Monday Afternoon Reading
By Barry Ritholtz - October 5th, 2009, 3:00PM
A rather interesting and eclectic set of readings:
• Inside the Crisis:Larry Summers and the White House economic team (New Yorker)
• The elusive leverage ratio (Rolfe-Winkler)
• Gold Is Still a Lousy Investment (WSJ)
• A Look Inside the Regulatory Kitchen (Matt Taibbi)
• Unemployment Becoming Leading Indicator for Pimco’s New Normal (Bloomberg)
• Todd Harrison interviewed by Steve Forbes (Video)
• Elite Military Hacker Squad Would Stop Wars With Bits, Not Bombs (Gizmodo)
• Mahmoud Ahmadinejad revealed to have Jewish past (Telegraph) I guess this means he must wipe himself off the face of the earth~!
What are you reading?
October 5th, 2009 at 3:12 pm
why is GS getting a special dispensation?
http://baselinescenario.com/2009/10/03/a-short-question-for-senior-officials-of-the-new-york-fed/
October 5th, 2009 at 3:12 pm
• Gold Is Still a Lousy Investment (WSJ)
Jeez, this is the drivel Dave Kansas is reduced to producing? Show me all the *other* 4-bagger asset classes this decade.
October 5th, 2009 at 3:16 pm
That WSJ article makes me want to go out and buy gold.
October 5th, 2009 at 3:16 pm
change YOY?
http://www.star-telegram.com/ed_wallace/story/1636767.html
http://www.star-telegram.com/ed_wallace/story/1656750.html
October 5th, 2009 at 3:22 pm
You might like this Barry.
http://www.zerohedge.com/article/kessler-market-commentary
October 5th, 2009 at 3:34 pm
market down turn cometh as the real economy doesn’t recover?
http://www.businessinsider.com/roubini-stocks-will-tank-when-the-recovery-comes-in-weak-2009-10
October 5th, 2009 at 3:35 pm
sorros US banking system bankrupt?
http://www.businessinsider.com/henry-blodget-soros-us-banking-system-is-basically-bankrupt-2009-10
October 5th, 2009 at 3:49 pm
http://www.dailymail.co.uk/femail/article-1216621/German-men-worlds-worst-lovers-lazy-English-come-second-battle-sheets.html
Unhygienic German men voted the worst in bed while lazy English come second in the battle between the sheets
“No, it turns out that Englishmen are too lazy – while the Germans are ‘too smelly’.
The survey, carried out by global research website OnePoll.com, asked women from 20 countries to rate nations on their talent in the bedroom and give reasons for their answers.
English men were criticised for ‘letting women do all the work’.
Swedish men were ‘too quick to finish’, Dutchmen too rough and Americans too dominating. Greeks were deemed ’soppy’.
However, some consolation can be taken from the Welsh and Scottish making the lousy lover list as well. Men from Wales were considered selfish and those from north of the border too loud.”
Uh huh….Lefty….time to put a little more effort in after hours….
October 5th, 2009 at 3:49 pm
BOFA to find emergency CEO?
http://seattletimes.nwsource.com/html/businesstechnology/2010004214_apusbankofamericaceo.html?syndication=rss
October 5th, 2009 at 3:53 pm
” I guess this means he must wipe himself off the face of the earth~!”
Funny comment, if it were only true that he made the original comment you’re refering to….. a classic case of wishful translation.
October 5th, 2009 at 3:58 pm
shareholder value?
http://baselinescenario.com/2009/10/05/shareholder-value-for-beginners/
October 5th, 2009 at 4:03 pm
Anybody have any anecdotal info about the economy from the weekend? I have two odd notes…one was how empty Staples was yesterday. Today, I had the shortest commute home I have ever had. There was no traffic at all on a route that typically has three or four bottlenecks. A trip that routinely took me an hour last year, took exactly 32 minutes.
