Posts filed under “Think Tank”

An ECB jab at the Fed

The euro has lifted back to near the 1.40 level vs the US$ after ECB member Weber basically said their benchmark rate will not go any lower, “the ECB governing council has used the room for rate reductions that was created by waning inflation risks and a dramatic worsening of the economic situation.” On other steps they have taken, such as liquidity facilities and the buyback of covered bonds, “additional steps are not necessary at the moment.” In likely a timing coincidence but ironic that its on the same day the FOMC begins its two day meeting, he says in a jab at the Fed, “the past has shown that an overly generous provision of liquidity in global financial markets in connection with a very low level of interest rates promotes the formation of asset price bubbles.”


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Category: MacroNotes

King Report: Fleeced Patsies



For the past few weeks we have provided ample evidence, mostly via private industry data and oration, that ‘green shoots’ are just another Bernanke equivocation and Street yearning.

We also opined that requisite ‘insider’ banks have fleeced patsies for necessary capital, so market beware.

Another of our themes is that the dollar, bonds and commodities keep checking the Fed across the big game board. And in order to avoid being checkmated, the Fed would have to sacrifice stocks.

The past week or so we have argued that this ‘second derivative’ rally, which is the latest permabull/Street shill euphemism for ‘dead cat bounce’, is occurring on very poor technicals. Volume is contracting, which is contrary to the start of any bull market. And leadership is by the misfits, which is never good.

In our June 16 letter we noted that technical indicators on the DJTA were declaring that its rally had ended; and because stocks were still in a ‘weekly’ sell, the daily ‘sell’ signals took on added gravitas.

Numerous pundits noted that insider selling had reached 2007 levels as did sentiment jigginess.

And finally, if all of the above escaped one’s consciousness, Goldman CEO Lloyd Blankfein, a week and a half ago, stated that this is not a recovery, the recession will be ‘long and protracted’, and any recovery would be ‘shallow’. Astute traders snickered that Goldman now had to be short.

Ergo, there have been enough warnings to induce the prudent to lighten up and move to the sidelines.

The FOMC Communiqué will be important only if it clearly indicates a significant change in policy. Anything else is a sideshow that will produce a fleeting effect on the markets.

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Category: Think Tank

A Tale of Two Depressions

This week’s Outside the box looks at some very interesting research done by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin They give us comparisons between the Great Depression and today’s downturn. They continue to update their data from time to time, the link to their work is at I have not previously heard of, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.

This week’s OTB will print long, but it is primarily charts. Please note that I have re-arranged some of the new charts to cut down on space because of some duplications. Word count is not all that much and it reads well. I will be referring to their work in future letters as well. Have a great week!

John Mauldin, Editor
Outside the Box

A Tale of Two Depressions

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences. Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices. In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Updated Figure 1. World Industrial Output, Now vs Then (updated) Updated Figure 1. World Industrial Output, Now vs Then (updated)

Source: Eichengreen and O’Rourke (2009) and IMF.

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Category: Think Tank

Can I be a fly on the wall?

Oh to be a fly on the wall over the next two days listening to the FOMC discuss the current state of the economy, their programs in place to help jump start it and what their game plan is looking forward. But, whatever comes out of it tomorrow, keep one thing in mind. The Fed…Read More

Category: MacroNotes

Will the Return of Volatility Keep Investors on the Sidelines?

Good Evening: U.S. stocks today suffered their broadest and deepest retreat since the March lows. That this weakness in equities was confirmed by the action in other parts of the capital markets and was accompanied by rising volume and volatility levels may mean that a correction of the March-June rally is now under way. A…Read More

Category: Markets, Think Tank

Over-the-counter derivatives

Patricia White, Associate Director, Division of Research and Statistics

Over-the-counter derivatives

Before the Subcommittee on Securities, Insurance, and Investment, Committee of Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

June 22, 2009

Chairman Reed, Ranking Member Bunning, and other members of the Subcommittee, I appreciate this opportunity to provide the Federal Reserve Board’s views on the development of a new regulatory structure for the over-the-counter (OTC) derivatives market. The Board brings to this policy debate both its interest in ensuring financial stability and its role as a supervisor of banking institutions. Today, I will describe the broad objectives that the Board believes should guide policymakers as they devise the new structure and identify key elements that will support those objectives. Supervision of derivative dealers is a fundamental element of the oversight of OTC derivative markets, and I also will discuss the steps necessary to ensure these firms employ adequate risk management.

