Category Archives: Economy and Meltdown

Did Tim Geithner Leak Every Fed Announcement To The Banks?

On August 17, 2007, the Fed’s Board of Governors announced a key change to primary credit lending terms, whereby the discount rate was cut by 50 bp — to 5.75% from 6.25% — and the term of loans was extended from overnight to up to thirty days. This reduced the spread of the primary credit rate over the fed funds rate from 100 basis points to 50 basis points. News of the emergency measure was supposed to be kept secret from market participants as it was substantially market moving. It wasn’t. And just when we thought our opinion of the outgoing Treasury Secretary and former NY Fed head Tim Geithner, whose TurboTax incompetence is now legendary, couldn’t get lower, it got lower. Much lower.

From the August 16, 2007 transcript (page 13 of 37) of the conference call preceding this announcement.

MR. LACKER. If I could just follow up on that, Mr. Chairman.

 

CHAIRMAN BERNANKE. Yes, go ahead.

 

MR. LACKER. Vice Chairman Geithner, did you say that [the banks] are unaware of what we’re considering or what we might be doing with the discount rate?

 

VICE CHAIRMAN GEITHNER. Yes.

 

MR. LACKER. Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that.

 

CHAIRMAN BERNANKE. Okay. Thank you. Go ahead, Vice Chairman Geithner.

 

VICE CHAIRMAN GEITHNER. Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the window. The only thing I’ve done is to try to help them understand—and I’m sure that’s been true across the System—what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about.

At least we now know who the bankers’ mole on the FOMC was before, as gratitude for his services, he was promoted to Treasury Secretary of the US. Because if he leaked one, he leaked them all.

h/t Manal

Guest Post: The "Bloated" Bond Bubble

Via Gordon T. Long,

The Fiscal Cliff theater was great ‘off Broadway’ drama, but the real show for traders took center stage Sunday December 16th in Japan. The curtain went up for the newly elected Prime Minister of Japan as the star actor in the unfolding global fiat currency drama. In the last 90 days the US, EU and now Japan have announced “unlimited”, “Uncapped” monetary policy with UK’s soon to be bank of England Governor, Carney indicating he wants inflation & growth targeting also when he assumes the reins. The goal has been to get interest REAL interest rates as low as possible, and the expected duration to be as long as possible. Market have reacted to this strategic and obvious debasement by stampeding, relentlessly into the Bond Market and creating a disturbing potentially destabilizing bond bubble. However, remember, Financial Repression is at work here and US Bond Yields and Interest Rates must be further reduced. We presently expect the 10 Year US Treasury Bill to eventually break below 1% and Equities will fall on the re-pricing of credit and risk, earnings revenue and margin issues and slowing real global growth.

 

GTL Bond Bubble by xxyyxxyy123123

Pictet On The Sudden Depreciation Of The Swiss Franc

Via Pictet,

Following the recent fall of the Swiss franc against the euro, there were paradoxical comments on the opportunity on both moving the Swiss National Bank’s floor lower (say to 1.25 for example) or on abandoning it altogether (or moving it higher). We believe both options are very unlikely, at least in the coming months. Moving the floor lower would be a bad idea in our view. As we have seen, the extent of the franc’s overvaluation is quite debatable and the lower the floor, the quicker a monetary policy dilemma may emerge. Moreover, in the event renewed upward pressures on the franc occur once again, a lower floor may prove more costly in terms of FX interventions. In any case, the SNB was relatively clear recently in saying that it has no plan to move the floor.

On the other hand, now that the euro is far higher than 1.20 francs, it could look tempting for the SNB to take the opportunity to simply abandon the floor. However, this would be quite a risky bet. As mentioned below, a new bout of the euro crisis may break out at some stage or another over the coming months, propelling the franc sharply higher once again. Then what would the SNB do? Reset a floor? In short, by abandoning the floor already now, the SNB would be playing dangerously with its credibility. In our view, we continue to believe the floor might be abandoned (or possibly raised substantially) at some stage, but most likely not before next year.

