The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Last week, the NY Times broke the story that Roger Ailes had urged various colleagues to lie to Federal investigators; (David Corn explains the background to this here).

NYT:

“It was an incendiary allegation — and a mystery of great intrigue in the media world: After the publishing powerhouse Judith Regan was fired by HarperCollins in 2006, she claimed that a senior executive at its parent company, News Corporation, had encouraged her to lie two years earlier to federal investigators who were vetting Bernard B. Kerik for the job of homeland security secretary . . .

Now, court documents filed in a lawsuit make clear whom Ms. Regan was accusing of urging her to lie: Roger E. Ailes, the powerful chairman of Fox News and a longtime friend of Mr. Giuliani. What is more, the documents say that Ms. Regan taped the telephone call from Mr. Ailes in which Mr. Ailes discussed her relationship with Mr. Kerik.”

Here’s what I learned recently: Someone I spoke with claimed that Ailes was scheduled to speak at their event in March, but canceled. It appears that Roger’s people, ostensibly using a clause in his contract, said he “cannot appear for legal reasons.”

I asked “What, precisely, does that mean?”

The response: “Roger Ailes will be indicted — probably this week, maybe even Monday.”

You read it here first . . .

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Peter T Treadway, PhD
Historical Analytics LLC
www.thedismaloptimist.com
pttreadway -at- hotmail.com
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852 9409 1186
305 489 7807
February 18, 2011

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Nobody’s Leaving the Euro

Frequently I have been asked how would Greece leave the euro if it so chose. My answer, which I have alluded to in The Dismal Optimist, has been look at what Argentina did in January 2002 when in a process dubbed pesificacion it forced the conversion of dollar deposits back into pesos which almost immediately lost the bulk of their value against the dollar.

Taking Argentina as a guide, here’s what Greece would have to do. To begin, the Greek finance and prime ministers would adamantly declare that Greece was staying in the euro. Then one fine night when everyone was asleep they would issue an order converting all euro deposits back into a resuscitated drachma. Henceforth, only drachmas would be available at Greek banks and only drachmas would be usable as legal tender in Greece. The drachma in international markets would immediately go to a huge discount against the euro. Of course, when the Greek people woke up and realized their euro deposits had been transmogrified into a devalued substitute and they had in fact been cheated, the country would go up in flames.

I recited this scenario to a Greek professor friend in Hong Kong who quickly pointed out the naiveté and incompleteness of my model. Assume Greece did that, he rejoined. Then the very day Greece was going up in flames every Italian, Portuguese, Spaniard and Irishman would pull his or her euros out of their banks. What would be launched would be the MOTHER OF ALL BANK RUNS. Europe’s banking system would go up in flames.

It won’t be allowed to happen.

I do not want to underemphasize the yet unresolved banking and sovereign debt problems that afflict the euro area. Probable sovereign defaults lie ahead particularly with Greece and probably Ireland. But in the end the euro will survive just as the US did after eight states and the territory of Florida defaulted in the 1840s. The member countries can threaten to check out but as the song says they can never leave. Yes there is no central European government and common fiscal policy. But history, technology, geography and overwhelming financial convenience are powerful forces behind the euro. If necessary the hard working Germans will pay and pay. Post World War II Germany has been determined to comport itself as a model citizen. This, combined with still lingering nightmares from the hyperinflation after the first World War, make Germany the ideal core engine for the euro. And the profligate south will slowly have to give up its wanton ways. Euro Uber Alles.

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Vice Chair Janet L. Yellen
At the University of Chicago Booth School of Business U.S. Monetary Policy Forum, New York, New York
February 25, 2011

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The U.S. Monetary Policy Forum has become an important venue for promoting an exchange of views among policymakers, academics, and financial market participants. I’m pleased to participate in this panel on lessons learned about unconventional monetary policy. In my remarks today, I’ll highlight the role of central bank communications in bolstering the effectiveness of unconventional monetary policy.¹ It is not my intention to provide new information about the outlook for the U.S. economy or monetary policy.

The Federal Open Market Committee (FOMC) has deployed unconventional monetary policy tools to promote economic recovery and price stability since late 2008. In particular, after the intensification of the financial crisis, conventional monetary policy became constrained by the zero lower bound on nominal interest rates. At that point, the FOMC began to provide forward guidance about the likely path of the federal funds rate, and the Federal Reserve also announced a program to buy agency debt and mortgage-backed securities (MBS). Over time, the purchase program was augmented substantially and was expanded to include longer-term Treasury securities. Furthermore, on several occasions, the FOMC has communicated to the markets about the likely longer-term trajectory of its holdings of Treasury securities, agency debt, and agency MBS.

In the remainder of my remarks, I will present some evidence regarding the effectiveness of these policy tools and discuss important similarities and differences in the transmission mechanisms through which they influence the economy. I will also present some simulations of a macroeconometric model to illustrate the importance of clear and effective communication in conjunction with the use of these unconventional policy tools.

