a reasonably-respected blog."

Me:

I’m having a hard time figuring out what people are proposing. First of all, from The Economics Of Contempt:

“The whole point of Treasury’s proposed resolution authority is to extend the FDIC’s systemic risk exception to the insolvency regime that governs large bank holding companies (e.g., Citigroup, BofA, JPMorgan, Wells Fargo). If there’s no systemic risk finding, failed bank holding companies will still be handled by the bankruptcy courts. Treasury’s proposal gives the government the same kind of discretion in cases of systemic risk that the FDIC has under the Federal Deposit Insurance Act.”

Here’s the plan:

“March 25, 2009
tg-70

Treasury Proposes Legislation for Resolution Authority

Treasury Secretary Timothy Geithner on Monday called for new legislation granting additional tools to address systemically significant financial institutions that fall outside of the existing resolution regime under the FDIC. A draft bill will be sent to Congress this week and several key features are highlighted below.

The legislative proposal would fill a significant void in the current financial services regulatory structure and is one piece of a comprehensive regulatory reform strategy that will mitigate systemic risk, enhance consumer and investor protection, while eliminating gaps in the regulatory structure. ”

So the govt is moving towards being able to seize the large banks, but they don’t have the power as of yet. That leaves you with various alternatives, one of which is owning more of the stock, and running the company. This would have a few problems, in that we could still lose a lot of money, and foreign investors and companies will consider us owning the bank to be guaranteeing it. As far as I know, there will still be other shareholders, and they will have certain rights. It could also involve us in foreign politics, as in Mexico with Banamex. Still, it might be better than the current plan.

Now, I thought that this is what Stiglitz and Krugman were proposing, as well as anyone who was complaining that we were investing money but not getting control. After reading Blodget and Krugman, it would be nice to have a clear explanation of exactly what they’re proposing. Are they saying that all creditors would becoming shareholders, but we’d control the bank, because we’ll have more shares? How is that done? What exactly is the alternative to what Geithner’s doing?

- Posted by Don the libertarian Democrat

man who buys and sells banks (at one point for a profit, lately, not so much) believes that the bank bailout package is inadequate

TO BE NOTED: From Zero Hedge:

"Tuesday, April 28, 2009

Chris Flowers: TARP Insufficient, Need $2 Trillion In Stimulus

Posted by Tyler Durden at 6:05 PM

Not too surprising that the man who buys and sells banks (at one point for a profit, lately, not so much) believes that the bank bailout package is inadequate. Where is Bill Gross to chime in how the Fed needs to buy $1 metric (as opposed to the bankrupt royal equivalent) quadrillion of Treasuries stat?

Publish at Scribd or explore others:

Hat Tip A B"

10 year note is approximately at the level which prevailed on the day when the Federal Reserve announced quantitative ease

TO BE NOTED: From EconomPic Data:

"Ten Year Yields: Higher or Lower?

Higher --> Supply: Across the Curve

Treasury bonds are taking a severe drubbing and the yield on the benchmark 10 year note is approximately at the level which prevailed on the day when the Federal Reserve announced quantitative ease (2.96 percent currently).

One participant noted that the 200 day moving average on the Long Bond was 3.798 percent and the market penetrated that level this morning as a sharp knife would melting butter.

Lower --> Quantitative Easing / Continued Economic Deterioration: Zero Hedge

There has been a lot of criticism of Big Ben (us included) but one thing that has come out is he is not afraid to take relatively risky moves to combat whatever he perceives as the biggest threat. As we have noted before, he has clearly revealed his playbook in the past and we see little indication that he will stray from it going forward. On the balance between inflation and deflation, much has been made of the Chinese response if we try to print our way out of this situation but the much larger problem has always been deflation. Combining what we know about the available policy options and the effectiveness of the last round of QE, we have to believe that more purchases of long rates are on the table as a serious consideration.