October 5th, 2009 at 4:11 pm
Steve – I do. Had to go to Home Depot twice this weekend – It was packed to the gills both days. First time I’ve seen it that busy in awhile. My commute in the morning here in LA has been getting progressively longer while my commute home has been getting shorter. Can’t make sense of that, although traffic here never really makes sense.
October 5th, 2009 at 4:17 pm
BR recommended:
• A Look Inside the Regulatory Kitchen (Matt Taibbi)
reply:
————-
God Damn, It pays to be a crook. I should reconsider my strategy for life. I couldn’t hope to build a mafia like the iBanks have developed. But I should just give up and accept that these people make the rules, control everyone who might be an inconvenience, and steal so well it will never be a problem for them. Everyone, including me, who thought the market is over valued and ready to correct is shit faced wrong. It will never go down unless the iBanks decide it would be profitable for it to go down. This is probably the first time in history the market is a totally phony invention. If the analysts and media cooperate and some Fed sugar is added to the mix, Q4 might be a money machine. I admit my mistake and bow to Cramer.
October 5th, 2009 at 4:18 pm
Insurance Scam
http://www.huffingtonpost.com/2009/10/05/wellpoint-cuts-workers-he_n_309716.html
Insurer WellPoint lobbies against health care reform, cuts its workers’ health benefits and gives executives huge bonuses. Who do they think they are, Wall Street bankers?
October 5th, 2009 at 4:22 pm
http://quotes.ino.com/chart/?s=NYBOT_DX&t=f
looks like the UNI-TRADE is alive, and well.. (thanks, Mark McHugh)
~~
“Former US Ambassador Peter Galbraith, who was fired from his role as second ranking official at the UN Mission to Afghanistan last week, says he was ordered by mission chief Kai Eide to cover up the extent of the voter fraud by Afghan President Hamid Karzai.
UN Mission’s Kai EideGalbraith says his public falling out with Eide was a result of repeated orders by Eide to keep secret data that the mission had gathered regarding the enormity of Karzai’s voting fraud…”
http://news.antiwar.com/2009/10/04/galbraith-was-ordered-to-cover-up-karzai-fraud/#
..does “Vote Fraud” count as an Export, when toting up Trade Balances?
~~
New York man accused of using Twitter to direct protesters during G20 summitElliott Madison arrested by FBI and charged with using social networking site to help demonstrators evade Pittsburgh police..
http://www.guardian.co.uk/world/2009/oct/04/man-arrested-twitter-g20-us
btw, Am I the only one that finds it strange that we can find more Domestic US-coverage in UK media, than our own, beloved, MSM?
~~
SB,
two local Golf Courses, w/ good weather, were barely trafficked over the weekend..the Cart jockeys, and Bag hoofers (Course attendants) were none too pleased by the low-turnout/poor tips..
October 5th, 2009 at 4:23 pm
@Dave J: Those health insurance execs aren’t stupid. They see how the game is played (and won).
October 5th, 2009 at 4:25 pm
Went to local Ruby Tuesday last Tuesday to meet some casual friends…the place was packed to the gills…turns out Tuesday is 2 for price of one day by coupon….
Spoke with the waitress…she said that goodness for the coupons…rest of the week quite slow….
October 5th, 2009 at 4:25 pm
thank goodness he tried to type..
October 5th, 2009 at 4:38 pm
Via Mannwich
“Buyout Firms Profited as a Company’s Debt Soared”
http://www.nytimes.com/2009/10/05/business/economy/05simmons.html
And a companion piece:
http://www.nytimes.com/2009/10/05/business/economy/05simmons-side.html
October 5th, 2009 at 4:38 pm
I’m still reading my P/L from last week and feeling grateful I didn’t play the c*sino today…!
October 5th, 2009 at 4:41 pm
http://www.wired.com/culture/culturereviews/magazine/17-10/mf_chanology?currentPage=all
when rational discourse fails, or is not possible … you call in the F-Team …
I loved the Borg-like collective, “Anonymous”.
October 5th, 2009 at 4:42 pm
@emmanuel: But he “earned” every penny and deserves to have his taxes cut all the way to the bone, no? Good grief, what a farce.
