Opening Quotes – Slaves to Market Desires

Same old. Same old.

Old Greenspan rewrote the rules ….

But  – more than ever – Central Banks are slaves to the ‘markets’ desire.

Its no way to run an economy – but hey we already know that.

FT.com

” …… traders are reckoning on central bank bodyguards to protect them. The biggest is of course the US Federal Reserve, and the market is inferring from the Fed’s latest comments that it stands ready to provide muscle if required.”

Barclays Capital said in a note to clients: “Policy accommodation remains in place and will continue to support higher-beta risky assets”.

Opening Quotes – The Premium of Bernanake’s Call

Highly recommend reading this:

http://www.bloomberg.com/news/2012-03-28/four-numbers-add-up-to-an-american-debt-disaster.html

The thought occurs that the ‘roll-over risk’ associated with the European LTRO ‘pyramid scheme’ is minor compared to what the Federal Reserve has created:

“The Federal Reserve purchased 61 percent of the net Treasury issuance last year, according to the bank’s quarterly flow-of-funds report. That’s masking the decline in demand from everyone else, including banks, mutual funds, corporations and individuals, Goodman says.

Of course, Fed Chairman Ben Bernanke might look at the same numbers and see them as a sign of success. His stated goal in buying bonds is to lower Treasury yields and push investors into riskier assets.”

Opening Quotes – Rewriting the Bernanke Call (Again)

Front page of the FT: “Fed doubts big US jobless falls will last”

For good order Bernanke also dissed the notion the US is growing much quicker than the data suggests.

But – and this is Financial Capitalism 101 – given a choice – the (equity) markets will always take the cash and worry about the ‘real’ economy (= earnings) later.

“Rapid recent falls in US unemployment may prove to be a one-off unless economic growth picks up, Ben Bernanke, chairman of the US Federal Reserve, warned on Monday.

The downbeat comments, underscoring the Fed’s support for easy monetary policy, may calm investors who had begun to doubt the central bank’s forecast of exceptionally low interest rates until “late 2014”.

Phew – good to ‘calm’ investors.

Today.

Opening Quotes: ‘We’re all Muppets now’

Simon Johnson (Bloomberg):

“Failure to do so is the kind of hubris we should fear. The Fed has an imperfect view of the future, as do we all. It has repeatedly demonstrated a limited ability to control economic outcomes. In light of this, the Fed could have required banks to build up shareholder capital on their balance sheets in case their aggressive risk-taking again becomes reckless and creates enormous losses. Instead, the Fed is allowing big banks to reduce capital levels, increasing the likelihood of another financial and fiscal crisis and endangering the broader U.S. economy.

We are all muppets now.”

 

http://www.bloomberg.com/news/2012-03-18/federal-reserve-stress-tests-make-us-all-muppets.html

The 5 cent Rally

OK – and a $15billion stock buy-back.

JP Morgan could hardly wait. You can see them watching the post-FOMC minutes tick idly by before annoucing the ‘good news.’ And would I be overly cynical in wondering if their haste – pre-empting the Federal Reserve’s own planned announcement – wasn’t just a well executed piece of market timing?

At the very least it hints at where the power lies. And demonstrates how quickly we forget the lessons of 2008-2009.

In advance of meeting the <higher> 2015 Basel III ratios, Anat Admati, professor at Stanford University, provides a reality check: “Independent of these stress test results, the dividends are misguided, period. The banks want it but that’s not enough justification.”

And Dennis Kelleher, president of Better Markets, an organisation that campaigns for stricter financial regulation, sums up the short-termism of the Feds acquiescence: “The tests have been perverted into a mechanism for the biggest banks to pay out billions in capital, which makes them less likely to survive the next economic crisis.”

Market wants;

Banks get.

History repeats.

Opening Quotes

Love this ……

http://www.bloomberg.com/news/2012-03-14/asian-stocks-climb-on-u-s-economy-as-yen-drops-to-11-month-low.html

Citigroup Inc. (C) slumped 3.3 percent after the close of regular trading in New York as it failed to meet the Federal Reserve’s minimum requirements in a stress test.

“I was expecting all of the banks to pass, but when you look at the terms the stress tests were so onerous that a modest miss really isn’t all that discouraging to me,” said William Fitzpatrick, a Milwaukee-based financial-services analyst at Manulife Asset Management, whose team oversees $800 million.

Until its Broken – Part I

As their largesse continues, John Burbank (founder of Passport Capital) believes ‘confidence in central banks is overdone.’ More specifically he also believes oil with continue to rise until it ‘breaks the US economy.’ Its a disconcerting thought with oil already back above its Euro denominated 2008 highs – back at the beginnings of the extraordinary pre/post Lehman central bank balance sheet expansion. Unsurprisingly the ECB’s balance sheet is beginning to come under more and more scrutiny. Including today’s 2nd LTRO its liabilities have balooned to Euro 3.2 trillion, and with ‘only’ Euro 80billion in capital this looks frightening. It is. And it isn’t.

With revaluation gains and enormous long-term ‘seigniore’ – basically the spread its makes on printing cash – I don’t think ECB’s solvency is the question. The ECB is way to precious to risk its own balance sheet. Rather, and far more problematic is the ECB’s unstated policy of stashing the sovereign debt risk upon the banking sectors balance sheet. As John Plender writes in today’s FT: ‘ unlike the Federal Reserve and the Bank of England, the ECB has loaded sovereign risk onto the balance sheets of undercapitalised private banks instead of taking it onto its own balance sheet. The economist Charles Wyplosz argues that this is tantamount to the ECB taking a trillion euro bet.’

European banks used the first LTRO cash in two major ways – to replace Euro 700 billion of bank debt expiring in 2012 & to buy their own sovereign debt. A large chunk has also placed back on deposit with the ECB itself – the circular logic of this knows no boundries – but lets disregard any notion this is about helping lending to the real economy. This funding helps but European banks face years (estimates of Euro2.5 trillion) of de-leveraging thier balance sheets. More interstingly we now know Italian & Spainish banks increased their (own) To some extent – sovereign holdings by 13% (to Euro 280billion) & 29% (to Euro 230billion) between December 2011 and January 2012. In the process the ‘Sarkozy spread’ was crushed in the shorter end of the curve. After today’s second slug of money – can this continue?

To some extent – whether it constitutes ‘financial repression’ or not – it makes a lot of sense for the peripheral banks to buy their guarantor’s own debt. Why not? But under the cover of imposing its own seniority (second piece follows) the ECB has created a mother load of moral hazard. And with the Euro-zone consigned to the illusion of ‘expansionary austerity’ it appears only a question of time before the stresses of solvency (not liquidity) return.

Zero Defense

Despite his endless self-promotion (aggrandizement?) – 0n the eve of the ECB’s 2nd ‘banking sugar fest’ – Bill Gross remains an astute investor and elegant commentator.

From <Bloomberg> a commentary he posted on Pimco’s website today:

“An instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion,”

And:

 “The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal-line stand,” Gross, the founder and co-chief investment officer of Pimco, wrote today. “Investment defense is coming of age.”

A longer – no doubt less elegant critique – awaits tomorrows ‘number.’