Source: Yahoo

Posted by Jake at 3:49 AM

Some massive tightening in the universe of 30 tracked names with both major loan and bond moves

TO BE NOTED: From Zero Hedge:

"Loans Versus Bonds Relative Value: Week Of April 16

Posted by Tyler Durden at 9:03 AM

Some massive tightening in the universe of 30 tracked names with both major loan and bond moves. The average loan spread tightened by 100 bps to 700 bps while bonds tightened by almost 200 bps to 1,381 bps from two weeks ago. Taking a cue from the equity markets, the most horrendous HY names saw the biggest tightening with Neiman Marcus and Sealy Mattress bonds both collapsing by over 800 bps. Curiously Sealy's loan only tightened by 20 bps, implying a long loan, short bond trade could be a good continuation trade here. The inverse is true with Cenveo, which saw its loans tighten by over 400 bps, while the bonds tightened a mere 207 bps (with TRS being a little tough to find these days, a one side bond long may be the most feasible trade).





source: Reuters/LPC Loanconnector"

the last thing they need is for the general population to think there could be some less than arms-length dealings going on behind the scenes

TO BE NOTED: From Zero Hedge:

"BlackRock Hires Vice Chairman Of U.S. Treasury Borrowing Advisory Committee

Posted by Tyler Durden at 11:30 AM

Bloomberg reports that Larry Fink's BlackRock has taken over R3 Capital Management, a $1.5 billion credit hedge fund started by ex-Lehman corporate bond trading desk head Rick Rieder. R3, which was previously part of Lehman Brothers and subsequent to Lehman's bankruptcy, was purchased by Rick Rieder and other management members for the paltry sum of $250 million.

Rieder has joined BlackRock as head of its fixed-income alternatives portfolio team and will continue to manage the R3 funds, according to a memo sent yesterday to BlackRock employees. Bobbie Collins, a spokeswoman for the New York-based firm, confirmed the memo today and declined to comment further.

Other members of the R3 team who are joining BlackRock include J. Richard Blewitt, Russell Brownback, Leland Hart, Michael Lipsky, Mike Phelps, John Stein, Josh Tarnow, Paul Tice, and Michael Weaver, according to the memo.

Lehman Brothers in October sold its 45 percent stake in R3for $250 million and made a new $250 million passive investment in R3’s fund, which can’t be divested until May 2011, R3 said in an October statement.

The R3 situation is curious as it basically occurred in a bankruptcy court firesale, with very little disclosure on just what assets and liabilities were being acquired by the R3 general partners from Lehman, and if any of the other Lehman firesales were an indication (Lehman U.S. brokerage assets, Neuberger Berman), the bankrupt estate likely lost out on any potential upside due to Judge Peck's desire to speed through any asset sale at warp speed. However, that should be a concern for the Lehman offical and ad hoc creditor committee (and their legal advisor Milbank Tweed) - if they were ok with hitting whatever lowball bid came their way, it is their issue.

What Bloomberg failed to catch however, is that by hiring Rieder as head its fixed income alternatives team, BlackRock is also retaining the very useful services of the vice chairman of the U.S. Treasury's Borrowing Advisory Committee, and is responsible for critical advisory memoranda to Tim Geithner such as this one, focusing on advice for Treasury debt issuances. Whether or not in this way BlackRock will have a hotline to Tim Geithner's cabinet on all fixed income issues, is not that clear: based on their hot reception of the PPIP they already have that. However, it is disappointing that the public-private incest continues unabated with no disclosure by either the government or BlackRock as to the full motives for this specific retention. This is even more troubling as BlackRock together with PIMCO will be the biggest beneficiaries of the private-public bait and switch, and the last thing they need is for the general population to think there could be some less than arms-length dealings going on behind the scenes. This most recent action would only reinforce these suspicions."

Zero Hedge points out that Goldman Sachs is on the legal warpath

From Alphaville:

"A litigious Goldman Sachs Posted by Tracy Alloway on Apr 09 15:06.

Zero Hedge points out that Goldman Sachs is on the legal warpath, issuing a cease and desist order against www.goldmansachs666.com.

The site is of the conspiratorial persuasion, with a host of memorable quotes such as:

Does Goldman Sachs Run the World?

Not completely, but it doesn’t mean they aren’t trying. It seems that, literally, only flesh eating bacteria can stop these guys.

Strangely, Goldman’s order centres not on the actual content of the site but on copyright aspects — and that’s despite the site carrying a rather large disclaimer that it is not affiliated with the investment bank in any way. The cease and desist order is reprinted below, via Zero Hedge. Click to enlarge.

