Fed Watch Thread

[flow5]

I missed this. These new revisions were applied to the bank's reserve requirements, however, there was no notice concerning recalculations:

January 20, 2011
H.6 (508)

MONEY STOCK REVISIONS

The Federal Reserve has revised the measures of the money stock and its components to incorporate the results of the Federal Reserve's annual review of seasonal factors and a new quarterly benchmark. This release includes revised monthly and weekly seasonal factors as well as comparisons of the revised monetary aggregates with previously published data. The revisions to the seasonal factors resulted in a higher growth rate for seasonally adjusted M2 in the first half of 2010 and a lower growth rate for seasonally adjusted M2 in the second half.

The benchmark incorporates minor revisions to data reported in the weekly and quarterly deposit reports, and it takes account of deposit data from Call Reports for banks and thrift institutions that are not weekly or quarterly deposit reporters.

These revisions to deposit data start in 2007. In addition, this release incorporates data from Call Reports on the amount of small-denomination time deposits held in individual retirement accounts (IRAs) and Keogh accounts; related revisions to deposit data start in 2005.

The benchmark also incorporates revisions to data on retail and institutional money market mutual funds, including revisions to IRA and Keogh balances held at those funds. Revisions to data on money market mutual funds begin in 2001. This release also incorporates the receipt of historical information from other sources of data.

Seasonally adjusted measures of the monetary aggregates and components incorporate revised seasonal factors, which were derived from data through December 2010. Monthly seasonal factors were estimated using the X-12-ARIMA procedure. The effects of both the new benchmark and the revisions to seasonal factors on the growth rates of M1 and M2 are outlined in appendix tables 6 and 7.

Historical data, updated each week, are available with the H.6 statistical release at www.federalreserve.gov/releases.

=======

Yes, I saw revisions to reserves as far back as 2001.

[flow5]

scottgrannis.blogspot.com/

Once again, new orders for Capital Goods—i.e., business investment—exceeded expectations. December orders were up 1.4% (vs. an expected 1.3%), on top of upward revisions to the data for the previous two months. Over the course of last year, business investment has increased by 15.5%, a staggering figure. If any part of this recovery can be termed "V-shaped," this is it.

(I'm using a 3-mo. moving average in this chart because the raw data are plagued by a seasonal adjustment flaw that doesn't fully correct for what appears to be a tendency for orders to surge at the end of each calendar quarter.)

Strong gains in business investment reflect the return of confidence to the business sector, while at the same time laying the groundwork for future gains in productivity.

=========


one of the best indicators of the economy that I've seen

[bimetalaupt]

Flow5,
I am sticking with year over year.. NOT ADJUSTED... OR AS YOU USED TO SAY NOT :MAL-ADJUSTED NUMBERS ???SO I WILL BE KEEPING ON THE RIGHT SIDE OF THE PAGE.. KEEPING OFF THE LEFT COAST OF LIBERAL USA.

BECAUSE interest is rising .. I am taking this to be a bet on higher inflation by the banksters!!!

I plan to return to the T-Bond market when 30 year T-Bond > 6%... It is all about inflation now.. Axel Weber is absolutely Livid about the action JCT. of France Left Coast... or the liberal school of Economic thinking.. When was the last Frenchman to find a Nobel Prise

JUST A THOUGHT,
Bi Metal Au Pt..

[flow5]

Based upon money flows HOUSING BOTTOMs IN JAN. Of course the Case-Shiller index is a 3 month moving average - so its bottom will come a month or two later.

"This index family includes 20 metropolitan area indices and two composite indices as aggregates of the metropolitan areas. The composite and city indices are normalized to have a value of 100 in January 2000"

MVt peaked in Feb 2006. Case-Shiller then peaked in the 2nd qtr 2006 @ 189.93 (because of the 3 month average).

Options and futures based on Case–Shiller index are traded on the Chicago Mercantile Exchange.

[scaredshirtless]

How do you mean bottomed?

Like - bottomed in price?

Or - bottomed in turnover volumes?

Knowing what I think I know about shadow inventories, impending 5 yr POA's recasting, MERS and put backs not to mention high unemployment and currently under water loans - what bottomed in housing?

I don't understand the correlation Flow. Thanks.

[comokate]

Great post Flow !
Do you have a link to where the report is located ? ( you mentioned a "Thursday release").

[flow5]

The equation of exchange is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged, is equal (for the same time period), to the product of the volume, and transactions velocity of money.

In my application of the equation, MVt represents the average (price level) of all transaction units. Average prices have bottomed based upon the proxy, or lag, for long-term money flows (inflation).

Houses are consumer's largest asset (in the volume of transaction units). Housing prices are thus one of the equation's largest components captured. Therefore, according to the equation of exchange (just by the numbers), housing must bottom this month, or next at the latest (or money flows must fall -which doesn't look possible).

Obviously, this math ignores the bottlenecks that exist in housing's recovery (and the ones you specifically point out). But that's exactly why you watch money actually exchanging hands (which equal "T", the volume of transactions units; and "P", the average price of all transactions units).

In the real world, the analysis isn't perfect, & neither is the data (even though the equation is a truism). The comparison of the historical trends is convincing. But the flaw is that there is no valid velocity figure.

But don't dismiss the numbers just because of Vt yet. Rates-of-change in legal reserves do not reflect the same economic activity, (or economic parameters), as do rates-of-change in the money stock. I.e., the historical data for legal reserves matches (validates) the rate-of-change in bank debits (the best monetary metric).

And that is why I'm an inveterate FED watcher (& don't watch foreclosures, etc).

[flow5]

THURSDAY'S Releases

Board of Governors Statistical Releases

www.federalreserve.gov/econresdata/releases/statisticsdata.htm

Wall Street Journal - Federal Reserve Monetary Data

online.wsj.com/mdc/public/page/2_3022-fedresdata.html#fedresdataC

Federal Reserve Bank of St. Louis U.S. Financial Data

research.stlouisfed.org/publications/usfd/

[flow5]

As expected, Treasury has announced that it will allow the $200 billion Supplemental Financing Program to run down to only $5 billion; that will save $195 billion of borrowing authority under the current debt ceiling:

1/27/2011
WASHINGTON – The U.S. Department of the Treasury’s Assistant Secretary for Financial Markets, Mary Miller, today issued the following statement on the Supplementary Financing Program:

“Beginning on February 3, 2011, the balance in the Treasury’s Supplementary Financing Account will gradually decrease to $5 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy.”