October 5th, 2009 at 4:45 pm
Guess who’s keeping the economy afloat, in a “mini-boom” (according to some, ahem people, here a TBP), if you will?
http://www.zerohedge.com/article/cleveland-fed-final-q2-gdp
October 5th, 2009 at 4:48 pm
You’ll laugh till you wet yourself…
http://www.zerohedge.com/article/wall-street-animal-spirits-stampede-across-river
October 5th, 2009 at 5:04 pm
bergsten @ 4:48
The picture bearing the caption “Goldman Sachs Prop Desk Traders lying in wait” is worth a laugh.
October 5th, 2009 at 5:07 pm
Gold Is Still a Lousy Investment (WSJ)
If you told people that bubble gum was valuable, women would be wearing it all over their bodies and men would be hoarding it in great fortresses.
People are so human sometimes.
October 5th, 2009 at 5:17 pm
“ Gold Is Still a Lousy Investment (WSJ)”
Gold bears try to make the argument that, regardless of the fundamentals, sentiment is too bullish for much of an advance in the price.
This article in the WSJ tends to undermine the proposition that bullishness on gold is rampant.
October 5th, 2009 at 5:30 pm
Is this inflationary or “spray-flationary”? I report. You decide.
http://www.nytimes.com/2009/10/06/business/global/06milk.html?hp
October 5th, 2009 at 5:30 pm
@ Steve Barry
Things are a still slow at a couple of local diners I visit for breakfast, according to hostesses/waitresses. Personally speaking, I now go to the cheapest diner more often than the others. They all know me by now, anyway. “How are you, Nisky. . .” “Looking good, Nisky. . .”
October 5th, 2009 at 5:31 pm
re: Au
http://www.financialsense.com/editorials/kosares/2009/1001.html
w/ TheChartStore charts~
October 5th, 2009 at 5:33 pm
Thanks all for the anecdotals…I found the lack of traffic today stunning and just had to see if anyone else saw something similar. It is either an outlier or a bad sign for the economy.
October 5th, 2009 at 5:46 pm
@cn
Ah, the kids.
October 5th, 2009 at 5:53 pm
Re: Gold…it is a lousy investment for the foreseeable future, but not for any reason in that article. It is lousy because so much hot money has poured in, while the smart commercial interests are betting against it and demand for the actual metal is plunging. We are facing deflation…all assets will deflate, including gold.
October 5th, 2009 at 5:56 pm
@cn: That is online GOLD.
October 5th, 2009 at 5:58 pm
@constantnormal,
I too read Wired’s “Assclown Offensive” article that you referenced.
Hadn’t heard of that 4chan site before, but I’m a fan now!
October 5th, 2009 at 6:06 pm
No joy in Mudville:
“InkStop managers called their employees last night at 10 p.m. to notify them that the company was “temporarily closing” while they restructure the company.
All employees have been laid off. To make matters worse, workers did not get their paychecks Friday. On top of that, they also found out that InkStop didn’t pay their health insurance premiums for the month of September. Employees just learned that their coverage actually ended August 31.
The Cleveland-based company has 163 stores nationwide.”
http://www.wxyz.com/news/story/InkStop-Closes-All-Stores-Workers-Stunned/rmX6OBoZa0a3tdd3Ksoc9w.cspx
October 5th, 2009 at 7:00 pm
have things really changed yet?
http://www.slate.com/id/2231088/
October 5th, 2009 at 7:01 pm
Ahmedinejad doesn’t want to wipe himself off the face of the earth; he isn’t Israeli.
October 5th, 2009 at 7:02 pm
consumers?
http://blog.nielsen.com/nielsenwire/consumer/is-the-economic-storm-over-consumers-weigh-in-on-the-new-frugality/
October 5th, 2009 at 7:02 pm
more on consumer spending
http://www.google.com/hostednews/ap/article/ALeqM5i57LvTr3fegARhsZVDA_poHnivRAD9ASDVC81
October 5th, 2009 at 7:05 pm
Andrew Ross Sorkin: Wall Street’s Near-Death Experience – Excerpt
http://www.vanityfair.com/business/features/2009/11/too-big-to-fail-excerpt-200911
BSD impotence in full view…small, ugly, disappointing, disoriented, tragic.