Does this mean Bank of America can sue www.BACPROXYVOTE.com too?

Related links:
Goldman Sachs to sue Goldmansachs666.com - Zero Hedge
Junk mail - FT Alphaville

This entry was posted by Tracy Alloway on Thursday, April 9th, 2009 at 15:06 and is filed under Capital markets. Tagged with goldman sachs."

Me:

Don the libertarian Democrat Apr 9 15:30

Just you wait until the Devil comes calling about that 666 infringement. Interesting times, interesting times.

so bids well above current market prices for these assets by the PPIFs or through the TALF seem unlikely

TO BE NOTED: From Morgan Stanley via Zero Hedge:

"United States
Review and Preview
March 31, 2009

By Ted Wieseman | New York

With all the big announcements about the Treasury’s legacy asset and loan purchase plans and strong rallies seen in most risk markets in response, as well as some better-than-expected economic data, Treasury and other interest rate markets had a surprisingly quiet week that was mostly focused on supply and left Treasury yields mixed. In addition to largely ignoring the surge in stocks and rallies to varying extents in other key markets in response to the Treasury plan – with a very strong rally by the commercial mortgage CMBX market versus a comparatively soft response by the subprime ABX market particularly interesting – Treasuries also paid almost no attention to a round of overall better-than-expected data, probably partly because investors were looking ahead to what’s expected to be a rough run of more important early figures for March in the coming week’s employment, ISM and motor vehicle sales results. The data were also a good bit better on a headline basis in a number of cases than in some of the important underlying details. New and existing home sales both posted rebounds off their lows in February but showed little progress in working down the severely bloated inventory situation heading into the key spring selling season. Both overall and core durable goods orders posted good gains in February but only after extremely large downwardly revised declines in January. Even with a slight recovery in February, capital goods shipments were so weak in the revised January numbers that the outlook for 1Q investment continued to worsen. Fourth quarter GDP growth was revised down less than expected to -6.3% from -6.2% but partly because of a smaller downward adjustment to inventories that pointed to a partly offsetting larger inventory drag in 1Q. Even with a stronger path for 1Q consumption implied by the personal income report, we cut our 1Q GDP estimate to -5.1% from -4.9%. Instead of trading on the Treasury plans, other markets’ reactions to the plans or the economic news, supply was the overriding market focus in what activity there was during the week’s sluggish trading, and this cuts two ways. The Fed’s surprise announcement that it would be including long bonds in its initial round of Treasury purchases after previously saying buying would be focused in the 2-year to 10-year range helped the long end outperform on the week. And the very rapid start to the buying program provided additional support. As heavy as the Fed’s US$15 billion in purchases was, it was only a fraction of the record US$98 billion of new coupon supply in 2s, 5s and 7s during the week. After a solid start to the three auctions with Tuesday’s 2-year, the week’s Treasury market lows were hit after a poor 5-year sale Wednesday that added to supply jitters from the failed UK gilt auction. Once the much better 7-year auction wrapped up the supply on Thursday, however, and the market was able to look ahead to a busy schedule of Fed buying combined with a week-and-a-half break in new issuance, the market was able to rebound to close the week Thursday and Friday.

For the week, benchmark Treasury yield moves ranged from modest gains driven by the Fed’s surprise announcement to decent losses in the intermediate part of the curve led by the 7-year, which reversed much of its strong outperformance in initial response to the FOMC’s Treasury buying announcement. The old 2-year yield was flat at 0.86%, 3-year up 4bp to 1.26%, old 5-year up 12bp to 1.76%, old 7-year up 15bp to 2.31%, 10-year up 13bp to 2.76% and 30-year down 6bp to 3.62% (for the new issues, there was about a 4bp yield pick-up for the 2-year and 5-year and 6bp for the 7-year). Even with risk markets surging, demand for cash reached new extremes, though this may have mostly just reflected quarter-end book-squaring. Very short-dated bills closed negative Thursday before reversing course slightly on Friday to leave the 4-week bill’s yield down 7bp to 0.01%. For the week, commodity prices weren’t much changed, with only small further upside in oil prices in particular, but TIPS performed extremely well even after a partial pullback to extend what’s now been a three-week run of major outperformance. The 5-year TIPS yield fell 13bp to 0.82%, 10-year 4bp to 1.34% and 20-year 14bp to 1.92%. Current coupon 4% mortgages ended the week about unchanged (and with little day-to-day volatility) to outperform the sell-off in the intermediate part of the Treasury curve (though performance was notably worse on an option-adjusted spread basis as interest rate volatility declined). This left yields on 4% MBS a bit above 3.9%, down from near 4.15% two weeks ago and the year’s highs above 4.3% at the end of February. Mortgage rates being offered to consumers have tracked the rally in the MBS market, falling to record lows in the latest week.

