Jeff Gundlach Explains Biflation

Thursday, April 26th, 2012

Appropos Bernanke’s razor’s-edge tight-rope-walk fence-sitting as the not-too-cold-not-too-hot economy reduces the Fed’s ability to do anything, Jeff Gundlach of Double Line provided a succinct explanation of the the ‘uncomfortable position’ the place-of-confusion Fed finds itself in. Simplifying the dilemma to: the Fed cannot raise rates as the dramatic implications for the huge debt load (and implictly the interest expense saving the budget deficit) of the US Government are untenable while at the same time inflation (in the things we need – not just want) is rising notably. However the new bond-king notes rather sarcastically, that the Fed can show that there is only modest inflation thanks to housing and wage growth (and herelies ‘the biflation’). The old-school-Fed’s efforts at pre-emptive strikes against inflation is simply not going to happen, he states, citing an “intentional attempt to suppress national income – an attempt to stop nominal GDP growing too much – simply won’t be tolerated until inflation moves into the 4-5% category“.

Tags: Budget Deficit, Confusion, Debt Load, Dilemma, Dramatic Implications, Emptive Strikes, Fence, GDP, Gundlach, inflation, Interest Expense, New Bond, Nominal Gdp, Old School, Razor, Rope Walk, Succinct Explanation, Tight Rope, Uncomfortable Position, Us Government
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How The ECB Is Turning Spain Into Greece

Friday, April 13th, 2012

As Spanish CDS surge and bonds shrug off the very recent gloss of a ‘successful’ Italian debt auction, the sad reality we pointed out this morning is the increasing dependence between Spanish banks, the sovereign’s ability to borrow, and the ECB. As ING rates strategist Padhraic Garvey notes this morning, the bulk of the LTRO2 proceeds were taken down by Italian (26%) and Spanish (36% of the total) and the latter is even more dramatic given the considerably smaller size of Spanish banking assets relative to Italy. The hollowing out of the Spanish banking system, via encumbrance (ECB liquidity now accounts for 8.6% of all Spanish banking assets), is a very high number – on par with Greek, Irish, and Portuguese levels around 10% where their systems are now fully dependent on the ECB for the viability of their banks. His bottom line, Spain is not looking good here and while plenty of chatter focuses on the ECB’s ability to use its SMP (whose longer-term effectiveness is reduced due to scale at EUR214bn representing just 3% of Eurozone GDP), consider what happened in Greece! The ECB did not take a Greek haircut and so the greater the amount of Greek debt the ECB bought, the greater the eventual haircut the private sector was forced to take. By definition, every Spanish bond that the ECB buys in its SMP program increases the default risk that private sector holders are left with. Only outright QE, a promise not to default and a willingness to expand the ECBs balance sheet with ownership of the entire stock of Spanish debt if necessary (in the extreme) would be enough to cause a material positive effect from ECB intervention but it is clear from the massive compression in German yields (and weakness in Spain) that the market remains nervous amid an ongoing preference for core. Of course the cycle of crisis, as BNP noted, from crisis to complacency is becoming more chaotic and less sustainable.

ECB dilemma / Bank liquidity

Latest central bank data (which comes out with a lag) shows that the 2nd 3yr LTRO was dominated by Spanish and Italian banks. Specifically we estimate that Spanish banks took down 36% and Italian banks took down 26% of the total. The larger takedown of Spanish banks here is significant as the size of its banking assets are lower than those of Italy, hence in proportional terms Spanish banks have shown the greatest need for 3yr LTRO cash.

On an on-going basis Spanish banks now take down some 316bn of ECB liquidity, which represents 8.6% of its banking assets. This is a very high number. By way of comparison Greek, Irish and Portuguese banks take down some 10% to 12% of their banking assets in ECB liquidity, and these systems are basically fully dependent on the ECB for the viability of their banks. Spanish banks are not far behind on this metric. The next worst are Italian banks with the liquidity takedown of 6.5% of their banking assets.