Money quote:
Kelleher, who had been keeping a careful watch over the firm’s dwindling cash pile, had just taken a look at Wachovia’s numbers for himself and observed, “That’s a shit sandwich even I can’t get my big mouth around.”
October 5th, 2009 at 7:06 pm
If it’s Monday, it must be more of “extend & pretend”.
October 5th, 2009 at 7:07 pm
NYS income tax receipts -36% YTD, in August they were only -24%, WTF? Everybody is worried about CA collapsing, NY has jumped ahead.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNQ6zYnQbPTc
October 5th, 2009 at 7:09 pm
O’B admin is talking about a jobs program but don’t call it another stimulus, OK, a rose by any other name. Why do we need another stimulus, whoops I mean a jobs program if the recession ended like Uncle Ben says?
October 5th, 2009 at 7:11 pm
Mahmoud “Ahma-denier-jad” (TM?!!)
October 5th, 2009 at 7:12 pm
>> verybody is worried about CA collapsing, NY has jumped ahead.
East Coast time, baby! Born to lead…
October 5th, 2009 at 7:12 pm
Ahmedinejad has jewish blood like Hitler? No wonder he looked like the Rabbis from Monsey when they were exchanging hugs!
http://www.nytimes.com/imagepages/2007/01/15/nyregion/15rabbi.2.ready.html
October 5th, 2009 at 7:38 pm
Bank wars is the name of the game here in Philly….TD Bank (formerly Commerce Bank before it merged with TD Banknorth) tried merging their computer systems with Commerce. Its been an utter disaster, and other banks are pouncing on them by pillaging their customers with $100 account bonus offers to switch banks. Here’s the link and the 1st Comment says it ALL!!
http://www.philly.com/philly/business/homepage/20091005_As_TD_Bank_works_out_problems__competitor_benefits.html
We had it good with Commerce Bank, but instead of worrying about the Sub Prime Mess, the Regulators were all worked up over Vernon Hill’s wife decorating the branches.
October 5th, 2009 at 7:54 pm
Ahmetoolijad is f**kin’ Jewish? Please Lord, End it Now!
October 5th, 2009 at 7:59 pm
Steve Barry,
About gold and the dollar:
- I believe other countries are slowly decoupling from us. So, at the same time we face deflation in credit markets here, I expect we will also face “no bid” under the dollar. (Ironically, that implies this: even though Mish will be correct in saying there’s deflation (by his definition), inflationists will (by their definition of rising prices) be correct in saying there’s inflation. (Well, maybe “oil and gold” are pretty unique in that we can’t manufacture them here at home.))
- Americans will continue a large trade deficit. True, we will start manufacturing more at home, eventually. But, not until the dollar really, really, really collapses.
- In return for those imports, Americans have been depleting their savings. For quite some time. Trading away our gold is just another example of that.
- True, gold is something no one really “needs”. But, that’s true of any status symbol. And you don’t see “the rich” doing without those, do you? Rich people in other countries would probably like to wear more of it. Or make adult toys out of it. Or whatever. (It’s not their highest priority. But, it’s important. No?)
…
Tangentially, can you imagine if gold ever became a serious input to a manufacturing process?
FD: I put about 3% into gold a couple of weeks ago. I don’t plan to change that for the forseeable future.
October 5th, 2009 at 8:01 pm
Last sentence in my first par was meant to provide examples of perhaps the only two or only kinds of commodities which inflationists will be able to point to as supporting evidence.
October 5th, 2009 at 8:04 pm
Hope you find this interesting as there is not much discussion about it!