Fed Treasury buying got off to a fast start, with two US$7.5 billion purchases, the first in the 7-year to 10-year range and the second 2-year to 3-year. Interestingly, by far the biggest purchase in the former was of the on-the-run 7-year issue and almost all of the buying in the latter was in the current 3-year. The Fed always stayed away from buying benchmark issues in the past as it expanded its Treasury portfolio gradually over the years (until reversing course after mid-2007 when it began selling down a large portion of its Treasury holdings as it was initially sterilizing its other liquidity facilities). But the goal now is clearly to lower broader borrowing costs as effectively as possible, not to gradually expand the Fed’s balance sheet in a non-market disruptive way in the manner of previous historical coupon passes, and these first two operations certainly suggest that the Fed quite reasonably thinks that largely focusing on supporting yields on the benchmark issues is the best way to do this. There will be three more rounds of Fed buying in the coming week – August 2026 to February 2039 maturities Monday; May 2012 to August 2013 Wednesday; and September 2013 to February 2016 Thursday. This additional buying will come during an off week for new Treasury coupon supply before 10-year TIPS, 3-year and 10-year auctions the week of April 6. On top of the fast start to the Treasury buying, the Fed’s net purchases of MBS of US$33 billion in the most recent week were also a new high, though the past week’s agency purchase (agency purchases are expected to take place generally once a week going forward under updated guidelines released by the New York Fed) of US$2.7 billion was around the average size seen up to this point. A continued pick-up in the pace of mortgage purchases may be needed in the weeks ahead as refinancings are likely to ramp up very sharply and put substantial supply pressures on the mortgage market.

The announcement of the Treasury’s legacy asset and loan purchase plans helped risk markets generally extend or resume significant rebounds that in most cases started off lows hit March 9. The S&P 500 gained another 6% on the week for a 21% rebound from the March 9 low. Financials continued to lead the bounce, with the BKX banks stock index up 12% on the week, but their leadership position faded late in the week after a stronger initial outperformance in response to the Treasury’s announcement. In corporate credit, the new series 12 investment grade CDX index tightened 15bp to 184bp in its first full week of trading, while the prior series 11 closed the week near 225bp after hitting a recent wide of 262bp on March 9. The high yield index was 132bp tighter on the week at 1,619bp through Thursday, down from 1,894bp on March 9, but the index was trading off about 3/4 of a point Friday. The leveraged loan LCDX index, which could benefit from the legacy loan portion of the bad bank plan, had a very good week but remained pretty far in the red for the year. Through midday Friday, the index was 379bp tighter on the week at 1,893bp, near its best level since the first half of February but still quite a bit wider than the 1,303bp close at the end of 4Q. The relatively strongest response to the Treasury plan was in the highest-rated parts of the commercial real estate market. The AAA CMBX index tightened nearly 200bp on the week to 559bp, wiping out almost all of the prior year-to-date losses. While the Treasury’s plan was clearly taken as good news for owners of high-quality commercial mortgage-backed securities (though AAA cash CMBS still trades quite a bit wider than the AAA CMBX index at this point, and lower-rated CMBX indices did not perform nearly as well), our desk notes that current spreads are still astronomically higher than where they traded a couple years ago before the financial crisis began – currently about 900bp for AAA CMBS versus only about 25bp pre-crisis. As a result, commercial real estate funding is punishingly expensive even after the recent market rebound, continuing to put intense pressure on commercial property valuations. Meanwhile, a comparatively much weaker performance by the subprime ABX market sharply contrasted with the CMBX strength. The AAA ABX index only gained 2 points from the record lows hit last week and at 26.17 is still down 33% so far this year. Lower-rated ABX indices saw almost no upside from recent record lows, with the AA index only up 0.02 point to 4.04 (incredibly, this index once traded as high as 97.00). Although the muted performance of the subprime market to some extent probably reflected uncertainties about how effective the Treasury’s plan would be, there appeared to be at base a simpler explanation. In contrast to the apparent assumption of the Treasury and many investors, our desk does not believe that current levels in the ABX market, even as far as they have crashed, have been trading at substantially depressed fire-sale prices relative to horrendous underlying fundamentals, so bids well above current market prices for these assets by the PPIFs or through the TALF seem unlikely. ( NB DON )