Some General Observations
It is important to recognize at the outset that conventional and unconventional monetary policy actions bear many similarities. Forward guidance concerning the path of the federal funds rate, for example, is explicitly intended to influence market expectations concerning the future trajectory of shorter-term interest rates and thereby affect longer-term interest rates. That said, standard monetary policy actions also typically alter not just current short-term rates, but the anticipated path of short-term rates as well, influencing longer-term rates through the identical channel. In fact, central bankers have long recognized that this “expectations channel” operates most effectively when the public understands how policymakers expect economic conditions and monetary policy to evolve over time, and how the central bank would respond to any changes in the outlook.

The transmission channels through which longer-term securities purchases and conventional monetary policy affect economic conditions are also quite similar, though not identical. In particular, central bank purchases of longer-term securities work through a portfolio balance channel to depress term premiums and longer-term interest rates. The theoretical rationale for the view that longer-term yields should be directly linked to the outstanding quantity of longer-term assets in the hands of the public dates back at least to the 1950s.²

Each of these policy tools tends to generate spillovers to other financial markets, such as boosting stock prices and putting moderate downward pressure on the foreign exchange value of the dollar. My reading of the evidence, which I will briefly review, is that both unconventional policy tools–the use of forward guidance and the purchases of longer-term securities–have proven effective in easing financial conditions and hence have helped mitigate the constraint associated with the zero lower bound on the federal funds rate.

The Effectiveness of Forward Guidance
I will begin with an assessment of the FOMC’s forward guidance concerning the federal funds rate, which began when the FOMC reduced its funds rate target to a range of 0 to 1/4 percentage point. In particular, the December 2008 FOMC meeting statement indicated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Identical guidance was reiterated in January 2009, and in March 2009 the phrase “for some time” was changed to “for an extended period.”

Figure 1 suggests that the provision of guidance concerning the future path of the federal funds rate likely contributed to more accommodative financial market conditions. In particular, the consensus outlook of professional forecasters regarding the path of the funds rate shifted down markedly in the Blue Chip survey published at the beginning of February 2009 (the solid line) compared with the survey published two months earlier (the dashed line).

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Back home after a little R&R — unpacking, relaxing, and thinking about the coming next few months. They should be interesting.

The temp has climbed up to 40 degrees, so I am sitting on the back deck — we still have lots of snow for the dogs to romp in, and they are. I am listening to dance hall reggae, sipping some banana rum, and easing out of the Caribbean mindset.

International goings on seem more fast moving, volatile and unpredictable than ever. I have fired up what is probably is my last contraband Havana Cubana — a Romeo & Juliet — as relations with Cuba more like to become normalized over the next year or so than anytime during my lifetime. (Nice smoke)

I grabbed tons-o-snaps while away; I’ll see if I can choose a few select for viewing.

I also have quite a few interesting research pieces in the works.

Should be a very interesting couple of weeks.

I don’t even know if this makes sense. Boo cold.

Doodling in Math Class videos: http://vihart.com/doodling

Washington’s Blog strives to provide real-time, well-researched and actionable information.  George – the head writer at Washington’s Blog – is a busy professional and a former adjunct professor.

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What determines which Middle Eastern or North African (MENA) countries will face revolt?

On February 3rd, the Economist came up with a list of “vulnerable” countries based upon the amount of democracy, corruption and press freedom:

Unemployment

But the Economist index doesn’t take unemployment into account unemployment.

As Alternet notes:

Arab Labour Organisation (ALO) figures show that Arab countries have among the highest unemployment rates in the world — an average of 14.5 percent in fiscal year 2007/08 compared with the international average of 5.7 percent. The rates may even be higher if one accepts unofficial estimates.

Global risk specialist Mi2g notes:

There are a lot of “orphans” and most are young – 65 percent of the population of the Arab League is under the age of 30. Youth unemployment rates are exorbitantly high – as high as 75 percent in some countries like Algeria. While the informal economy provides partial compensation, this does not provide security; the Jasmine Revolution was triggered by the self-immolation of a young man, Mohamed Bouazizi, unemployed after police confiscated his wheelbarrow, used to make ends meet by selling fruits and vegetables.

On February 2nd, Nomura published a report written by Steven Cook of the Council on Foreign Relations, arguing that youth unemployment and underemployment – along with a large proportion of youth – are primary factors driving revolt in the Middle East:

In both Tunisia and Egypt factors were at play which are also to be found in other economies in the region, notably:–An autocratic and corrupt regime [and] A significant―youth bulge and related unemployment and under-employment….

In other words, when there alot of young, unemployed (or under-employed) people, they might revolt.

Here are statistics from Nomura showing the percentage of youth under 15 years old and median age in years in the Middle East and Northern Africa:

Last fall I was listening to NPR’s On The Media podcast: Photojournalism and Foreclosure which opened my eyes to the genre.

…And one of the things that they left were hundreds of these karate trophies that apparently a son had won.

And what was startling to him is that he realized they detached all of the nameplates that listed first place, second place, third place so that he had at least some token of his accomplishment. And that back story fleshes that photograph out….

A couple of the photographers featured in the segment were recently linked to over at Collateral Vision and they caught my attention. A bit surreal to go through. It’s not always about the numbers.