Bottom line, Spain is not looking good here. There has also been a warning shot aimed at Ireland from the ECB’s Asmussen, who asserts that the current amount of liquidity support extended by the ECB and through ELA (additional liquidity support through the Irish Central Bank) “needs to be substantially reduced over time”. He also warns that Ireland should be very careful on any deviation from the original promissory notes agreement, suggesting that any restructuring here should be preceded by reduced bank reliance on emergency liquidity assistance.

At the other extreme, Dutch banks take down a mere 0.4% of their banking assets in ECB liquidity, and latest data show German banks taking liquidity to the equivalent of 0.6% of their assets. We estimate that German banks took down 8% of the 2nd LTRO while the Dutch take down was significantly small. The French need for ECB liquidity is higher, with total ECB takedown running at 147bn, which represents 1.7% of its banking assets, and we estimate that French banks took down 12% of the 2nd 3yr LTRO.

In the past three weeks there has been evidence that the beneficial effects of the two 3yr LTROs are largely behind us, with spreads under widening pressure again. In the meantime there has been no evidence of ECB bond buying through its SMP program. While the SMP may be resumed and would have a positive impact, it could ultimately risk making things worse. Why? Consider what happened in Greece. The ECB did not take a Greek haircut. So greater is the amount of Greek bonds that the ECB bought, the greater was the size of the private sector haircut required in order to get to the 120% medium-term debt/GDP target.

A baseline assumption is that the same could happen in the future i.e. if there had to be, say a Spanish, restructuring (albeit unlikely) at some point in the future that the ECB would not share in the pain. By definition then, every Spanish bond that the ECB buys in its SMP program increases the default risk that private sector holders are left with. The SMP program has survived the Greek default event because the ECB did not take a haircut, but that action in itself has impaired the effectiveness of the SMP. Only outright QE, a promise not to default and a willingness to expand the ECBs balance sheet with ownership of the entire stock of Spanish debt if necessary (in the extreme) would be enough to cause a material positive effect from ECB intervention.

A more positive gloss has taken hold in the past few days, coinciding with Italy getting paper into the market yesterday amid a strong convergence theme for peripheral spreads to core. However, the fact that 2yr Schatz trade close to a single digit and that the 5yr area is trading so rich to the curve tells us that this market remains very nervous amid an ongoing preference for core.

Tags: Balance Sheet, Bank Liquidity, Banking System, Complacency, Default Risk, Dependence, Dilemma, ECB, Gloss, Haircut, Private Sector, Qe, Sad Reality, Smp Program, Spanish Banks, Spanish Cds, Strategist, Term Effectiveness, Viability, Willingness
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The Happiness Dilemma (Feldman)

Thursday, October 20th, 2011

by Kevin Feldman, iShares

A few weeks ago, my colleague Russ blogged about a new bias that he is noticing among investors. Regardless of where his job has taken him — be it Australia, Latin America, Europe or even the United States — Russ is finding that investors have become overly pessimistic about their home country.

After reading his blog this journal article — “The Financial Crisis and the Well-Being of Americans” by Princeton economist Angus S. Deaton — caught my eye. Yes, it is US-focused, but it may be able to partially explain some of the gloom among global investors.

We all know that the financial crisis has been difficult, and I imagine it’s made most of us unhappy at various times. After all, 60% of American households saw their wealth decline between 2007 and 2009. Deaton wanted to examine more precisely the relationship between the crisis and American happiness — “self-reported subjective well-being,” or SWB, in economist jargon. Which parts of the crisis hit people the hardest?

Deaton turned to data from Gallup, which happens to conduct polls on popular well-being. Since January 2008, Gallup has randomly polled 1,000 Americans, asking them questions intended to measure happiness. How are their lives going? Are they satisfied with their standard of living?