The franc has weakened sharply against the euro this year
Over the past week or so, the Swiss franc suddenly weakened significantly against the single currency, reaching almost CHF1.255 per euro, its lowest level since May 2011. Behind the scene, this sudden decline was linked to a further substantial reduction in the systemic risk associated with the euro crisis and the widespread practice of charging penalty rates on CHF deposits. However, the short-term trigger of the CHF fall was clearly last week’s surprisingly “not-so-dovish” ECB press conference.

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What to expect for the future?
The first thing to keep in mind is that the stability that prevailed on the EUR/CHF during most of last year lies in the fact that the SNB had to sell huge amounts of francs. According to our rough estimates, between mid-May and mid-September 2012, SNB FX interventions reached a massive CHF190bn. A good part of the money invested in the franc during that period was probably “hot money” seeking protection from a potential euro breakup. This means that potentially substantial amounts may leave the franc if the euro area systemic risk is reduced further. Moreover, short-covering probably played a significant role in the franc’s recent downward move and this may continue, at least in the short run. The consequence is that it is extremely difficult to figure out up to what point the recent appreciation of the euro against the franc will go in the short run, but we believe the move may well extend further for a while.

 

Swiss franc weakness unlikely to last in our view
Nevertheless, we do not believe the franc’s recent depreciation against the euro will prove a lasting phenomenon. It is far from sure that risk aversion will continue to fall over the coming few months. Peripheral European countries are in a deep recession and even German economic activity contracted in Q4 2012. Austerity programmes are a powerful drag on growth and public budget rebalancing is far from being achieved. At some stage over the coming few months, a new bout  of the euro crisis may burst. And, even if it does not, the prolonged weakness of the euro area economy may well lead to more accommodative measures by the ECB. Moreover, a temporary surge in risk aversion is also possible around the looming US political challenges (the debt ceiling, the ‘Sequester’ and the continuing budget resolution).

 

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From a longer-term point of view, things are also not that straightforward either. At first sight, it would seem reasonable to bet on a lower Swiss franc against the euro. First, although some downward euro correction is quite possible in the short run, we expect the single currency to appreciate further against the dollar during the course of 2013, on the back of improving world and European growth and further – although irregular – progress in resolving the euro crisis. Second, the Swiss franc still seems to be overvalued (see chart above).

 

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However, we are not convinced by these lines of reasoning. The extent of the franc’s overvaluation is debatable. Swiss exports were surprisingly resilient to the strength of the franc. The Swiss export industry is currently not suffering so much from a lack of competitiveness but rather from a lack of demand.

Moreover, it’s worth noting that at current inflation differentials (around 2.5 percentage points less inflation in Switzerland compared to the weighted average of its trading partners), the estimated overvaluation of the real trade weighted value of the Swiss franc (around 2.5% currently) would be erased in a year or so, and all that with no further nominal exchange rate movements.

Toward a monetary policy dilemma at the SNB?
An even more important point playing to the advantage of the Swiss franc is the potential gradual building of a SNB “monetary policy dilemma” later this year. Already currently, the Swiss economy is not that weak. Employment is booming and the pace of house price increases remains quite elevated. In that context, the more world and European growth improves over the coming months, the more Swiss growth will accelerate, and growth prospects will brighten. This means that the same factors behind our rather bullish scenario for the euro against the dollar may well lead, later in 2013, to anticipations that a SNB ‘exit strategy’ is getting closer, which is likely to give some support to the Swiss franc.

Consequently, we believe by year-end the Swiss franc is more likely to be stronger than today, rather than weaker. We maintain our forecast of a euro at 1.20-1.22 franc in 12 months’ time.

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The floor should remain in place and unchanged

Following the recent fall of the Swiss franc against the euro, there were paradoxical comments on the opportunity on both moving the floor lower (say to 1.25 for example) or on abandoning it altogether (or  moving it higher). We believe both options are very unlikely, at least in the coming months. Moving the floor lower would be a bad idea in our view. As we have seen, the extent of the franc’s overvaluation is quite debatable and the lower the floor, the quicker a monetary policy dilemma may emerge. Moreover, in the event renewed upward pressures on the franc occur once again, a lower floor may prove more costly in terms of FX interventions. In any case, the SNB was relatively clear recently in saying that it has no plan to move the floor.