The past week saw a somewhat more positive tone to the economic data after what’s been mostly a steady run of gloomy results for some time, though underlying details of the figures in many cases weren’t as good as the headline results. For example, home sales rebounded, but there was little improvement in the horrendous inventory situation as we move into the key spring selling season. New home sales rose 4.7% in February to a 337,000 unit annual rate, rebounding from the all-time low hit in January to the second worst reading ever. Even with the number of homes available for sale down for a 22nd consecutive month to a seven-year low, the months’ supply of unsold new homes only moderated to 12.2 months from the record high 12.9 months hit in January. Around 5-6 months of supply would be consistent with a balanced market, so inventories are still completely out of hand heading into the crucial spring selling season. Meanwhile, existing home sales gained 5.1% in February to 4.72 million after hitting a 12-year low, but inventories were unchanged, remaining badly elevated at 9.7 months. Similarly, durable goods orders at first glance looked much better than expected, but underlying details, in particular the extent of the revisions to prior months, ended up being much more negative. Overall durable goods orders jumped 3.4% in February, but this followed a downwardly revised 7.3% plunge in January and still left orders down at a near record 35% annual rate over the past six months. Non-defense capital goods ex-aircraft bookings, the key core gauge, jumped 6.6% in January, but this similarly followed a downwardly revised 11.3% collapse in January, a record decline, and left the recent trend extraordinarily weak. Non-defense capital goods shipments ticked up 0.6% in February but only after a record downwardly revised 8.9% drop in January, pointing to severe weakness in business investment in the first quarter. We cut our forecast for 1Q equipment and software investment to -29% from -24.5% and overall investment to -27% from -24%. A 27% drop in current quarter investment following the 22% fall in 4Q would mark the worst six-month decline since the Great Depression. The inventory drag in 1Q also appears likely to be worse, as durable goods inventories fell a larger-than-expected 0.9% in February on top of a downwardly revised 1.1% drop in January. Note that the drop in sales has been so severe, however, that even with this sharp recent pullback, the I/S ratio in this sector remains very close to a 17-year high. On top of the weakness in durable goods inventories early in 2009, the smaller-than-expected downward revision to 4Q growth to -6.3% from -6.2% (and the way too high -3.8% advance estimate) was partly a result of a smaller-than-expected downward revision to inventories, pointing to a likely greater drag from inventories in 1Q. We now see inventory destocking knocking 2.1pp off 1Q growth instead of 1.5pp.

Against the expected bigger negatives from investment and inventories, the consumption picture at least looks a bit better. Real consumer spending fell 0.2% in February, as expected, but January was revised up to +0.7% from +0.4%. As a result, we now see 1Q consumption rising 1.3% instead of +0.9%. While the swing into positive territory would be a positive development, the upside we’re forecasting would mark a meager rebound after a near-record 4.1% annualized collapse in 2H08. Combining the expected downside in investment and inventories against the upside in consumption and also incorporating our February trade forecast and other underlying details of the 4Q GDP revision, we marginally reduced our 1Q GDP forecast to -5.1% from -4.9%. With 4Q GDP only being revised down to -6.3% instead of the -6.8% we were expecting, the net decline in the economy over the 4Q/1Q period still looks to be extremely severe, but slightly less so than we were forecasting coming into the week.