The National Association of Credit Managers released their Credit Manager’s Index – basically an ISM for credit conditions – and it improved to 49.8 in September from 48.1 in August. This was the highest level in over a year. The component measuring new credit applications, a proxy for credit demand, rose to the breakeven level of 50 from 49.3 in August.
So what does this mean?
Ok so lending is coming back but is it enough to sustain the recovery. The answer is a resounding no if you start looking at Money Supply and in particular M2.
M2 has been declining!
•By July 20, M2 had dropped to $8.34 trillion, down $50 billion
•By August 24, it was down to $8.28 trillion, down $110 billion
•By September 14, the latest data point from the St. Louis Fed, M2 recovered slightly to $8.30 trillion, still down $90 billion from June 22
And obviously the banks are not lending it out! In other words, if the banks don’t lend it out, the money that the Federal Reserve has pumped into the banking system won’t reach the money supply that drives the economy.
So how do we evaluate this to see where the markets are heading?
Each year can be marked as a positive liquidity year wherein we have money supply growth, also known as M2 ( total of all physical currency part of bank reserves plus the amount in demand accounts (“checking” or “current” accounts plus most savings acccounts, plus money market accoutns, plus retail money market mutual funds, and small denomination time deposits (cd’s under $100,000) and/or credit expansion when banks are lending. The opposite would be a negative liquidity year wherein we have credit contraction/credit freeze like we currently have today.
Here is data on Money Supply:
Average P/E in a liquidy year is 19.1. Average P/E in a negative liquidity year is 11.1. Data all the way back to the early 1900’s
Standard & Poor’s currently projects 2009 earnings on the S&P at $54.09
So applying this data, and forecating that we will continue to have a negative liquidity year in 2009, fair value of S&P 500 for today would be as follows based on:
2009 being a negative liquidity year: 11.1 x 54.09 = 600.40
Yes that is where the S&P will be gravitating towards as long as the M2 Money Supply is stifled and credit conditions remain at the breakeven level of 50.
October 5th, 2009 at 8:10 pm
wunsa–
Au, as Money, has a long History
here’s one facet http://www.usagold.com/gildedopinion/buckler2.html
another http://goldnews.bullionvault.com/history_money_worthless
and, a third/related one, somewhat breathless in style http://www.moneyandmarkets.com/three-government-reports-point-to-fiscal-doomsday-3-35720
October 5th, 2009 at 8:22 pm
Thanks, Mark. I’ll read those.
…
Oh, Steve, I am also open to being completely wrong. I.e., perhaps that by buying gold recently I will be shown to be “the greater fool”. With just a 3% allocation, I can live with that.
E.g.:
http://globaleconomicanalysis.blogspot.com/2009/10/deflation-threat-what-deflation-threat.html
(But, notice that prices are “sliding for six straight months from year-earlier levels”. The next six months’ comparison to “year-ago” levels will, if I’m not mistaken, show that prices rose.)
October 5th, 2009 at 8:55 pm
Jobs vs. bottom line in mega military project
http://www.msnbc.msn.com/id/33129102/ns/us_news-military/
Three of my nephews are Filipino welders and they’re ready to go. I’m hoping they get the work but this won’t go over smoothly, if at all.
October 5th, 2009 at 9:14 pm
@Wunsacon:
In a bubble world, we are all open to being completely wrong. That’s what makes this such a tough time for investing. I am no gold basher…I actually fully advocate a return of the gold standard and using gold to back currency. I just believe that the debt bubble we are in will deflate, bringing gold down the vortex. If you are timing gold short-term, it is an equally bad time to be in gold, with record long speculation per the COT report.
I fully plan on being long gold miners if the deflation ever ends.
October 5th, 2009 at 9:27 pm
dmlopr
Too bad so many jobs were lost with the closure of Clark and Subic bases. real economic setback for Philippines economy naman
October 5th, 2009 at 9:29 pm
Understood, Steve.
MEH, thanks for those links. Me thinks I’ve understood that history or those arguments for a while. At this juncture, I guess my argument (in support of gold) is:
(a) rich people like status symbols like gold
(b) the rest of the world is getting richer and therefore
(c) they’ll continue buying our gold from us.
