Posts filed under “Think Tank”
Letter from Charles McMillan, 2009 President, National Association of REALTORS urging an 18 month moratorium on the Home Valuation Code of Conduct (HVCC) to Andrew Cuomo, NY Attorney General and James B. Lockhart III, Federal Housing Finance Agency:
Good Evening: In the wake of yesterday’s beating, U.S. stocks were mostly unmoved today by a series of new stories and economic releases. Much of today’s trading desk debates centered on the current Fed meeting and the exit strategies from quantitative easing the FOMC may or may not announce tomorrow. Given the uncertainty ahead of…Read More
May Existing Home Sales, a measure of closings where the contracts were likely signed a few months prior so thus doesn’t reflect the rise in mortgage rates, totaled 4.77mm annualized, 50k less than expected but is up from 4.66mm in April which was revised lower by 20k. The NAR said about 33% of the sales…Read More
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…Read More
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.
Category: Think Tank
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 http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, 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
- 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)
Source: Eichengreen and O’Rourke (2009) and IMF.
Category: Think Tank
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
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
Patricia White, Associate Director, Division of Research and Statistics
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.
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.