Treasury created the SFP in order to help the Fed expand its balance sheet without “printing money” (or, more accurately, “printing reserves”). Under the program, Treasury issues bonds, as usual, but it deposits the proceeds in an account at the Federal Reserve, rather than using them to pay the nation’s bills. The Fed then uses those deposits to purchase assets. Since the money ultimately comes from investors who own the new Treasury bonds, the SFP allows the Fed to expand its balance sheet without creating reserves out of thin air.

With the program winding down — at least until the debt ceiling gets raised — the Fed will have to ask its electronic printing press for another $195 billion if it wants to maintain its targeted portfolio.

[flow5]

Monetary Policy under a Corridor Operating Framework

www.kansascityfed.org/Publicat/EconRev/PDF/10q4Kahn.pdf

[flow5]

CBO: Social Security to begin running permanent deficits this year, not 2016Share390posted at 6:45 pm on January 26, 2011 by
.
The Congressional Budget Office said Wednesday that Social Security will pay out $45 billion more in benefits this year than it will collect in payroll taxes, further straining the nation’s finances. The deficits will continue until the Social Security trust funds are eventually drained, in about 2037.

Previously, CBO said Social Security would start running permanent deficits in 2016. In the short term, Social Security is suffering from a weak economy that has payroll taxes lagging and applications for benefits rising. In the long term, Social Security will be strained by the growing number of baby boomers retiring and applying for benefits.

Remember the payroll tax cut for employees that was part of last month’s tax cuts deal? Democrats warned at the time that that would play into the GOP’s hands on entitlement reform by establishing a new lower baseline rate that’s insufficient to fund the program. (The current rate is temporary, but as we’ve learned, temporary tax rates are hard to raise.)

The result: An accelerated, expanded shortfall in Social Security that will inevitably intensify cries that the program is unsustainable and needs to be reformed. Which, of course, it does: As noted above, assuming The One wins a second term, Social Security would have begun running deficits before the end of his presidency anyway. As it is, two graphs for you from today’s new CBO report. First, the Baby Boomer effect on expenses over the next 10 years:

And second, the offsetting receipts, with the Medicare line self-explanatory:

This isn’t the only horrible news in the report by a longshot, either. CBO’s projected deficit for this year is a cool $1.5 trillion or 9.8 percent of GDP, which is just two-tenths of one percent less than last year’s all-time budget-buster.

And there’s not much revenue relief coming from new jobs: CBO expects that unemployment will remain above eight percent through 2012 and won’t get back to a historic norm of 5-6 percent or so until 2016. This ship has already started to sink, in other words, and yet Captain Hope chose to use his annual megaphone last night to talk about stuff like high-speed rail. As Megan McArdle says, terrifying.

[flow5]

Money works quickly. Where are the nominal gDp target proponents? Just pissing in the wind?

Real-output is set to outstrip the supply of goods & services offered in the market place (i.e., at high enough run rates to generate new, higher price levels).

[flow5]

SOMA now up by $164,099,852.20 (JAN 26th data)


"On August 10, 2010, the Federal Open Market Committee directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities (agency MBS) in longer-term Treasury securities. The most recent H.4.1 data release indicates that outright holdings of domestic securities in the System Open Market Account (SOMA) totaled $2.054 trillion as of August 4, 2010"

[flow5]

DAILY AVG IN MILLIONS
Two weeks ended % CHANGE IN WEEKLY AVERAGES

1/19/2010 1/5/2010..……………………………………….…. 13-wk…26-wk…52-wk

Total reserves………………………………………..……….…….….24.8.…...6.1……-1.3
Non-borrowed reserves……..…………………………….……..35.5…..14.4.……8.5
Required reserves………………………….……………….……....28.8…..11.1…..11.9
Excess reserves………………………………….…………..…...…11.6..….-4.1…..…0.5
Borrowings from Fed………………………..…………..……….-35.0.…-66.7….-73.0
Free reserves…………………………………………………..……..…14.0……..0.3……14.9

[flow5]

"The Great Recession distinguished itself from earlier recessions in terms of its severity rather than its length. There was a decline in real output relative to trend of $1.1 trillion or 8 percent"

From the peak in December 2007 to the end of the recession, private non-farm payroll employment declined by 7.3 million jobs—bringing employment below its level in January 2000 (Chart 7). The severity of the Great Recession is very apparent when you realize that an entire decade's worth of job growth was lost.

"many unemployed workers withdrew from the labor force and stopped actively looking for employment. This can be seen by the decline in the labor force participation rate (Chart 19). While there are around 15 million unemployed workers, there are also around 9 million workers who are working part time for economic reasons (as opposed to their own choice), and around 1.3 million "discouraged" workers who want a job but who are not currently actively looking for work—and therefore are not counted as unemployed. As firms decide to increase their total hours, some of this additional labor demand will take the form of firms restoring part-time workers to full-time status—an action that does not reduce the unemployment rate"

There still remains a significant excess supply of housing that will exert downward pressure on house prices and new construction (Chart 28). Given the very low level of new home construction, the primary driver of this excess supply of housing is the on-going foreclosure process. The foreclosure pipeline continues to grow (Chart 29). How far along are we at resolving the foreclosure problem? Total completed foreclosures including short sales and deeds-in-lieu from the beginning of 2008 until the end of the third quarter of 2010 represent around 58 percent of all foreclosure starts over that same period. In addition, in each quarter the pace of foreclosure starts has exceeded the pace of completed foreclosures. At best, then, we are only halfway through the resolution process.

[flow5]

Annaly Capital Management

Released by the BEA this morning: the advance reading of real GDP came in at 3.2% for the 4Q of 2010 (actually, it was 3.17%, but who’s counting?) versus expectations of 3.5%. There was a lot of internal noise, with large positive contributions from personal consumption and net exports, offset by negative contributions from inventories and government spending. However, the line item that jumped off the page was the GDP deflator, the measure of inflation that turns nominal GDP into real GDP.