Policy Objectives

Mitigation of Systemic Risk
The events of the last two years have demonstrated the potential for difficulties in one part of the financial system to create problems in other sectors and in the macroeconomy more broadly. OTC derivatives appear to have amplified or transmitted shocks. An important objective of regulatory initiatives related to OTC derivatives is to ensure that improvements to the infrastructure supporting these products reduce the likelihood of such transmissions and make the financial system as a whole more resilient to future shocks.

Centralized clearing of standardized OTC products is a key component of efforts to mitigate such systemic risk. One method of achieving centralized clearing is to establish central counterparties, or CCPs, for OTC products. Market participants have already established several CCPs to provide clearing services for some OTC interest rate, energy, and credit derivative contracts. Regulators both in the United States and abroad are seeking to speed the development of new CCPs and to broaden the product line of existing CCPs.

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Category: Derivatives, Federal Reserve, Think Tank

FOMC – Economy less worse but what will they say on inflation?

While still finishing up almost .03 for the week ended Sunday, AAA said the average price of a gallon of unleaded gasoline fell Sunday for the first time since April 28th, a 53 day streak without a drop. At $2.69, it is up .76 since March 18th, the day the FOMC announced they were going…Read More

Category: MacroNotes

MBA/Higher interest rates=lower mortage originations

After the note I just sent on the Fed, the MBA said that after raising its forecast for mortgage originations by over $800b in March after the Fed’s QE plan and the subsequent decline in interest rates, they are cutting its ’09 est by $700b. 88% of the cut is due to refi’s as the…Read More

Category: MacroNotes

Over-the-Counter Derivatives: Modernizing Oversight

Here are my prepared remarks for the Senate Banking Committee later today.  The hearing starts at 15:00 in Room 538 DSOB (Dirkson Senate Office Building).   Drinks and poetry readings at Kelly’s Irish Times afterward.  — Chris

Over-the-Counter Derivatives: Modernizing Oversight to Increase Transparency and Reduce Risks

Statement by Christopher Whalen

Committee on Banking, Housing and Urban Affairs

Subcommittee on Securities, Insurance, and Investment

United States Senate

June 22, 2009

Chairman Reed,  Senator Bunning, Members of the Committee:

Thank you for requesting my testimony today regarding the operation and regulation of over-the-counter or “OTC” derivatives markets.  My name is Christopher Whalen and I live in the State of New York.[1] I work in the financial community as an analyst and a principal of a firm that rates the performance of commercial banks.  I previously appeared before the full Committee in March of this year to discuss regulatory reform.

First let me make a couple of points for the Committee on how to think about OTC derivatives.  Then I will answer your questions in summary form.  Finally, I provide some additional sources and references to help you in your deliberations.

1)          Defining OTC Asset Classes:

When you think about OTC derivatives, you must include both conventional interest rate and currency swap contracts, single name credit default swap or “CDS” contracts, and the panoply of specialized, customized gaming contracts for everything and anything else that can be described, from the weather to sports events to shifting specific types of risk exposure from one unit of AIG to another.  You must also include the family of complex structured financial instruments such as mortgage securitizations and collateralized debt obligations or “CDOs,” for these too are OTC “derivatives” that purport to derive their “value” from another asset or instrument.

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Category: Bailouts, Derivatives, Think Tank

Brewster’s Millions (Billions)

With the crowded reflation trade showing signs of fatigue, notwithstanding the highest close in Chinese stocks today since July, the FOMC meets for a 2 day meeting and their commentary on the QE side of their monetary policy will either reignite it or further its rest. Will the FOMC follow thru with their existing programs…Read More

Category: MacroNotes