Archive - Aug 15, 2010

Tyler Durden's picture

Willem Buiter's Game Theoretical Explanation Of The Interaction Between Central Banks And Treasuries





Despite missing this most recent paper by Buiter at its first publication three weeks ago, it represents the bedtime reading for this evening as it is just as relevant now as it was then. In it, the Citi strategist asks "who will control the deep pockets of the central bank?" and does so from the perspective of a game of "chicken" in a prisoner dilemma context. Buiter summarizes the problem as follows: "As long as neither the monetary authority nor the fiscal authority gives in, the deficit is financed by public debt issuance. With the public-debt to GDP ratio rising without bound, an eventual catastrophe occurs: the sovereign defaults and banks holding large amounts of sovereign debt may collapse, triggering a financial crisis and a deep slump. Following default, the fiscal authority loses access to the government debt markets, at least for a while. The resulting need to instantaneously balance the government’s primary budget means sharp public  spending cuts and tax increases. This would be the "collision" outcome. The outcome where the monetary authority gives in and monetises public debt and deficits is called Fiscal Dominance. Monetary dominance is the outcome where the fiscal authority gives in and cuts public spending and/or  raises taxes to stabilise or reduce the public debt to GDP ratio to prevent a sovereign default." Buiter does a dramatic deconstruction of this theoretical principal to the practicality of Europe, in a truly fascinating and must read analysis. His conclusion is that the "analysis emphasises that the Eurosystem can absorb much larger losses without risking its solvency or undermining the effective pursuit of its price stability target. We don’t, however, argue that the resources of the Eurosystem should be used in this quasi-fiscal manner. Openness, transparency and accountability suffer when the central bank is used/abused for quasi-fiscal purposes, and the legitimacy of the institution can be undermined." Alas, this only means that fiscal stimulus fundamentalists like Krugman will now start pushing for monetary replacements to traditional policy. And with that QE2 (and its myriad of imminent associated alphabet soup programs) is even more of a certainty.

 

Tyler Durden's picture

Upcoming Weekly Calendar





A look at the key economic events in the relatively quiet week ahead from the perspective (and benchmarks) of Goldman Sachs.

 

Tyler Durden's picture

A Couple Of Pointers For TheStreet.com On Blogging Etiquette





Our religulous readers at theStreet.com decided to take a stab at Zero Hedge over the weekend due to our discovery, first among all media, that the Hindenburg Omen had struck this past Thursday. We take this opportunity to teach theStreet a few of the key rules of blogging etiquette.

 

Bruce Krasting's picture

Let BABs Die





Just another dumb program that puts cash in the big bank's pockets.

 

Leo Kolivakis's picture

South Korea's Pensions to Boost Equity Stake





Analysts say they expect South Korea’s public pension funds, which now hold more than 300 trillion won ($252.73 billion) in assets, to be increasing their equity holdings soon.

 

Tyler Durden's picture

Guest Post: Gold Market Is Not “Fixed”, It’s Rigged





In 1919 the major London gold dealers decided to get together in the offices of N.M. Rothschild to “fix” the price of gold each day. While this was notionally to find the clearing price at which all buying interest and all selling interest balanced the possibility for market manipulation and self-dealing is inherently systemic in such a cozy arrangement. This quaint anti-competitive procedure continues to this day. In no other market in the world do the major players get together each day and decide on a price. Imagine if Intel, AMD and Samsung were to meet each day to “fix” the price of microchips, or if the major oil companies were to meet each day to “fix” the price of crude oil; wouldn’t there be a public outcry and a flurry of antitrust violation lawsuits? The “fix’ is not open to the public, there are no published transcripts of each fixing, and there is no way to know what the representatives of the bullion banks discuss between each other. The current London Gold Fix is conducted by the representatives of five bullion banks, namely HSBC, Deutsche Bank, Scotia Mocatta, Societe Generale, and Barclays. The “fix” is no longer conducted in an actual meeting but by conference call.