The GDP deflator was very light at only 0.3%. If it had come in as estimated (1.6% according to Bloomberg), and all other inputs remained constant, real GDP growth would have been cut in half.

A smaller deflator pads real growth by subtracting a smaller number from nominal growth. We read one possible explanation for the light deflator: oil is an import, and imports subtract from GDP, therefore higher oil prices subtracted from the GDP price index. What we do know is that the core PCE price index (a preferred Fed measure of inflation) also declined, and the GDP deflator tends to track Core PCE over time despite the quirkiness of GDP accounting. The current level of Core PCE, 0.4%, is the lowest on record since 1959.



As mentioned above, low and falling inflation has the effect of padding real GDP growth. The chart below shows the recent trend in real GDP growth.

www.creditwritedowns.com/2011/01/really-nominal-gdp.html

However, remember our small and shrinking deflator? The one that we said seemed to be skewing real GDP higher? Take a historical look at nominal GDP growth, and the recent economic activity looks different.



Average nominal growth since the late 1940s is about 6.8%, which included the inflationary 1970s and early 1980s, but this doesn’t seem way off. During expansions in the past 30 years, growth has averaged about 6.4%. Current nominal growth is at 3.4% and has been trending down throughout 2010. Considering that we are 6 quarters into an expansion with plenty of unusual stimulus to boot (+$2 trillion Fed balance sheet, +$1 trillion federal deficit), this low level of nominal growth and inflation is surprising.
====================


Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not “long and variable”. The lags for monetary flows (MVt), i.e. the proxies for (1) real-growth, and for (2) inflation indices, are historically (for the last 97 years), always, fixed in length. However, the FED's target?, varies widely.

Short term money flows are accelerating. Long-term flows just bottomed. The combination obviously creates a high ratio of real to nominal gDp (a potential thorn for targeting nominal gDp - as opposed to inflation).

[scaredshirtless]

Thanks Flow.

I just don't see true comprehensive recovery until housing recovers too - whatever level that ends up being based upon fair honest open market pricing.

I hope your numbers are positive - we could use the help.

[flow5]

On Jan. 6 the Fed released a very important document, albeit one with a boring headline: “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.”

Lulling the readers into a comatose state, the first sentence says that the release “has been modified to reflect an accounting policy change that will result in a more transparent presentation (emphasis added) of each Federal Reserve Bank’s capital accounts and distribution of residual earnings to the U.S. Treasury.”

More transparent? Who are they kidding?


Reading the documents a few times, here is my translation of the accounting change: If and when the Federal Reserve should lose money on the $2 trillion plus of securities on its balance sheets so as to erase its capital, the central bank does not have to record the loss.

From now on, the Fed allows itself to debit the loss to a liability account called “Interest on Federal Reserve Notes Due to the U.S. Treasury.” Never mind if the Fed’s capital of $52 billion has been wiped out. This novel accounting fiction ensures that the daily surplus capital of the Federal Reserve Bank remains as paid in capital, thus complying with the statutory mandate of the Federal Reserve Act.

In other words, if the Fed were to raise the Interest on Reserves that exceeds the return of its portfolio, or if it sells securities at a loss, they will not hit the capital account. Instead, these losses would simply be allocated to the new “Interest on Federal Reserve Notes” item. The Fed’s capital remains intact. It now has no obligation to transfer money to the Treasury to cover the loss until there are sufficient gains in its portfolio.

Saying that the accounting change makes things more transparent would be funny if it was not so … how should I say? – non-transparent.

This is a bit like a pharmaceutical company’s accountants reporting that their experiment went nowhere; that they lost the $1 billion invested in R&D; but that they still have the money because royalties from future discoveries will replenish its coffers. True, shareholders will not actually receive dividends until the $1 billion is recouped, but, the balance sheet would show that there was no doubt whatsoever that any losses would be recouped.

GAAP accounting rules do not allow private companies to get away with this accounting fiction. Why is the Fed allowed to do so?

One reason is that the Fed has the legal obligation to immediately transfer to the Treasury any amount above its $52 billion of capital. Thus, in contrast to private companies, it cannot build up reserves to cushion against rainy days. As a result, there is an argument that it should be given some leeway to deal with a situation if, during some days, its capital would fall below $52 billion. If the loss of capital had occurred before the change in the accounting rule, the Fed would be forced to go instantly to Congress and beg for money. Some would say that this obligation could diminish the Fed’s independence.

The second reason is that the Federal Reserve is correct in stating that they can pay the Treasury in the future. In contrast to the pharmaceutical company in our example that can never be sure if it can devise a successful drug, the Fed can always print money.

However, it’s simply not accurate to call what it’s doing transparent while stating that “Although the accounting policy change does not affect the amount of residual earnings that the Federal Reserve Banks distribute to the U.S. Treasury, it may affect the timing of the distributions.”

First, as demonstrated, the change is about far more than accounting.

Second, it might be true that if interest rates stay at close to zero, then perhaps only the timing of the distribution would be affected rather than the amount. But if interest rates do rise, then Bernanke’s response last week to the Senate that “It’s possible that there might come a period where we don’t remit anything to the Treasury for a couple of years” implies that the value of the portfolio would be affected.

If interest rates rise, the Fed could get even deeper in the hole and pay back Treasury with freshly minted money, effectively monetizing the losses. That means inflation and even more dollar devaluation.

I do hope that my explanation above is both clear and simple and captures the essence of the Fed’s otherwise technical note. The document obscures the fact that the Fed has adopted a procedure that would disguise the increased chances that it will end up printing money. It is a game of smoke and mirrors.

[flow5]

The government's first guess at the growth of fourth quarter GDP was less than expected (3.2% vs. 3.5%, with some expecting 4-5%), but if that is the reason for today's market sell-off, then this is another good buying opportunity. GDP estimates can and do change significantly over the years, of course, but meanwhile, the main reason that Q4 growth was disappointing was that there was a large decline in inventories. As the chart below shows, inventories subtracted a full 3.7 percentage points from Q4 growth.