October 5th, 2009 at 10:45 pm
On this, the 40th anniversary of Monty Python’s first episode…
http://popwatch.ew.com/2009/10/05/monty-pythons-flying-circus-turns-40/
…did Dave Letterman apologize for his previous apology?
http://www.nytimes.com/2009/10/06/business/media/06letterman.html
October 5th, 2009 at 11:00 pm
What… is your name?
What… is your quest?
What… is the Capital of Abyssinia?
Addis Ababa.
You have to know these things when you’re King.
October 5th, 2009 at 11:06 pm
Gold has been a lousy investment? Based upon a timeline to 1980, well yes I guess so. Based upon a timeline of this decade it is the only asset class within a whisker of it’s all-time highs. Consider this decade the monster bull market in emerging market equities, real estate, foreign currencies, basic materials, energy and gold. After huge runs higher, all these assets classes suffered massive losses. Some have partially recovered. Point of fact, gold has been the most enduring asset class of the decade.
It’s quite pathetic that the WSJ should publish such a glib, disingenous article but nothing that comes from a Murdoch-owned media outlet has any credibility with me, so what else is new.
I have 1 question for the author: if the rumours of the dollar being abandoned for oil trading worldwide comes true, does he really believe gold will fall significantly on that news?
I’m staying long of my gold and looking to add on the breakout.
October 6th, 2009 at 5:25 am
thx for the link .. I feel the need to repost along side this one .. funny how things look .. from the east and the west pov …
New York man accused of using Twitter to direct protesters during G20 summit .. posted 10-04-09
http://www.guardian.co.uk/world/2009/oct/04/man-arrested-twitter-g20-us
“New York man accused of using Twitter to direct protesters during G20 summitElliott Madison arrested by FBI and charged with using social networking site to help demonstrators evade Pittsburgh police….”
Iran Election TWITTER Feeds: Constant Updates .. posted: 06-14-09
http://www.huffingtonpost.com/2009/06/14/iran-election-twitter-fee_n_215330.html
“With the Iranian government jamming cell phones and text messages and blocking access to many social networking sites such as Facebook, Twitter has emerged as one of the mediums with the most information being passed around ….”
and we gotta cool it .. this is a financial site .. not a capital @ site |-:
October 6th, 2009 at 6:04 am
And our fearless leader goes after climate change by giving even more of our money to BIG OIL:
Obama Administration Releases First Funds for Elusive ‘Clean Coal’
by Stacy Feldman – Oct 5th, 2009
The Obama administration announced the winners of the first phase of “clean coal” dollars from the economic stimulus package, with the largest sums going to oil firms.
Only $21.6 million of the $1.4 billion for carbon capture and storage (CCS) technologies was made available in phase one. The money was awarded to 12 companies that will test ways to catch and compress CO2 from polluting plants, transport it by pipeline and pump it underground.
The biggest winners were C6 Resources, a Shell Oil affiliate; ConocoPhillips; and Shell Chemicals, another division of Shell Oil. Each nabbed $3 million to demonstrate their technologies for seven months.
In the announcement, U.S. Energy Secretary Steven Chu recycled the ‘clean coal’ boilerplate of past releases: “These new technologies will not only help fight climate change, they will create jobs now,” although there was no estimate of how many jobs will be generated.
He also repeated this claim:
“The investments will help position the United States to lead the world in carbon dioxide capture technologies.”
America still has a long way to go, though. A few subsidy-funded R&D tests are now being carried out, but none is considered economically feasible on a large scale, or even that clean.
read more @ http://solveclimate.com/
October 6th, 2009 at 7:03 am
this: “…that will test ways to catch and compress CO2 from polluting plants..”
couldn’t be a bigger Boondoggle, if they tried.
see: http://arencibia.com/technologies.html
the Technology, developed and well-proven, has Existed for Years.
~~
wunsa-
re: links, no prob. it was, more, for those of the “if we were told bubble-gum was valuable”-crowd..
