Below is a list of the 4 largest Federal Reserve asset category by notional as of today:
- Treasurys: $1,655,889 million
- Mortgages: $883,627 million
- Other assets: $209,863 million
- Agency debt: $79,283 million
Quietly, the Fed's Other Assets have overtaken Agencies, and are now the Fed's third largest asset category and about four times the total Fed capital of $55 billion. We have written about these "other assets" in the past; we will likely write about them in the future again, for the simple reason that the chart showing the Fed's notional holdings in this category correlates quite clearly with the parabolic Greek unemployment rate.
Here's 'Buck' to explain, in plain English, "one of the most complex 'but effective' institutions in the United States - The Federal Reserve System". Whether you view for the pure irony of it - or pass on to an Econ PhD friend, this animated cartoon from the St. Louis Fed (funded by our cliff-invoked taxpayer money we are sure) takes us from inception around one hundred years ago to the present-day and covers the three divisions (Reserve Bank, FOMC, and Board of Governors) and three responsibilities (providing financial services, conducting monetary policy, and supervising banks). It seems 'Buck' had not been informed of the other and varied roles the Fed plays in the world's populations' lives. How long before this is required viewing for all K-12 schools nationwide?
As we have discussed a number of times (most recently here), the infiltration of Goldman Sachs alumni into the highest ranks of political and monetary policy 'running the world' ranks is becoming pandemic. What is perhaps even more surprising is the fact that during the ECB's press conference this morning, the head of the world's 'almost' most powerful entity had to defend himself from such crackpot, tin-foil-hat-wearing, digital-dickweed-esque conspiracy theories that Draghi's affiliation to the Mother Squid is of greater importance than his current professional position. The sadly ironic aspect is that Draghi's membership of the Goldman Sachs-sponsored G-30 warranted more discussion during the press conference than that of Italy's Monti debacle (or Greece's "killer medicine").
Any fringe hopes that the ECB may cut its discount rate to negative were just dashed as Goldman, pardon the ECB, decided to keep rates unchanged, largely as expected.
Citi's Robert Buckland explains: If policymakers really do want to encourage stronger economic growth (and especially higher employment) then we would suggest that they take a closer look at the equity market's part in driving corporate behaviour. Despite high profitability, strong balance sheets and ultra-low interest rates, any stock market observer can see daily evidence of why the listed sector is unlikely to kick-start a meaningful acceleration in the global economy. A recent Reuters headline says it all: "P&G Plans to Cut More Jobs, Repurchasing More Shares". If anything, low interest rates are increasingly part of the problem rather than the solution. Perversely, they may be turning the world's largest companies into capital distributors rather than investors.
Sixteen years ago today, Alan Greenspan spoke the now infamous words "irrational exuberance" during an annual dinner speech at The American Enterprise Institute for Public Policy Research. Much has changed in the ensuing years (and oddly, his speech is worth a read as he draws attention time and again to the tension between the central bank and the government). Most critically, Greenspan was not wrong, just early. And the result of the market's delay in appreciating his warning has resulted in an epic shift away from those same asset classes that were most groomed and loved by Greenspan - Stocks, to those most hated and shunned by the Fed - Precious Metals. While those two words were his most famous, perhaps the following sentences are most prescient: "A democratic society requires a stable and effectively functioning economy. I trust that we and our successors at the Federal Reserve will be important contributors to that end."
- LA port workers to return Wednesday (AP)
- Iran says extracts data from U.S. spy drone (Reuters)
- Obama to stress need to raise debt limit "without drama" (Reuters)
- Big Lots Chief Probed by SEC (WSJ)
- NATO missiles to be sent to Turkey, Syria clashes rage (Reuters)
- GOP Deficit Plan Irks Conservatives (WSJ)
- Japan Can End Deflation in Months, Shirakawa Professor Says (BBG) ... almost as good as Bernanke ending inflation in 15 minutes.
- Osborne Prepares to Breach Fiscal Rules Amid U.K. Growth Slump (BBG)
- Global Banking Under Siege as Regulators Guard National Interest (BBG)
- Freeport plans return to energy (FT)
- Serbian NATO envoy jumps to death at Brussels airport (Reuters)
- Tide Turns After a Flood of Chinese Listings (WSJ)
- Australian economy loses steam (FT)
- Euro Crisis Feeds Corruption as Greece Slides in Rankings (BBG)
I recently received the following question from a friend of mine and wanted to share my thoughts with my market pals, and throw this out for feedback. I would be particularly interested in hearing from my derivatives friends who are much more technically informed than I am on the subject.
“I was looking at something today that I thought you would probably have some comment on: have you noticed how wide the out months on the VIX are versus the one or two month? How are you interpreting this?”
From my viewpoint this has been a key debate/driver in the equity derivatives world for a good while now (I started having this discussion in early 2011 with some market pals and the situation has only grown more extreme since then).