As Brian Wesbury notes, real final sales (real GDP excluding inventories) rose at a very impressive 7.1% annual rate last quarter, with the result that:

... Manufacturers and retailers underestimated consumer demand and ran down inventories dramatically in the fourth quarter. Anecdotal reports suggest that low inventory levels are having a cost in the form of lost sales. Moreover, prices are not likely to be slashed to reduce excess inventories after the holidays. What this means is that there is more room for production increases in 2011 and inflation will continue to move higher.

It is quite likely that businesses are already attempting to rebuild their inventories, but even if they manage to hold them steady, that will have the effect of boosting first quarter growth. I recall quite a few times in the past where a weak GDP number caused by inventories was followed by a stronger number in the subsequent period. It's likely to happen again.

I needed a 4% Q4 print to make my Dec. '09 prediction of at least 3% growth in 2010 correct. If the first estimate stands, then I will have overestimated growth by 0.2%. Not too bad, but it was my optimism on the economy's growth prospects that led me to mistakenly expect the Fed to begin tightening policy last year, and to expect bond yields to be higher than they turned out to be.

But just because I overestimated growth last year does not mean I need to cut my growth expectations (at least 4%) for this year. Stronger growth is likely because confidence is up, uncertainty is down (e.g., the tax cut extension passed), global growth remains very strong (e.g., China and India), fiscal policy headwinds are slowing (e.g., no more wasteful stimulus experiments), and monetary policy remains very accommodative.

Another thing I did not expect was the very small rise in the Q4 GDP deflator (0.26% annualized), which contributed to a very small rise in the nominal growth of Q4 GDP: 3.44%. The very small gain in the deflator last quarter could be just a one-time event, since as the chart above shows,

Regardless, relatively slow growth in nominal GDP, alongside somewhat faster growth in M2 in the fourth quarter, resulted in a modest decline in M2 velocity (see chart below), whereas I had been expecting a pickup. But again, that is not a reason to get bearish on 2010. It still makes sense for velocity to pick up (confidence is improving, and the dollar is weak, which suggests that money demand is declining on the margin even as the Fed remains very accommodative), and it is also the case that M2 growth appears to be accelerating a bit.

===================

1st & 2nd qtrs will show a strong pop.

Just think, if the FED targeted nominal gDp (as some advocate), in the 2nd qtr you might tighten monetary policy (even though inflation gauges are quiescent). Why restrict real-output?

[flow5]

Randall Forysth - Barrons:

The nation's financial crisis was avoidable, if only regulators had curbed the excesses resulting from failed corporate governance that permitted the wild over-borrowing and opaque financial instruments to flourish amid a breakdown of accountability and ethics. Once the crisis exploded, government actions were inadequate and inconsistent in dealing with the crisis.

So says the 500-plus-page report from the Financial Crisis Inquiry Commission that investigated the crisis of 2007-08, the worst since the 1930s, which caused the severe recession from which the U.S. economy is slowly emerging. The FCIC report was published in book form and online (http://www.fcic.gov/report) Thursday.

But a minority dissent presents an alternative explanation and analysis of the crisis by raising this relevant question: If the bubble and bust was the result of the failure of U.S. institutions and the American public to curb imprudent and abusive practices, why did similar collapses happen in other countries and housing markets?

The majority report, backed by the Democratic members of the panel led by Rep. Phil Angelides, the former treasurer of California, contends the financial crisis was avoidable, the results of warnings missed and ignored in the "explosion of risky subprime lending and securitization," aided and abetted increased leverage by securities firms and an "exponential" increase in Wall Street's trading activities.

The main culprit in allowing these excesses, the FCIC report says, was the "Federal Reserve's pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending practices." Thirty years of financial deregulation, championed by former Fed Chairman Alan Greenspan, allowed the burgeoning of all manner of dubious loans, from subprime to no-doc "liar loans" to option ARMs that let borrowers pay what they felt like each month.

Financial institutions then could package these mortgages into securities, which then were combined into collateralized-debt obligations hedged by credit-default swaps. Soon synthetic CDOs were constructed from CDSs, and those esoteric, opaque instruments were financed with overnight repurchase agreements.

It all sounds like an updated version of Only Yesterday, Frederick Lewis Allen's popular history of the 1920s, which seemed very distant by the time of its publication in 1931. I mean, who would have conceived of anything so inherently unsound, so certain to come unraveled?

But before it did, the shadow banking system, consisting of off-balance sheet assets and funded with nonbank liabilities, burgeoned and fueled the boom. And whether government sponsored enterprises Fannie Mae and Freddie Mac were sufficient or even necessary parts of the edifice that collapsed remains a major point of contention; the bill for the taxpayers is undeniable.

But there are other bad actors in the drama, and their role cannot be denied: the credit ratings agencies. Without their imprimatur of triple-A, there would have been no way to stitch together billions of dollars' worth of silk purses from sows' ears.

What's missing (at least from an admittedly quick read of the highlights of the 662-page tome, footnotes included) is an explanation of why Wall Street would engage in this form of self-delusion. The simple answer was the profits from this alchemy were so vast that managements would be accused of being derelict if they didn't grab their share.

Wall Street greed always makes a good villain, and it no doubt drove the mortgage madness beyond anything previously imaginable. But that factor, even abetted by regulatory ineptitude, is not sufficient to explain the global character of the crisis.

That lies at the heart of the dissent by FCIC Vice Chairman Bill Thomas and Commissioners Keith Hennessey and Douglas Holtz-Eakin, all Republicans.

There was a credit bubble around the world, which created housing booms -- and busts -- as great or greater in the U.K., Ireland, Spain, France and Australia. Large financial firms also failed in Iceland and Germany as well as Spain and the U.K. Moreover, the credit bubble extended beyond residential real estate to other asset classes, including commercial property.

"This tells us to look to the credit bubble as an essential cause of the U.S. housing bubble. It also tells us that problems with U.S. housing policy or markets do not by themselves explain the U.S. housing bubble," they write.

Further points from the minority dissent:

Wall Street's influence on Washington doesn't explain institutional failures in Europe. Securitization doesn't explain housing bubbles in Spain, Australia and the U.K. The decisions to invest in American housing assets by many U.S. commercial banks, several large U.S. university endowments and some state pension plans, along with a number of large and medium-sized German banks can't be explained by Wall Street's structure. And while Greenspan might be blamed for a lot of things, it's a stretch to blame his "deregulatory ideology" for European regulatory failures.