According to Gallup, in the fall of 2008 and spring of 2009, Americans reported “sharp declines in their life evaluation” and “sharp increases in worry and stress.” The most stressed-out respondents were those who had lost jobs; because getting laid-off was so damaging to their self-esteem, the newly unemployed felt the hit even more deeply than the amount of lost income seemed to justify.

Still, Deaton points out, the unemployed constitute a relatively small minority of the population; most Americans were feeling better by the end of 2010. (Unfortunately, that’s where Deaton’s study ends) So what explains this improvement in the national mood?

It wasn’t gains in employment, which were largely non-existent. Instead, the main reason people got happier seemed to be that the stock market had recovered from its plunges of ’08 and ’09. Americans’ emotional well-being tracked almost exactly the hills and valleys of the stock market. (Perhaps that is why Russ witnessed such pessimism among investors. Between the beginning of August and the end of September, the Dow Jones Industrial Average fell 10 percent.)

If you’re an investor, this probably doesn’t surprise you; seeing one’s portfolio nosedive would depress most of us. But as Deaton reminds, “most Americans have no direct or indirect interest in the stock market,” because most Americans don’t own stock outside of pension plans, including 401(s) and IRAs. (Only about 20%, according to one survey.) If that’s the case, why were Americans who weren’t nearing retirement feeling so bummed out?

The answer, according to Deaton, is that non-stop media coverage of the stock market made people anxious even if they weren’t invested in it. “For much of the financial crisis,” he writes, “the stock market became the most watched indicator, not only of the present but also of the future. ….The stock market was the indicator of the state of the economy, something that would have been less true in normal times.”

In other words, there was a disconnect between the level of popular anxiety about the stock market and the level of popular investment in the stock market. But that anxiety wasn’t completely illogical. If you were nearing retirement or owned equities to support future retirement, feeling anxious was understandable. If you were part of a lower-income household, you might not have been invested in the market, but you may have taken market declines as predictors of future unemployment.

The media-fueled fixation on stock prices, Deaton concludes, makes him think that SWB is “essentially irrelevant for any concept of well-being that we care about.” Happiness-related polling data may just be too sensitive to media coverage, too disconnected from economic reality. “In a world of bread and circuses,” Deaton concludes, “measures like happiness that are sensitive to short-term ephemera, and that are affected more by Valentine’s Day than to a doubling of unemployment, are measures that pick up the circuses but miss the bread.”

Tags: American Households, Blogged, Colleague, Deaton, Declines, Dilemma, Economist, Financial Crisis, Gallup, Global Investors, Gloom, Jargon, Journal Article, Latin America, Life Evaluation, National Mood, Respondents, Russ, Small Minority, Standard Of Living
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Jim Grant on Future Gold Standard: “This is not a threat, this is not a promise, it’s going to happen”

Thursday, July 21st, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis
Jim Grant speaks about going forward with gold standard, and away from a “PhD Standard” ruled by academics like Fed chairman Ben Bernanke.

Link if above video does not play: U.S. Debt Crisis Is Contrived, James Grant Says

Select Quotes

• Debt crisis is contrived
• Treasury market operating on muscle memory, up in price down in yield for 30 years.
• People have come to view treasuries are intrinsically safe when in fact pieces of paper emitted by a government that is cash-flow negative and the printer of the world’s reserve currency.
• On going forward with a gold standard, “This is not a threat, this is not a promise, it’s going to happen”
• The gold standard is a better alternative for money management. The historical evidence is incontrovertible.

Jim Grant essentially describes the problems and solutions presented in Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited. Please give that a read if you have not yet done so.