When people become desperate or hope-less, two things tend to coalesce; 1) they become easily led by charismatic leaders (no matter how crazy the ideas would appear previously), and 2) they resort to actions deemed previously un-possible. Putting a roof over your family's head, feeding your kids (or yourself), or buying the next iPad can drive people to these acts of desperation. Greece's homelessness rate has risen 25% since 2009 (with 20,000 living on the streets of Athens) and over 30% are at risk of poverty (with Ireland close behind). Suicide rates had risen by 40% in the first half of 2010 (and Greece was still relatively low). HIV infections from injecting drug-users has surged 20-fold in two years! And while crime rates remain among the lowest in Western Europe, robberies have surged since 2005 and prison populations (per capita) are on the rise - though, thankfully not as bad as in the US (yet). With sovereign bond spreads at multi-month lows, stocks at multi-month highs, and Barroso et al. claiming victory at every opportunity, perhaps some internal (Farage-like) reflection on the social depression they have enabled is required as the Bank of Greece warned the nation’s social cohesion is under threat.
The Great Depression brought about the Keynesian Revolution, complete with new analytical tools and economic programs that have been relied upon for decades. In dampening each successive downturn, authorities accumulated increasingly larger deficits and brought about a debt supercycle that lasted in excess of half a century. The efficacy of these tools and programs has slowly been eroded over the years as the accumulation of policy actions has reduced the flexibility to deal with crises as we reach budget constraints and stretch the Fed’s balance sheet beyond anything previously imagined. Some have referred to this as reaching the Keynesian endpoint. Keynes would barely recognize where we now find ourselves. In this ultra loose policy environment we are limited by our Keynesian toolkit. Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion.
The Bank of England's Monetary Policy Committee meets Thursday. There is an overwhelming consensus in the market that there will be no action taken--no rate cut or resumption of the gilt purchase program (QE) that was completed last month.
More importantly, tomorrow the Chancellor of the Exchequer Osborne will make his Autumn Statement to parliament. He will have to tread a narrow line. Circumstances will force him to acknowledge that it is taking longer to recover from the financial crisis than the government had anticipated.
N as in "Nominal". Nominal GDP targeting, the latest burlesque of monetary fiction. But first things first. There is a land, where people calculate a "potential GDP". How do they do that? By simply extrapolating trends. Potential GDP is "the level of economic activity achievable with a high rate of use of its capital and labor resources". In the past, the differences from observed GDP were not very large, though now we are growing "below trend". But what if that trend has changed? With a flawed measurement of economic activity, leading to an imaginary output gap, what else might our economic elite come up with? Stagnating real GDP and high unemployment are no fun. After exhausting every traditional and non-traditional tool of monetary and fiscal policy, what else could be done to make that GDP grow? Nominal GDP equals real GDP plus inflation. So if real GDP doesn't want to grow... Eureka! you just have to cause more inflation, and nominal GDP will obediently join its potential GDP. Except for one little error of judgment: if elevated inflation led to wealth creation and jobs, Zimbabwe would be the richest country on earth. As real incomes of US employees have stagnated for more than a decade, rising prices would either lead to falling volumes, or force households further into debt. Also, how would this be different from a communist command-style economy?
Today's "trading", in a repeat of what has become a daily routine, can be summarized as follows: flashing red headline about Fiscal Cliff hope/optimism/constructiveness out of a member of Congress who bought SPY calls in advance of statement: market soars; flashing red headlines about the inverse of Fiscal Cliff hope/optimism/constructiveness out a member of Congress who bought SPY puts in advance of statement: market plunges. Everything else is noise, as is said hope/expectations/constructiveness too since it is increasingly likely nothing will happen until the debt ceiling hike deadline in March, but stop hunts must take place in a market which nobody even pretends is driven by fundamental newsflow. Such as the bevy of PMIs released last night, the key of which was the China HSBC PMI as reported previously, which beat expectations by the smallest of possible increments, at 50.5, but rising to expansion territory and the highest in 13 months, which sent the EURUSD spiking and has kept it in the 1.3030 range for the duration of the overnight session. Sadly, those on the ground in China hardly felt the number was a bullish as EURUSD trading algos around the world, sending the Shanghai Composite to a fresh post-2008 low, closing down over 1% at 1,960. But let's just ignore this inconvenient datapoint shall we?
Judging by how the SkyNet formerly known as "the market" has been trading in the past three weeks (and years), one may get the impression the "smart money", hiding behind Bloomberg terminals for 9 hours each day, has gone full lunatic retard. Yet not even said Bloomberg terminals users are completely insane, as confirmed by a just released poll of Bloomberg Professional users, who were asked on their opinion for the two next probably Bernanke replacements: one Larry Summers, best known, together with Robert Rubin, Alan Greenspan and everyone in Congress and Senate over the past 30 years, for destroying the US economy, as well as one Janet Yellen, currently vice chair of the Fed, and almost certain replacement for the Chairsatan once his term expires in early 2014. The verdict: nay to both, but a resounding hell no to the man who destroyed the US banking system, then crushed the Harvard endowment, and finally brought the US consumer and economy to a state of complete ruin.