The crisis had its roots in the credit bubble, which had international dimensions, notably the build-up of savings in China and other developing countries, they contend. While the GOP trio don't mention China's currency peg as a factor, holding the exchange rate of the renminbi stable while experiencing huge trade deficits forces China's central bank to accumulate vast dollar assets, much of which funded American home mortgages.

With the compression of credit spreads, riskier lending was encouraged. "Fueled by cheap credit, firms like Countrywide, Washington Mutual, Ameriquest and HSBC Finance originated vast numbers of high-risk, nontraditional mortgages that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to repay. At the same time, many homebuyers and homeowners did live up to their responsibilities to understand the terms of their mortgages and to make prudent financial decisions." Of course, prudence didn't matter as long as houses continued to appreciate and cover this multitude of sins.

A separate dissent by another Republican, Peter Wallison, contended housing policies under the Clinton and the Bush 43rd administrations was the root cause of the crisis by driving down lending standards. While that may have contributed, this also doesn't explain the global nature of the bubble and crisis.

The majority report contends that a credit expansion does not necessarily have to lead to bubbles that burst. The credit can be carefully regulated and channeled to productive uses. Somehow, however, it always pumps up booms that go bust.

"The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits," writes Carmen M. Reinhart and Kenneth S. Rogoff in This Time is Different, their masterful history of financial crises and their effects over centuries. "Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics and profits no matter how well regulated it seems to be."

What hopefully will be different next time is that the effects of the bust won't require a bailout from the public purse.

=============

The Global cause of housing's boom-bust was the assumption that the money supplies of the world's economies could be managed thru an interest rate - monetary transmission mechanism.

[itstippy]

The Q4 2010 drawdown in inventories boosted Q4 Final Sales numbers (GDP minus Inventories).

The strong Final Sales numbers lead many to proclaim the "return of the consumer". If this is true we will see increased State sales tax revenues for Q4 2010. State sales tax revenues are the most accurate measure of consumer demand at retail level.

[flow5]

Is housing hiding inflation in other sectors of the economy? CPI gives housing a 42 percent weight and this has obscured rising costs in medical care, education, food, and energy. It has also given the Federal Reserve another excuse to digitally print more money.

www.doctorhousingbubble.com/housing-hiding-inflation-sectors-economy-cpi-housing-growth-in-medical-care-college-fuel/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+DrHousingBubble-HowILearnedToLoveSocal+%28Dr.+Housing+Bubble+-+How+I+learned+to+Love+SoCal%29
=========

good detailed discussion

[scaredshirtless]

And exactly my point.

No housing at normal volumes and price discovery = no recovery.

[flow5]

BI prefers non-interest tools to curb high inflation
Esther Samboh, The Jakarta Post, Jakarta | Mon, 01/31/2011 11:58

Bank Indonesia (BI) continues to prefer using a non-interest rate tool to curb surging inflation in the country and to ensure that changes in monetary policy will not affect economic growth, a senior central bank official said.

BI spokesman Difi A. Johansyah said over the weekend that in order to curb rising inflation, the central bank would continue to use its non-interest rate monetary tools, such as adjusting reserve requirements imposed on commercial banks and maintaining the value of rupiah against the US dollar.“

High inflation does not have to be responded to by the BI rate, but it can also be managed through liquidity and currency measures. We don’t want to be drastic, so we will tighten policies gradually,” he told reporters at his office in Jakarta.

Bank Indonesia’s policy to maintain its benchmark interest rate at a record low 6.5 percent since August, 2009 has helped boost economic growth to the government’s target of 6 percent.

The loose monetary policy had however resulted in an overall increase in money in circulation, pushing up the year-on-year inflation rate to a 20-month high of almost 7 percent in December, surpassing the central bank’s 2010 and 2011 target of between 4 and 6 percent.

Foreign market analysts have urged the central bank to tighten its monetary policy by raising rates due to heavy inflationary pressures, but BI Governor Darmin Nasution has said that surging food prices — the main reason behind surging inflation in December — could not be contained by a rate hike.

Difi explained that by increasing the rupiah and US dollar-based minimum reserve requirements, the money in circulation in the nation’s banking system could be reduced in order to stem demand-side inflation.

BI has increased rupiah minimum reserve requirements (GWM) to 8 percent from the previous level of 5 percent starting last November, absorbing Rp 50 trillion (US$5.56 billion) in excess liquidity in the nation’s banks, BI deputy governor Budi Mulya said.

The dollar-based reserve requirement will be increased gradually to 5 percent in March and 8 percent in June this year from the current 1 percent, mopping up an additional $3 billion in liquidity, he added.

“BI is controlling excess liquidity in the market, signaling to the market that we are concerned with the inflationary pressures. We are still waiting on the impact of the increase in the minimum reserve requirements. We will see if a BI rate hike is necessary or other variables could be used [to stem inflation],” Difi said.

Regarding currency tools, BI deputy governor Hartadi A. Sarwono said the central bank had intervened in the foreign exchange market to stem inflation and is targeting Rp 9,000 per dollar as a benchmark to achieve its 2011 inflation target.

“If there is pressure on the rupiah, we enter the market. There we have room to strengthen the rupiah to help stem inflation.

The market reads this, that Bank Indonesia is concerned about inflation by intervening in the market,” Hartadi said, as quoted by Reuters news agency.

As the central bank will push demand-side efforts to stem inflation, Hartadi said he hoped other related-institutions, including the government, could manage the supply-side as inflationary pressures remain due to surging food prices.

Analysts have warned that the central bank would no longer have sufficient room to maintain its benchmark interest rate at the current level with the prevailing inflationary pressure. Many argue that an interest rate hike is needed to keep inflation in check.
==============

I'll watch this one as the Central Bank understands monetarism

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Getting beyond carry trade: What makes a safe-haven currency?
Maurizio Michael Habib Livio Stracca
30 January 2011

What makes a safe-haven currency? This column analyses a panel of 52 currencies in advanced and emerging countries over the past 25 years. It finds that safe-haven status is not determined by the interest rate spread, as emphasised in the carry trade literature, but by the net foreign asset position, which is an indicator of country risk and external vulnerability.

