Friday, October 31, 2008

. Federal Reserve: "Factors Affecting Reserve Balances", October 30

- Fed's Treasuries holdings + loans: $1,233.9bn (+$50.5bn)
- Other central banks' Treasuries holdings: $1,571.2bn (+$15.9bn) (*)
- Other central banks' agency securities: $915.0 (-$8.4bn) (*)
- Global Dollar Liquidity Measure: $3,290.4bn (+$58.0bn)

(*) Off-balance-sheet items

The weekly Fed balance sheet is a complete mess. (Other words that come to my mind: chaos, confusion, anarchy). New items are being added every week. And we're talking hundreds of billions of dollars. Literally. My new Global Dollar Liquidity measure, which (hopefully) reflects the impact of all recent liquidity programs, now reaches almost $3.3 trillion. The numbers are trully mind-boggling. Monthly average figures (not displayed here) show a 46.5% increase in my proxy for the monetary base. Think about it: prior to the Lehman Brothers collapse, we were dealing with a 2.6% contraction. This is by far the greatest balance sheet expansion in the history of the Federal Reserve Bank. The Global Dollar Liquidity is growing at the phenomenal rate of 29.6% per annum. Totally unheard of!

Ladies and gentlemen, it's not that complicated after all: the massive delevarging efforts by the private sector are being matched by an equally massive releveraging process from G7 central banks. Keynesian economics, anyone?

Thursday, October 30, 2008

[Latest Endogenous Liquidity Index: -65.5%; Latest Global Dollar Liquidity measure: +28.7%]

- A truly historic agreement! Yesterday's swap lines agreement between the Fed, Banco Central do Brasil, Banco de México, Bank of Korea and Singapore's Monetary Authority is a historic event. As any reader of Thomas Barnett's books on globalization would instantly recognize, these facilities confirm the inescapable reality of today's economic and financial connectivity. The message for commodity-exporting countries is clear: you can benefit from global trade flows, provided that you recognize the risks and that you play by the rules. Look at the list of CBs included in the "swap club": the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. These are all independent central banks, which makes the inclusion of Banco de Mexico and Banco Central do Brasil all the more impressive. Henrique Meirelles, the Banco Central do Brasil chairman, waisted no time in putting forward the importance of the agreement: "O acordo é importante pela inclusão formal do Brasil com outras economias relevantes do globo". [Banco do Brasil: "Nota à imprensa"; Federal Reserve: "Press Release"]

- The trouble with "Helicopter Ben". Remember Ben Bernanke's recent remarks at the Economic Club of New York? The thing that caught my attention was his response to a question on ... financial bubbles. In essence, Mr. Bernanke seemed to suggest that bubbles pop up whenever bank regulation fails. In other words: they have little to do with monetary policy itself. This was a clever answer, since we all know that it was the then Fed vice-chairman who in 2003 argued forcefully for a 1% fed funds rate. Now "Helicopter Ben" is at it again. I know, I know: in times of crisis, you just throw prudence to the wind. My point is, if you want to avoid a permanent spike in long-term rates, you need a monetary policy rule-set. And what is the FOMC's rule-set? I dunno. [Ben Bernanke: "Stabilizing the Financial Markets and the Economy", Federal Reserve]

- Endogenous Liquidity daily watch. The Endogenous Liquidity Index improves modestly (+0.65%) on the heels of falling CDS spreads — especially Emerging Market spreads, as commodities rally and the dollar falls. Inflation breakevens are rebounding somewhat, and I suspect that they will move further up in coming days (they are still close to all-time lows, though). On a spot basis, the recent slight improvement in the 3-month TED spread is now history: we're back at 373 bps. The real worry, in my opinion, is the credit spreads situation. The 10-year Moody's Baa spread refuses to back down. That, my friends, is a sure sign of trouble in terms of corporate earnings. [Selected Interest Rates]

Wednesday, October 29, 2008

[Latest Endogenous Liquidity Index: -65.8%; Latest Global Dollar Liquidity measure: +28.7%]

- The Fed cuts rates. The FOMC lowers the fed funds target to 1.00% from 1.50%; in a related action, the Board of Governors unanimously approves a 50-basis-point decrease in the discount rate to 1.25%. [Communiqué]

- Two new swap lines. The Fed announces the establishment of temporary reciprocal currency arrangements (a.k.a swap lines) with the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. (A similar announcement was made yesterday with respect to the Reserve Bank of New Zealand.)

- Norway's central bank lowers key rate from 5.25% to 4.75%. From the communiqué: "There is now unusually high uncertainty surrounding economic developments ahead. An overall assessment of the outlook and the balance of risks suggests that it is now appropriate to reduce the key policy rate by 0.50 percentage point. Weight is given to moving forward the reduction in the key policy rate so that lending rates for households and businesses can gradually be reduced".

- The People's Bank of China cuts one-year lending rate from 6.93% to 6.66%. From Bloomberg: "This cut was driven by the slowdown in the third quarter and the likelihood that the U.S. and other central banks will cut rates,'' said Xing Ziqiang, an economist at China International Capital Corp. in Beijing". Coordinated rate cuts, anyone?
[Latest Endogenous Liquidity Index: -65.8%; Latest Global Dollar Liquidity measure: +28.7%]

- The TED spread & credit spreads. Pointing to the slightly lower TED spread, CNBC's Steve Liesman keeps talking about "improving credit markets" conditions. Wrong, in my opinion. Money markets are not credit markets. Take a look at the 10-year Moody's Baa spread: at 560 bps, it trades at an all-time high. This is hardly what you would expect in the context of "improving credit markets". [Selected Interest Rates]

- Don't cry for me, Argentina (again). Argentine policymakers just don't get it. If you destroy property rights, credit markets will respond in kind. The supply of loanable resources is all but collapsing; interest rates are skyrocketting in Buenos Aires and beyond. Ladies and gentlemen: checks and balances do matter. The arbitrary exercise of government power generally results in very high long-term (real) interest rates. The great Montesquieu said as much in The Spirit of the Laws. Now just ask Vladimir Putin and Nestor Kirchner. [Financial Times: "Argentine own goal"]

- The Goldilocks/Stagflation Index at a new high (if you can believe it). Inflation expectations are collapsing at a much faster rate than economic growth: that's the message behind the new high in my Goldilocks/Stagflation Index. With the denominator (ten year-inflation breakevens) at such an impressive all-time low (77 bps), even the lackluster performance of the numerator (the platinum-gold ratio) cannot impede the index to reach new highs. Does that really matter? When valued against the Goldilocks/Stagflation Index, the S&P500 trades at a new all-time low. If credit spreads would collaborate (not a sure bet, by any means), the ensuing rally would be —as a well-known CNBC commentator recently put it— "jaw-dropping".