 

Tyler Durden's picture

Visualizing The Past Of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future





The chart below shows the UST yield curve over the past 20 years: as is more than obvious, every single point left of the 10 Year is at record tights. The only question on everyone's lips is where do we go from here. And that is where the confusion really hits. The confusion is further intensified by the sudden collapse in the 2s10s and the 2s10s30s butterfly. The odd thing here is that a flattening move as violent as recently seen in these two curves, has historically preceded a rise in the Federal Funds rate as can be seen in the chart to the right, before the Fed began tightening in 1999 and in 2004. In other words a flattening has traditionally been a leading indicator to an economic improvement (as liquidity extraction tends to go side by side with a pick up in inflation and thus economic growth). Alas, this time around, a tight monetary policy is the last thing on the Fed's mind, and the economy is only starting to demonstrate it is rolling over into a second and more violent recessionary round. In essence, the Fed's interventionist intention of purchasing the entire curve (including the long-end), as recently announced by the FRBNY, has completely dislocated all leading signaling by the curve itself. As a result, speculation is now rampant as to what may or may not happen. A case in point are the divergent opinions of Bank of America and Morgan Stanley. While the former Merrill Lynch is advocating an outright 10s30s flattener, Morgan Stanley is sticking to its guns and continues to push for a steeper curve: this in spite of the collapse in the 2s10s from a records steepeness of almost 290 bps in May, to under 220 bps as of Friday's close: the over 25% collapse is enough to blow up most of the funds who had positioned themselves for further steepness. At least Morgan Stanley is consistent. Yet both banks urge clients to hedge their trades and provide creative ways to do so, as both realize the likelihood of being wrong, now that the Fed is openly the biggest market participant, is probably higher than the inverse.

 

George Washington's picture

Is Gulf Seafood Safe to Eat?





The FDA and NOAA say that Gulf seafood is fine. President Obama ate a fish taco yesterday made with Gulf fish.

So does that mean Gulf seafood is safe to eat?

 

Tyler Durden's picture

More Details On The Structured Notes Bubble





A few days ago, IRA's Chris Whalen had a good summary of why and how the next bubble is currently brewing in the Structured Notes space. For those unfamiliar with this particular product, we present a recent Bloomberg brief on the Structured Note market which has quietly grown from a side freakshow into the prime time spectacle. In brief - there has been $25.85 billion in YTD structured note issuance, and over $60 billion in global interest-linked note volumes. An amusing excerpt from the brief: "Sales of notes linked to wheat jumped this month after Russia’s worst drought in 50 years spurred a surge in the price of futures contracts on the grain. Banks including DZ Bank AG and Royal Bank of Scotland Group Plc, issued 82 wheat-linked warrants this month, compared with a total of 159 in the first seven months of the year, according to data compiled by Scoach, the structured products trading platform run by Deutsche Boerse AG and Switzerland’s SWX Group. The listed notes, called knock-out warrants, offer investors a leveraged way to bet on the price of wheat." For all those who thought Wall Street was dormant in the post-CDO implosion vacuum, this is a rough wake up call - it appears no matter what, idiots and their money are promptly parted, and the world's foremost financial innovators will always find a way (and a product) to guarantee that. And it is very refreshing to see that Germany's DZ Bank has almost learned from the CDO bubble: the questionably solvent German bank dominates the Structured Note market with $7.2 billion in issuance to date, followed closely by such stalwarts of financial stability as Barclays and Deutsche Bank.

 

Tyler Durden's picture

Guest Post: Mass Delusion - American Style





The American public thinks they are rugged individualists, who come
to conclusions based upon sound reason and a rational thought process.
The truth is that the vast majority of Americans act like a herd of
cattle or a horde of lemmings. Throughout history there have been many
instances of mass delusion. They include the South Sea Company bubble,
Mississippi Company bubble, Dutch Tulip bubble, and Salem witch trials.
It appears that mass delusion has replaced baseball as the
national past-time in America. In the space of the last 15 years the
American public have fallen for the three whopper delusions:

  1. Buy stocks for the long run
  2. Homes are always a great investment
  3. Globalization will benefit all Americans
 
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