We all “know” that some currencies are safe havens in crisis times – take the Japanese yen or the Swiss franc. But do we know why? And does the dollar belong to this list?

There is a well established and fast-growing body of literature showing how low-yield currencies typically appreciate during times of global financial stress and behave as safe havens (Brunnemeier et al. 2008, Lustig et al. 2008, and Menkhoff et al. 2009). This leads to a systematic deviation from the uncovered interest parity; low-interest rate currencies systematically under-perform except in exceptional circumstances such as when global exchange rate volatility is high.

This empirical regularity is not necessarily the same as safe-haven status. The two concepts – deviation from uncovered parity and safe-haven status – overlap only in so far as, and to the extent which, traders pursue carry trade strategies.

In our recently published work (Habib and Stracca 2011), we try to go beyond this literature and search for the "fundamentals" of safe-haven currencies, analysing a panel of 52 currencies (51 bilateral exchange rates) in advanced and emerging countries over the past 25 years. In short, we ask: What makes a safe-haven currency?

The search for fundamentals
We put forward three possible sets of explanations of a safe-haven status.

•First, a currency may be a safe haven if the country issuing it is itself safe and low-risk. That may be appreciated by nervous investors in times of high risk aversion.
•Second, we surmise that size and liquidity of a country's financial market may support a safe-haven status, an argument that has been called for during the latest financial crisis. When global risk aversion is high, market liquidity may dry up and most liquid markets may get an additional bonus.
•Third, we test whether financial openness and more generally financial globalisation is a determinant of a safe-haven status. An ideal safe haven should be a place that is insulated from the global storm when the storm strikes; a difficult feat in times of financial globalisation.

An essential element of our analysis is to appraise whether and which of these possible determinants is a stable and robust predictor of safe haven behaviour. In particular, we test whether, as commonly argued (see Kohler 2010 for instance), the global credit crisis of 2007-09 has indeed different characteristics, in terms of safe-haven currencies compared with previous high global volatility episodes (see Ranaldo and Soderling 2009). Indeed, the stability analysis confirms the perception that the recent behaviour of the dollar has been rather anomalous compared with previous regularities. Contrary to the common belief, which has been strengthened by the appreciation of the dollar during the recent crisis, the dollar is not always a safe-haven currency.

Our results show that are only very few variables entering consistently and robustly as determinants of safe-haven status. Of course, this result is certainly not unexpected given the large literature on the exchange rate disconnect. Explaining exchange rate behaviour is hard, also in this domain. Nonetheless, we do find a number of variables to be statistically significant and reasonably robust, more so for advanced countries and less so for emerging countries.

First of all, focussing on carry trade, we do find that the interest rate spread is consistently associated with a safe-haven status in advanced countries, but not in emerging countries, probably reflecting the low liquidity and high transaction costs that are typically associated to currencies of emerging economies. This confirms the notion that the interest rate differential is not a fundamental driver of safe-haven status, and it depends on carry trade strategies being pursued.

After controlling for carry trade, in the whole sample and for emerging markets, we find that the net foreign asset position, an indicator of external vulnerability, and to a lesser extent the absolute size of the stock market, an indicator of market size and financial development, are robustly associated to a safe-haven status. Nonetheless, even the variables that are statistically significant tend to have a rather small quantitative impact on exchange rate behaviour. It is therefore very difficult to explain the safe-haven status, and this should lead to some caution against over-interpreting exchange rate behaviour during financial stress. We still know precious little about the fundamental drivers of exchange rates.

Conclusions
Overall, our findings put the spotlight on the fact that save haven status is not determined by the interest rate spread, as emphasised in the carry trade literature, but by the net foreign asset position, which is an indicator of country risk and external vulnerability. The role of the interest rate spread stems mainly, in the literature and in reality, from the fact that traders tend to follow carry trade strategies, targeting not all currencies and not always the same currencies.

The views expressed in this column are those of the author and do not necessarily reflect those of the European Central Bank.

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Treasury Sees $194 Billion Drop In Borrowing Needs Due To SFP Program Roll Off, Over Half A Trillion In Financing Needs For Jan-Mar Quarter
Submitted by Tyler Durden on 01/31/2011 15:19 -0500

Debt CeilingDepartment of the Treasury


Today, the Treasury issued its revised merkatble borrowing estimate. And while the last time the Treasury issued this forecast, it had expected a $431 billion need of marketable borrowing financings (while expecting a $454 billion total Financing need), this number has now plunged by $194 billion to $243 billion. But don't be fooled that this is due to an expectation that treasury revenues are suddenly going to pick up. Oh no. In fact, total Financing Needs have increased by $49 billion to $503 billion for one quarter!

The only reason why the marketable borrowing estimate has plunged is due to the roll off of the SFP program, which will bring down EOQ cash from a previous estimate of $270 billion to $65 billion, a $205 billion decline in cash.

In other words, the Treasury now sees adding $237 billion in marketable debt to the total December 31 debt which means that the US will be close to breaching the debt ceiling by the end of March even with the SFP program roll off. What is amusing is that the Treasury now expects financing needs in Q2 to plunge from $503 billion to $258 billion, which in turn will need $299 billion in marketable debt to be issued over the April-June time period. We are willing to write naked CDS, and sell the TVIX against this number being revised by at least 20% at the next forecast revision, some time in late April.

Table summarizing this adjustment:



Full press release:

Washington, D.C. -- The U.S. Department of the Treasury today announced its current estimates of net marketable borrowing for the January – March 2011 and the April – June 2011 quarters:

* During the January – March 2011 quarter, Treasury expects to issue $237 billion in net marketable debt, assuming an end-of-March cash balance of $65 billion, which includes $5 billion for the Supplementary Financing Program (SFP). This borrowing estimate is $194 billion lower than announced in November 2010. The decrease in borrowing relates primarily to a lower SFP balance. * During the April – June 2011 quarter, Treasury expects to issue $299 billion in net marketable debt, assuming an end-of-June cash balance of $95 billion, which includes $5 billion for the SFP.