Mike “Mish” Shedlock
Copyright © http://globaleconomicanalysis.blogspot.com

Tags: Ben Bernanke, Cash Flow, Debt Crisis, Dilemma, Fed Chairman, Global Economic Trends, Gold Standard, Hugo, James Grant, Jim Grant, Michael Mish, Michael Pettis, Mish Shedlock, Money Management, Muscle Memory, Reserve Currency, Salinas, Trade Imbalance, Treasuries, Treasury Market
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When Even John Taylor Says Bernanke’s Interpretation Of The Taylor Rule Is Wrong

Thursday, March 3rd, 2011

Something funny transpired over the the past two years in the Fed’s interpretation of the critical Taylor rule, which Bernanke refers to in every testimony before Congress or the Senate:  John Taylor, the creator of the rule, and Zero Hedge’s nomination for Fed chairman (inasmuch as we need a Federal Reserve) said Bernanke is wrong in his interpretation of the rule, and if he had a proper interpretation the Fed Chairman should already be hiking rate. Yet leave it to Bernanke to believe he knows better what the rule is supposed to mean….than even its creator. From the WSJ: “Stanford University professor John Taylor, an outspoken critic of the Federal Reserve in recent years, has a new complaint: He says Fed Chairman Ben Bernanke is misrepresenting Mr. Taylor’s eponymous rule on interest rates.” A brief reminder on the Taylor rule, which has been presented numerous times on Zero Hedge before: “The Taylor Rule offers a simple formula that economists often use as a guide for the appropriate level of the federal funds rate. The formula provides changes in interest rates depending on the level of inflation and the output gap, which is the difference between actual gross domestic product and the economy’s potential output. Depending on how you define the rule (for instance if you give the output gap a lot of weight in the formula or just a little, or if you use a projected inflation rate or actual inflation) you can come up with different interpretations of whether interest rates should be high, low or even negative in a theoretical world.” And an odd dilemma appears when one uses the original version of the Taylor rule as presented in 1993 or its 1999 revision: they provide totally different results: the first one says the Fed is wrong, the second one validates QE. Yet here is Taylor himself: “I did not propose or prefer an alternative rule in that 1999 paper, and it is hard to see how one could interpret the paper that way.” So is the entire US monetary policy based on a rule derivative that is not even endorsed by its creator? The answer is a resounding yes.

From the WSJ:

Mr. Bernanke said Tuesday that the Taylor Rule suggested that short-term interest rates, if they could be, should be pushed way below zero. That, in turn, helped to justify the Fed’s $600 billion bond-buying program, he said.

When Sen. Pat Toomey, Republican from Pennsylvania, challenged him on whether Mr. Taylor himself believed that, Mr. Bernanke asserted even Mr. Taylor has come up with variations of his own rule. The one he originally formulated in 1993 doesn’t support the Fed’s current policy, but Taylor’s revision to it in 1999 does support the Fed’s current policy, Mr. Bernanke said.

“There’s no particular reason to pick the one that he picked in 1993. In fact, he preferred a different one in 1999 which, if you use that one, gives you a much different answer,” Mr. Bernanke said in an exchange Tuesday with Sen. Toomey.

Taylor’s 1999 paper (read it here) does point to alternate versions of his rule. But Mr. Taylor says he never stood behind any alternatives to his original 1993 rule. Instead he says he was citing alternatives that others proposed, including the Fed. The 1993 version of the rule calls for a federal funds rate of around 1%, not close to zero as it is now. He charges Mr. Bernanke with misrepresenting his preferences.

“I did not propose or prefer an alternative rule in that 1999 paper, and it is hard to see how one could interpret the paper that way,” Mr. Taylor says in a blog post today.

WSJ’s Hilsenrath explains why this is such a material issue:

If this were just two academics feuding over a formula, it wouldn’t be very interesting. But it’s more than that. Mr. Bernanke is the Fed chairman. Mr. Taylor is one of the most influential voices in monetary economics and he’s saying the Fed chairman is distorting his views to justify a controversial policy.

“It is important to correct the record because the ‘others have suggested’ rule has a much larger coefficient on the GDP gap and is therefore more likely to generate negative interest rates and be used to rationalize discretionary actions such as quantitative easing,” he says on his blog.