On the other hand, now that the euro is far higher than 1.20 francs, it could look tempting for the SNB to take the opportunity to simply abandon the floor. However, this would be quite a risky bet. As mentioned above, a new bout of the euro crisis may break out at some stage or another over the coming months, propelling the franc sharply higher once again. Then what would the SNB do? Reset a floor? In short, by abandoning the floor already now, the SNB would be playing dangerously with its credibility. In our view, we continue to believe the floor might be abandoned (or possibly raised substantially) at some stage, but most likely not before next year.

 

Critically, as SNBCHF blog noted, while the SNB did make aprofit last year, Q4 saw them give a lot of it back – suggesting the deltas (or exposure) is very high (and senstivie to JPY and Gold):

The profit in foreign currency positions fell from 10.3 billion in the first three quarters to 4.7 billion in the whole year implying a loss of 5.6 billion in the last quarter. The loss was 4 billion higher than our estimate (possible reason: the IMF FX reserves data used for our estimate will be revised downwards). Especially the yen and gold depreciated in the last quarter. The latest monetary data showed that the SNB reduced sight deposits and liabilities by only 4 billion francs in Q4/2012 and they even increased by one billion francs last week.

Doug Casey: "We Are Living In The Middle Of The Biggest Bubble In History."

The recovery since the 2008 financial crisis is just an illusion created by the papering-over of our insolvency by central-bank printing. Doug Casey adds that the current state is akin to being “in the eye of the hurricane thanks to this ‘cover'” and believes the printing which will ultimately lead to very high inflation once bank lending starts to pick up again. This excellent interview moves from Casey’s view of a looming loss of confidence in the dollar (and the impact of mass repatriation) to what must the Keynesians be thinking as the “apparency of prosperity” remains all that we have to lift animal spirits. With an eye to gold (and non-western central banks behavior towards it as they realize “the USD is just an unsecured liability of a bankrupt government”), he evaluates the likelihood of a western economic collapse in 2013 and what that would imply for an implicit gold standard in the world. From Austrian economist Hans Herman-Hoppe’s view of a post-Keynesian-crash era to his potential triggers for this collapse (such as gold-energy barter and non-dollar blocs), Casey succinctly reminds us that there is not just one asset-class bubble but that “we are living in the middle of the biggest bubble in history.”

 

CruciVIXion

The USD ends the week up over 0.6%, Treasury yields down 2-4bps, Silver up 4.6%, Oil 2%, and Gold 1.4%; but it is VIX that rules the waves of unreality this week as it collapsed from this morning’s unchanged on the week, played catch down to stocks (from yesterday) and then led stocks on a vol steepening/compression extravaganza down to 12.31% – its lowest since June 2007 as the ‘contingent’ extension of the debt-limit appeared the initial trigger and nothing at all the secondary trigger. AAPL wavered below and tested up to $500 (amid very large average trade size) but was the distinct loser once again with size sellers as S&P 500 futures surged (yet agin inferring the unwind of the long-AAPL, short-ES trade continues). Once the fire was lit, there was no stopping the stop-chasing momo run in stocks as ES chased all the way up above the week’s highs. VXX was crushed (as the curve also compressed) and high-yield credit and stocks tracked each other in the rampapalooza. Of course the moment the day-session close, ES cracked back lower but for now no one cares (ending up just 5 points in the S&P cash).  

Average trade size was high once again in the S&P as the USD, Bonds, and Stocks were bid.

 

Treasuries didn’t buy it but who cares – VIX led the way…

 

VIX recoupled then they were off to the races together…

 

S&P 500 futures are 4-5points off the day-session closing highs as futures close…but we have tested this upper range…

 

And Treasuries were not buying this risk-on thing…

 

Nothing is stopping stocks now… USD strength on the week…

 

Tech was the only loser on the week (thanks to AAPL) as Energy and Industrials led – with financials just eking out a gain by the close today.

Stocks took off in the afternoon in a world of their own relative to risk once again as cross-asset-class correlatin collapsed with CONTEXT (our risk proxy) not buying into the strength at all…

 

The VIX term structure steepened notably once again to near 5-month steeps – and pushing it near a cyclical level that tends to mark short-term turning points in complacency in stocks…

 

What happened the last time VIX dropped this far this fast? It was July 2006…

 

Charts: Bloomberg and Capital Context