During the October – December 2010 quarter, Treasury issued $363 billion in net marketable debt, and ended the quarter with a cash balance of $343 billion, of which $200 billion was attributable to the SFP. In November 2010, Treasury estimated $362 billion in net marketable borrowing and assumed an end-of-December cash balance of $300 billion, which included an SFP balance of $200 billion. The higher cash balance resulted primarily from lower outlays.

Additional financing details relating to Treasury’s Quarterly Refunding will be released at 9:00 a.m. on Wednesday, February 2, 2011

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WSJ: A flood of cash by investors seeking to profit from rising interest rates is having an unintended effect in the deal world, where this money is being recycled into corporate buyouts.

Investors have been selling bonds, which typically lose money when interest rates increase, and putting their cash in funds that invest in bank loans that finance corporate buyouts. The loans have floating rates, so the interest they pay investors rises as rates go up.

.Individuals and institutions pumped about $6 billion into these funds in the fourth quarter of last year, almost doubling the previous quarterly record set in 2004, according to Lipper Inc. The pace accelerated this year, with investors pouring in about $3.4 billion as talk of inflation pushes rates higher.

That inflow helped fuel $7.9 billion worth of new leveraged buyout loans January, the biggest month since January 2008 when volume hit $11.3 billion, according to Standard & Poor's LCD.

Among the deals funded by this wave of investor money is KKR & Co.'s $5.3 billion deal for Del Monte Foods Co., the biggest buyout since 2008, and Carlyle Group's $3.9 billion deal for CommScope Inc. Leveraged buyouts are typically funded by a small portion of equity from the buyout firm, and a bigger slice of loans and bonds.

More
Del Monte Sells $1.3 Billion in Notes
.TPG Capital LP and Leonard Green & Partners also are prepping large loans for their $3 billion purchase of clothing retailer J. Crew Group Inc. A group of bidders led by Apollo Global Management LLC recently offered about $12 billion for Sara Lee Corp., which would have required close to $8 billion of financing had it been accepted.

Increased investor interest "absolutely means we're much more confident competing in sale processes," said Adam Blumenthal, co-founder of private-equity firm Blue Wolf Capital, which specializes in transactions for smaller companies. "Sellers are confident that if we come in and say there will be a financing package on the table, it will be there."

Bigger Loans, Better Terms
The new availability of loans, typically made by banks and sliced up for investors like these funds to buy, means buyout firms can get bigger loans and demand better terms when they borrow money. That is a big contrast to the past couple of years, when lending was tight and buyout firms took what they could get, no matter the terms.

And the more loan money available, the less equity the buyout firms need to put up. Equity contributions to new buyouts have fallen to about 30% right now, from 40% at the beginning of 2010, said Ian Palmer, a managing director in Leveraged Finance Syndicate at Barclays Capital. The average buyout loan amounted to $1 billion in January compared to $670 million throughout 2010, according to LCD.

"The biggest concern I have for this year is that demand is going to create a frothy environment," said Craig Russ, who co-manages $22 billion of floating-rate investments at Eaton Vance Investment Managers.

Deals Are Being Structured More Loosely Access thousands of business sources not available on the free web. Learn More Investor appetite was so strong for Del Monte that KKR increased the size of the loan this week. And KKR took advantage of the demand to remove many of the standard protections for loan holders, including requirements for financial tests that companies must meet.

"We continue to see the trend toward more borrower friendly terms and on occasion see some very uncommon terms," said Michael Knox, founder of Xtract Research, a covenant-focused research firm.

To be sure, buyout business is nowhere near where it was during the precredit-crisis boom, when money was flowing to finance huge buyouts.

Since then, the loan market has struggled to revive itself as investors poured money into "junk" bonds, investments seen as higher-yielding but riskier.

Leveraged loans have returned 5.2% annually on average, compared with 7% for junk bonds, according to Barclays data. Recovery rates average 71% for loans compared with 43% for junk bonds, according to S&P.

Market Heats Up
Combined with growing demand from other types of investors, the mutual-fund inflows are heating up the market. Banks are also participating in so-called pro rata revolving credit lines that companies use for working capital. Pro rata deals hit $75 billion in 2010, up from $38 billion the previous year, according to Standard & Poor's LCD.

Even CLOs, those investment vehicles that helped drive the boom in lending before the bubble burst in 2007, have money to spend. Those CLOs that survived the crisis are now flush with cash because many companies used proceeds from high-yield bond offerings to pay off their loans

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BLOOMBERG: The Federal Reserve’s policies for stimulating the U.S. economy are allowing European banks to sell a record amount of dollar-denominated bonds to refinance about $1 trillion of debt maturing this year.

UBS AG, Switzerland’s biggest bank, and Barclays Plc led European financial borrowers in raising $43.8 billion of investment-grade bonds in the U.S. last month, beating the previous record of $42.4 billion last January, data compiled by Bloomberg show. The region’s lenders sold the equivalent of $52.8 billion of bonds in euros and pounds, half what they raised a year ago and making January the slowest start to a year since 2002.

Fed Chairman Ben S. Bernanke’s pledge to inject cash into the financial system by purchasing $600 billion of Treasuries in a second round of quantitative easing is helping European borrowers hurt by the sovereign debt crisis at home. As a result of the extra dollars he created, cross-currency basis swaps show that it’s cheaper for European banks to sell bonds in dollars and swap the proceeds back to euros than it was at the same time last year.

“There’s no doubt QE2 provided a great boost to the U.S. capital markets,” said David Marks, the London-based chairman of debt capital markets for financial institutions at JPMorgan Chase & Co., last year’s biggest underwriter of corporate bonds. “European banks are beneficiaries of that as much as any other participant.”

Dollar bonds are making up a record share of European banks’ global sales. Lenders in the region sold 38 percent of their debt in the U.S. currency in January, compared with 27 percent in the same month of 2010 and 17 percent five years ago, Bloomberg data show.

Spread Inverts

Relative yields on U.S. bank bonds fell below those on European debt for the first time on Dec. 8, according to Bank of America Merrill Lynch index data. The gap, which reached as wide as 30 basis points, or 0.3 percentage point, on Jan. 11, narrowed to 15 basis points as of the end of last week. A year ago, U.S. debt spreads were 51 basis points higher.