And below is the full transcript of the exchange between Bernanke and Toomey:

MR. BERNANKE: I think that many of the monetary or nominal indicators that somebody like Milton Friedman would look at did suggest the need for a monetary stimulus. For example, nominal GDP has grown very slowly. Growth in the money supply is in fact — I’m not talking about the reserves held by banks which are basically idle — but if you look at M1 and M2, those have grown pretty slowly. The Taylor Rule suggests that we should be, in some sense, way below zero in our interest rate, and therefore we need some method other than just normal interest rate changes to —

SEN. TOOMEY: Do you know if Mr. Taylor believes that?

MR. BERNANKE: Well, there are different versions of the Taylor Rule, and there’s no particular reason to pick the one that he picked in 1993. In fact, he preferred a different one in 1999 which, if you use that one, gives you a much different answer.
SEN. TOOMEY: My understanding is that his view of his own rule is that it would call for a higher Fed funds rate than what we have now.

MR. BERNANKE: There are, again, many ways of looking at that rule, and I think that ones that look at history, ones that are justified by modeling analysis, many of them suggest that we should be well below zero. And I just would disagree that that’s the only way to look at it. But anyway, so I think there are some — there is some basis for doing that.

Which begs the question: is the broken US monetary system so institutionalized that the only person willing to speak up against the faulty usage and interpretation of a rule, is its own creator? What would happen should the Fed follow the Taylor-endorsed rule is that QE2 would immediately have to be ended. But of course this will never happen: after all it is now clear the Fed’s policy was never to actually control inflation or maximize unemployment: the whole point was always just to get stocks as high as possible. And when the bubble pops, which it will, it will be time to point fingers, and we are confident that the Fed will resort to blaming Taylor himself. Luckily by then there will be no Fed, as the monetary system will have finally reverted back to its one sustainable form, backed by either precious metals or some other non-dilutable instrument.

The fiat experiment has taken enough casualties.

Tags: Ben Bernanke, Dilemma, Economists, Eponymous, Fed Chairman, Federal Funds Rate, Federal Reserve, Gap, Gross Domestic Product, Inflation Rate, Mr Taylor, Original Version, Output Gap, Outspoken Critic, Professor John Taylor, Proper Interpretation, Qe, Stanford University Professor, Taylor Rule, Wsj
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Potash (POT) Beats by 12 Cents, Guides 2011 a Bit Higher but Excites Crowd with 3-1 Split

Friday, January 28th, 2011

by Trader Mark, Fund My Mutual Fund

It is always bemusing to watch stocks jump on stock splits which are nothing but an accounting change.  2x more stock at half the price.  Nothing changes but back in 1999 you’d see stocks jump 15-20% on a stock split as long as it was on the NASDAQ.  Some of that behavior still lives.  Potash (POT) reported a solid quarter, with not that exciting guidance, but the 3-1 stock split has helped to stoke excitement.

For the quarter $1.77 v $1.65 expectation, revenues up 65% to $1.81B.  For 2011 the company guides to $8.40 to $9.60, vs current $8.89.  Based on how poorly these fertilizer companies guided in 2008 and 2009 versus a quickly changing market, take everything with a grain of salt. Even assuming Potash hits $10 EPS in 2011, this is a forward PE of 17.5 (forward, not trailing) for an extremely cyclical company.  But increasingly valuation is becoming moot across the market as it was in 1999 – all the central banker liquidity has to go somewhere.  Indeed we shall see that same dilemma in Amazon.com (AMZN) in a few hours.

• The company said it expects global shipments of potash to reach 55 million metric tons to 60 million metric tons in 2011, up from 52 million tons in 2010.
• Potash Corp now expects 2011 potash shipments of 9.5 million to 10 million tonnes. It had earlier forecast sales shipments of 9.3 million tonnes.
• The company has earmarked $2.0 billion for capital expenditures in 2011, with $1.4 billion going to potash expansion projects.
• The company will pay out the stock split to shareholders in the form of a stock dividend, with each receiving two additional shares for each one owned on the record date of Feb. 16.