October 6th, 2009 at 7:53 am
MEH, hey, did you check out the “our team” link at your link? At the bottom of:
http://arencibia.com/people.html
check out the cool cats (and dogs) representing the “24/7 office staff”.
October 6th, 2009 at 7:55 am
wunsa-
more proof that Engineers do more than wear pocket-protectors.. (;
October 6th, 2009 at 10:49 am
Re:
“Mahmoud Ahmadinejad revealed to have Jewish past (Telegraph) I guess this means he must wipe himself off the face of the earth~!”
BR -
A note as someone who respects your writing and intelligence: I must complain that this throw away joke of yours refers to a malicious mistranslation while implying an anti-semitic/anti-Jewish slur by conflating “the jews” with a particular racist government.
The translation issue has been covered in several places (eg http://www.juancole.com/2006/05/hitchens-hacker-and-hitchens.html). The slur is more serious: I would assume that it is unintentional, but that conflation is exactly the same that is pushed by many anti-semites.
October 6th, 2009 at 3:42 pm
BR, reading John Silvia’s comments before the Fed board, 9/25/09. Interesting insights. I can’t find a link on either site (they email me a pdf) so posting it here, hopefully not too long for this venue. I’ll leave Wells’ disclaimer on at the end.
This report is available on wellsfargo.com/research and on Bloomberg WFEC
John Silvia, Chief Economist
wachovia.com
October 05, 2009
Economics Group
I wish to thank Professor Kaufman for the opportunity to speak at this conference and with the chance to catch-up with some long-time friends.
In line with this conferences theme, I will highlight some of the ways that the rules have changed but, even more so and with great disappointment, how much the underlying economic and political forces have not changed.
First, in contrast to the views expressed by a previous speaker I see no reason why stress tests and risk simulations cannot account for the boom/bust cycles of the economy and the financial systems. Moreover, both economic and financial cycles can be and are integrated in a Bayesian Vector-Auto regression model which, in fact, we do work with at Wells Fargo. This approach to stress testing is far superior to the common approach of merely changing one input, often the federal funds rate or the unemployment rate, and then producing a scenario that represents a “valuable” test to a financial institution. Such one-variable tests are unrealistic as we know very well that the real world will often experience several economic series changes moving at the same time. For example, a (lower/higher) federal funds rate is accompanied by changes in inflation, growth, exchange rates as well.
Second, one factor in the economy that has not changed is the underlying social/political bias in public policy towards housing that has been part of our society for most of the post-WWII era. America’s overinvestment in housing has been a chronic complaint with this overinvestment being assisted from federal and state tax laws, bank regulatory policy and credit/interest rate subsidies. This has not changed in recent years and, in fact, has continued this year with the increase in Federal Housing Authority (FHA) in recent months at below market rates/very low down payment requirements even as delinquency rates rise on these same FHA loans.
Third, we have witnessed change in the short-run but without resolution in the long-run of the Fed’s role as policeman in the credit markets. Increased liquidity at the short-end of the yield curve has brought down Libor and TED spreads but are these short rates too low given that current yields are below that of the often-criticized pre-Lehman period? What about long-term rates? Currently, the Fed has indicated that they will reduce their support for Treasuries by the end of October and will gradually withdraw support for mortgage-backed and asset-backed securities by March of next year. Will the Fed’s involvement in these markets really diminish in the face of relatively high unemployment and a likely upward move for interest rates in general?
Fourth, the zero interest rate policy at the Fed has already signaled a change in global financing as increasingly the U.S. finds itself as the source of borrowing in a global carry trade with lending and investing abroad. Moreover, this zero interest rate policy returns policy to the pre-1951 Treasury accord period and brings into question whether such a policy is consistent with an
independent central bank? At this time in the business cycle, Federal Reserve intervention has created a set of below-market interest rates in many financial instruments. These rates are likely to move up as the Federal Reserve exits. Therefore, it is very difficult to know if financial markets have indeed better accounted for risk in setting interest rates.