Archive - Apr 18, 2015

It appears the re-election of Rahm Emanuel as Chicago Mayor has done nothing to assuage concerns about the city's insolvency. As Emanuel's victory became more assured, credit risk (measured by the spread between Chicago Muni yields and Treasury yields) has soared from 180bps to over 240bps. Furthermore, it has accelerated even more since the April 7th election. Recent statements by S&P that if the city fails to articulate & implement a plan by the end of 2015 to sustainably fund pension contributions, or if it substantially draws down reserves to fund contributions, they will likely lower the rating; has not helped (given that Moody's already have Chicago at Baa2 - just 2 notches above junk).

At some point, maybe sooner than later, the US economy will re-enter recession. Historically, that's the time when the Fed would lower interest rates in attempt to spur economic growth. But today, interest rates are already at 0%. That's what's so dangerous for the Fed about its current ZIRP policy -- it leaves no gunpowder left in the low-interest-rate bazooka. The Fed will enter its next battle defenseless. This is clearly a situation the Fed wants to avoid, so raising rates - soon - is an urgent priority. But... practically, can the Fed (and other central banks) really raise rates now without killing the already-moribund global economy?

This may take you the entire weekend to digest, but if you are an unsecured creditor/lender (have a checking, savings or demand deposit account) to a euro zone bank, I would consider it your fiduciary responsibility to yourself to sit down and parse this piece with care and aplomb!

"The last time China suffered such pace of capital outflows was during 2012 when $165bn of capital left during the last three quarters of that year. And before then it was during the Lehman crisis," JPM notes, in yet another sign that Beijing is stuck between a rock and a hard place as it battles to maintain the dollar peg in the face of slumping economic growth.

 What will happen to the markets when the Western welfare states finally go broke? It will make 2008 look like a picnic.

After trending sharply higher in recent months, the US dollar has entered a consolidative range against most of the major currencies.