No position

Copyright (c) Trader Mark, Fund My Mutual Fund

Tags: 5 Million, 60 Million, Amazon Com Amzn, Capital Expenditures, Dilemma, Eps, Expectation, Fertilizer Companies, Global Shipments, Grain Of Salt, liquidity, Million Metric Tons, Mutual Fund, Nasdaq, Potash Corp, Potash Pot, Shareholders, Stock Dividend, Stock Splits
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Chart of the Day: Lending Still Shrinking

Tuesday, January 5th, 2010

As shown in the graph below, courtesy of Clusterstock – Business Insider, the latest figures from the St. Louis Fed show that commercial and industrial lending is still declining.

The dilemma is that US banks can borrow for almost nothing and lend money to the government by buying 10-year Treasury Notes and 30-year Treasury Bonds with yields of 3.8% and 4.6% respectively. “Thus, the banks are thriving on the ‘yield curve’ while the poor slob on the street gets nothing for his savings (assuming he has any savings at all). And when you think about it, why should the banks make risky loans to the poor goof on Main Street when they can play the yield curve with almost zero risk?, remarked Richard Russell, author of the Dow Theory Letters.

It goes without saying that lending needs to expand before a decent economic recovery can get under way.

Source: Clusterstock – Business Insider, January 4, 2009.

Tags: 10 Year Treasury, 30 Year Treasury Bonds, Advertisement, Banks, Business Insider, Dilemma, Dow Theory Letters, Economic Recovery, Goof, Graph, January 4, Money, Poor Slob, Richard Russell, risk, Risky Loans, Treasury Yields, Yield Curve
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No respite from recession for small businesses

Friday, December 11th, 2009

Despite the marked improvement in a number of credit spreads – including the TED spread, LIBOR-OIS spread, mortgage spreads, high-yield spreads and credit derivative indices – the credit situation for small businesses remains tight. The graph below shows the percentage indicating it was harder to obtain credit, as reported in the National Federation of Independent Business Optimism Survey, remains at crisis-type levels.

Source: Gluskin, Sheff & Associates – Breakfast with Dave, December 9, 2009.

The dilemma of small businesses is also illustrated by data from DiscoverCard Small Business Watch, showing the proportion of small businesses that have experienced cash-flow problems over the past 90 days.

Source: Chart of the Day, Clusterstock – The Business Insider, December 10, 2009.

Without a turnaround in the above, small businesses will not create jobs. And this is key to the overall economic recovery as small businesses are responsible for more than 60% of employment.

Tags: Business Insider, Business Optimism, Cash Flow Problems, Credit Situation, Dilemma, Economic Recovery, Federation Of Independent Business, Graph, Libor, National Federation Of Independent Business, Ois, Proportion, Recession, Respite From, Small Business, Small Businesses, Source Chart, Ted, Turnaround
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Corporate America’s Massive Cash Hoards

Thursday, December 3rd, 2009

Michael Brush points out that American companies are sitting huge amounts of rainy day money, and they need to start spending again, or start paying some of it back to investors. The latter is the less likely, given that CEOs get nothing for hoarding cash. Knowing which companies will benefit from the spending spree helps.

While many Americans are living on tight budgets because of lost jobs or fear of losing a job, companies face a very different dilemma: They’re sitting on growing piles of cash.

Faced last year with the doomsday scenario of the next Great Depression, companies slashed jobs and cut expenses. The depression never came, and money continued to roll in, albeit often at lower levels.

That’s left companies overflowing with cash — at least a half-trillion dollars more than they had at the end of 2008 and probably much more.

Corporate America’s huge piles of cash, MSN Money, December 1, 2009

Tags: Cash Money, Ceos, Corporate America, Dilemma, Doomsday Scenario, Fear, Great Depression, Hoards, Investors, Jobs, Losing A Job, Massive Cash, Msn Money, Piles, Rainy Day, Spending Spree, Tight Budgets, Trillion
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