Elsewhere in credit markets, the extra yield investors demand to own company bonds worldwide instead of similar maturity government debt rose 1 basis point to 162 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.974 percent.

The cost of protecting corporate bonds from default in the U.S. fell for a second day. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1.5 basis points to a mid-price of 82.7 basis points as of 12:12 p.m. in New York, according to Markit Group Ltd.

‘Legitimacy’ of Demands

The index, which typically falls as investor confidence improves and rises as it deteriorates, jumped to 86.1 basis points Jan. 28 as protests in Egypt intensified.

The country’s military said yesterday that it recognized “the legitimacy of the people’s demands” and promised not to fire on peaceful protests.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Morgan Stanley and Bank of America Corp. are marketing $1.55 billion of bonds backed by commercial mortgages, according to a person familiar with the transaction. The pool consists of 37 loans on 79 properties across the U.S., said the person, who declined to be identified because terms aren’t public. Shopping centers and malls account for 43.6 percent of the offering, and office buildings make up 28 percent, the person said. The deal is set to be sold next week.

Positive Returns

Corporate bonds worldwide returned 0.07 percent last month as of Jan. 28, following a loss of 0.55 percent in December, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The securities posted their first monthly gain since October.

High-yield, or junk, bonds returned 2.17 percent last month as of the end of last week, following a gain of 1.77 percent in December, the firm’s indexes show. The securities gained 15.2 percent in 2010. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

The U.S. debt markets are providing another option for Europe’s 35 biggest lenders as they seek to refinance $1 trillion of debt maturing this year and $744 billion in 2012, Bloomberg data show. Eighty-one percent of issuance this year took place in the first two weeks of January, the data show.

ABN Amro

ABN Amro Group NV, the Dutch lender nationalized in 2008, was the most recent European issuer of dollar bonds. The Amsterdam-based bank raised $2 billion for three years from a Jan. 27 offering split equally between 3 percent notes and floating-rate debt, Bloomberg data show.

The fixed-rate securities, issued by its ABN Amro Bank NV unit, were priced to yield 3.03 percent, or 205 basis points more than Treasuries. That compares with a yield of 3.38 percent on similar-maturity euro notes the firm sold Jan. 14.

UBS, based in Zurich, sold $1.75 billion of debt in two parts on Jan. 25 through a U.S. unit, compared with no benchmark offerings in the European market in the month, according to Bloomberg data. London-based Barclays, which hasn’t sold corporate debt in either euros or pounds this year, raised $2 billion in the U.S. on Jan. 6, the data show.

European Sales

The U.S. market still remains largely closed to banks from Europe’s most indebted nations, none of which has issued a benchmark dollar bond since September. Apart from government- guaranteed issues, only Intesa Sanpaolo SpA, which reported the strongest results among Italian banks in regulators’ stress tests in July, and Banco Santander SA, Spain’s biggest lender, sold bonds in the U.S. currency last year, the data show.

“Those European banks that can issue in U.S. dollars are definitely relying more on dollar funding than before,” said Alberto Gallo, a credit strategist at Goldman Sachs Group Inc. in New York.

For the biggest European issuers, Fed policy is easing the way for bond sales. The money set aside for buying Treasuries through June is in addition to the $1.7 trillion of government and mortgage debt that the U.S. central bank bought in the first round of QE from December 2008 to March 2010.

Riskier Assets

The extra cash these purchases freed up has helped drive investors’ appetite for riskier assets, reducing the extra yield they need to own U.S. investment-grade bank debt instead of government securities to the lowest since May. The spread narrowed to 204 basis points as of Jan. 28, from 210 at the end of last year and 237 a year earlier, according to Bank of America Merrill Lynch’s U.S. Corporates, Bank index.

Concern that European countries’ deficit struggles will prompt governments to force bondholders to share bailed-out banks’ losses has hurt lenders’ debt in the region. Relative yields on European bank bonds averaged 219 basis points as of Jan. 28, compared with 235 on Dec. 31 and 183 a year earlier, Bank of America Merrill Lynch’s EUR Corporates, Banking index shows.

European lenders’ dollar borrowing costs, driven higher by the recent crisis, are mitigated by the inversion in the basis swap, which makes it cheaper for borrowers to raise money in dollars and convert the proceeds into euros than to issue bonds in their own currency.

The five-year basis swap is at 26 basis points below the euro interbank offered rate, or Euribor, compared with 15 basis points under on Jan. 31, 2010, Bloomberg data show. The cost fell to 39.8 basis points less than the benchmark on Nov. 30, the lowest since March 2009.

“You can get a better cost of funding” by issuing in dollars, said Suki Mann, senior credit strategist at Societe Generale SA in London. Also, “inflows into credit funds in the U.S. are still significantly more supportive than they are in Europe,” he said.

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Will those inventories be replenished with domestic or foreign production? James Hamilton is not optimistic:


But the fact that a huge negative contribution of inventories coincided with a huge positive contribution of imports does not seem to be a coincidence. There's a clear pattern in the recent data that when one of these makes a positive contribution to GDP growth, the other makes an offsetting negative contribution. Although we often think of inventories as a substitute for production (you could either produce a good or sell it out of inventories), in the current environment inventories seem to act more as a substitute for imports (you could either import the good, or sell it out of inventories). So although inventories shouldn't be the same drag on GDP in 2011, I expect imports to go back up and exert a drag of their own.


Sadly, the story of this recovery continues to circle around the external accounts. Absent a resolution of the global rebalancing story, faith in fiscal stimulus is somewhat misplaced; much government spending will simply leak abroad as evident in previous GDP reports.
by TIM DUY

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Keep in mind that this number will likely not increase very much over the next several weeks, as organic issuance of about $150 billion per month is offset by $100 billion in monthly SFP draw downs.

Incidentally, keep a close eye on stocks tomorrow: since today we had the December 8, 2010 56-day CMB maturity, which will not be met with a rolling re-issuance tomorrow, the Primary Dealers, whose ranks have now swelled by such "traditional" bond trading firms as pure-play derivative expert MF Global (led by ex-Goldman CEO Jon Corzine) and pure-plau futures trading expert SocGen, will have an extra $25 billion in pocket change to invest in 5x beta stocks as they see fit.