After some recently rare improvement in some of the economic data seen over the past week, we expect the key early round of March data to have a much more negative tone. We look for the worst employment report yet in this downturn, some renewed weakness in the ISM (though less so than we anticipated coming into the week after better results from the second round of regional reports), and another disastrous month for motor vehicle sales. Key data releases due out in the coming week include consumer confidence Tuesday, ISM, construction spending and motor vehicle sales Wednesday, factory orders Thursday, and employment Friday:

* We look for the Conference Board’s consumer confidence index to rise to 26.0 in March. Both the Michigan and ABC gauges suggest that sentiment was little changed during early March, so we look for the Conference Board measure to hold near the record low of 25.0 posted in February.

* We expect the ISM to decline a point to 35.0 in March. The regional surveys released to this point have been mixed. On an ISM-weighted basis, Empire and Philly posted declines, while Richmond and KC registered gains. So, we look for another relatively steady result on the ISM. The key orders gauge is expected to show an uptick, but employment and inventories should move lower. Finally, the price index is likely to register a pullback this month.

* We forecast a 0.5% decline in February construction spending. The housing starts data suggest that construction activity may have received some temporary support from unseasonably mild weather conditions across parts of the country. So, we look for a much smaller decline in spending than seen in recent months. Renewed weakness in homebuilding and a more rapid pace of decline in non-residential activity should be evident in the coming months. Finally, we don’t expect to see any noticeable support for public infrastructure spending tied to the recently enacted fiscal stimulus legislation until the second half of the year.

* Motor vehicle sales hit a 28-year low of 9.1 million units in February. Anecdotal reports suggest that the sales environment remained miserable in March, and we look for a little changed 9.0 million unit sales rate.

* As foreshadowed by the durable goods data, we look for a sharp 1.9% rise in February factory orders combined with a significant downward revision to January. Meanwhile, shipments are likely to show little change. Inventories are expected to slip 0.7%, with the I/S ratio ticking down a tenth to 1.45 after a major prior run-up.

* We look for a 700,000 drop in March non-farm payrolls. The readings on both initial and continuing unemployment claims are still pointing to a steady deterioration in labor market conditions. However, we actually expect to see an even steeper drop in jobs this month relative to the 650,000 or so declines that were posted in each of the first two months of the year. In particular, we look for some restraint tied to weather-related influences. Although conditions appear to have been near normal during the March survey period, this follows on the heels of much milder than usual weather in February. So, we suspect that favorable weather may have helped to prop up employment in February and this effect could be unwound in March. But any swing to the downside is likely to be tempered by the impact of concurrent seasonal adjustment (a statistical technique that has been used for the past five years or so). Interestingly, all of the large net downward adjustment to the December and January payroll figures in last month’s report was attributable to revised seasonals. The unadjusted figures were actually pushed up a bit. Thus, concurrent seasonal adjustment helped to push up the February reading and offset this by lowering the results for the prior two months. The smoothing process that results from concurrent seasonal adjustment is one reason why the declines in payroll employment seen to this point have not been even larger. Finally, the unemployment rate should continue to move substantially higher to 8.5% from 8.1% (note: we still look for a 9.9% peak by year-end)."

The whole point of having the government take over AIG was that it wouldn't need to enter into panicked unwinds

From Felix Salmon:

"Who's Gaining from the AIG Unwinds?

Tyler Durden has a scary post up, connecting banks' profitability in January and February to the fact that those were the months when AIG Financial Products was unwinding an enormous number of its contracts en masse. These trades, initiated by AIGFP, were allegedly enormously profitable for the biggest banks in the CDS market:

The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever"...
I can only guess/extrapolate what sort of PnL this put into the major global banks... I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

If this is true, then (a) the banks still aren't anywhere near sustainable profitability, and (b) those AIG retention bonuses -- paid on the grounds that only the people who got AIG into this mess could get it out -- are even more egregiously untenable than we had suspected.

The whole point of having the government take over AIG was that it wouldn't need to enter into panicked unwinds. If it went ahead and did that anyway, the levels of competence and oversight at AIG are even lower than most of us had thought. Which is quite an achievement."

Me:

"The whole point of having the government take over AIG was that it wouldn't need to enter into panicked unwinds."

That's also the reasoning of helping Citi, which we own a lot of stock in.

So, AIG helps Citi, and we are where? Didn't we just shift some of our funds from one of our businesses to the other?
Somebody help me out here.

By DonthelibertarianDemocrat Posted: Mar 29 2009 10:26pm ET