Romeo Fayette

Erosion in the M2:M1 Relationship and the Burgeoning Eurodollar Bubble

Technically, LIBOR is artifically low because of Fed intervention (via Term Auction Facility, TAF), as celebrated by the SF Fed in this white paper: www.frbsf.org/publicat...

If you're simply asking why the spread mechanically widened, 3mo TBills went from 14bp yields in Sept to 5bps of recently.


On Nov 10 06:01 PM TucsonSpike wrote:

> Related to this the TED spread reversed course and started rising
> middle of September, while the LIBOR has stayed flat or even dropped
> a little.
>
> Does anyone have a theory on why/how this can be happening?

Erosion in the M2:M1 Relationship and the Burgeoning Eurodollar Bubble

First, by "saving," I mean trimming debts and obligations.
The average Joe will save money at 1% because the average Joe hasn't had (and can't forsee) a pay increase. Either that, or he's one of 17.5% of Americans that are unemployed according to "real unemployment," which counts those discouraged from job-seeking as unemployed... unlike the official gov't data. The average Joe has a mortgage that's underwater on top of that. There's no suitable alternative for the average Joe, because as far as his world is concerned, there's deflation all around.
When the risk-free return (T-bills) are yielding under 10bps, the average Joe's savings account suffers the consequence while a dirty bank borrows from the discount window at 50 bps or borrows from Joe's savings account at 100 bps, then can get a risk free return on 2yr treasuries yielding 143 bps. Why would you lend if you're a bank? Leverage up for that 43 bp risk free spread.
Not everyone's comfortable with investment risk. The alternative to a 1% savings account is cash under the mattress. That gets no yield and it's literally all your eggs in one basket--imagine a fire taking your net worth to zero?!


On Nov 10 12:40 PM ryanclarke wrote:

> The author wrote ,"GDP isn't swelling. We have to start saving."
>
>
> My response is, "why should average U.S. Joe save money and stick
> it in a savings account at a bank when the bank pays an interest
> rate of about 1% ? "

Erosion in the M2:M1 Relationship and the Burgeoning Eurodollar Bubble

I have referenced Shadow Gov't Stats in a prior article, but I use it sparingly (and with disclaimer) since their data are mere projections and estimates using an alternative formula.
An M3 calculation requires a compilation of a LOT of data. I wouldn't hang my hat on SGS's having privy to enough information to come up with accurate numbers on a timely basis. That being said, it's a wonderful website that I turn to often for personal knowledge... and I suppose it's as credible as the actual government's data.


On Nov 10 02:55 PM Kalpa wrote:

> Romeo
> Thanks for your article. Do you discredit the two entity's which
> now chart M3 or why do you not mention them?
> I wrote this recently:
> seekingalpha.com/artic.... <br/>I'd
> be curious to hear your comments.

Mike Shedlock has a hard time seeing why markets went giddy over today's Q3 GDP data: "The government sloshed trillions around and yet disposable income is down, jobs are horrendously weak, and the only reason GDP rose is wasteful government spending, cash-for-clunkers and extremely unaffordable housing tax credits whose effect is soon going to start diminishing."

Earnings beats are positive, but why do you think those stocks got wrecked thereafter? On the day of earnings, these stocks spike to a higher price level to reflect the higher valuation, but the bid disappears thereafter. In talking to traders, I'm hearing that nobody wants to buy into 4q.
Fact of the matter is, revenues are still off yoy. There comes a profit-growth-sustaina... issue when revenues are down. You can cut costs to maintain a profit margin, but without revenue growth, how do you grow profits? The even more devastating truth is: without that revenue growth, how do you grow as a greater economy.
Look at growth beyon high water marks like 2007.


On Oct 29 06:12 PM Niner wrote:

> There are people that love wallowing in gloom and dispair. They just
> can't stand the thought that this recession will end and they'll
> have to find something else to whine about. Look at the earnings
> beats. The majority have been not just "less worse than expected"
> but the companies actually made more money than consensus some have
> had increases in revenue too. I quit counting at 35 beats on positive
> earnings this morning before the market opened. Companies are going
> to start spending the money they are making. New hires, new equipment,
> mergers and acquisitions the recovery is on the way. The only thing
> I can figure is the naysayers are short. Plus if one could take a
> head count, the number of Bears would far out number the Bulls on
> this site!

The "too-big-to-fail" plan coming out of Congress would restrict government bailouts and have any rescues or unwinding of firms paid for by its rivals with more than $10B in assets. The proposed legislation - reached through a deal between the Treasury and Rep. Barney Frank - largely shifts bailout costs from taxpayers to the financial industry. About 120 banks fit the $10B-or-larger mold.

Can anyone say systemic risk?
I really have avoided this debate because I feel like it's a double edged sword to limit growth potential in a capitalist society (i.e. the TBTF qualm has no place in Capitalism)... but then again, we're learning about all of Capitalism's shotcomings every day now.
My first reaction as to how we can fix TBTF without trampling that capitalistic drive to be the biggest and the best: tax the $hit out of firms the bigger they get. Have an incremental tax grid by industry. If you cross certain threshholds on that grid, you're taxed at a higher rate. Those incrementally higher dollars should go to a TBTF fund like the FDIC.
Again, my first reaction; I haven't thought it through.

When Will the Dollar Snap-Back?

You know, it's funny because I refrained (as best I could) from bashing Fed policy. I wrote an article recently about all the emergency measures our govt has taken to try and keep the US economic Ponzi scheme going... after Disinflation, ZIRP, QE and Dollar Devaluing, we're left with what? about a quarter's worth of inventory restocking to squeeze some GDP from--i.e. 4q09.
"Strong Dollar policy" is political rhetoric. The dollar should be allowed to oscillate, as should many other economic indicators. Running Monetary Policy by focusing on isolated targets--like a strong dollar, inflation, or employment alone--is too static and frankly lazy. But that's the problem with having economists run the economy; their models are static, uncreative, and impractical. If economists are the black, then MBAs are the white, just so you know that neither extreme gets my stamp of approval.
That's a long-winded lead-up to my response for you: the govt knows that devaluing the USD is our last line of defense. That being said, you know how fuc#ed we must be for them to pull out that kind of weapon-of-mass-destruc...


On Oct 17 10:19 PM Paul from California wrote:

> Didn't anybody read the excellent article in the WSJ by David Malpass
> on October 8th? The title was "Devaluing Currency has never led to
> Prosperity." The title summaries it all.

Why Natural Gas ETF Has Resumed Its Climb

There are seasonal adjustments to data to control for that. Actually, seasonal adjustments are set in place to control more for the trough (summer) months than they are for the peak winter months. Data smoothing.
When you think about it, the bottom up earnings forcasts for Nat Gas firms take seasonal demand fluctuations into consideration. Therefore, full year and quarterly earnings are appropriately gagued.
Top-down, it's all relative. Producers anticipate the seasonal demand and meet it with appropriate supply. (Same story for replacements like oil.) Further smoothing the price performance, downstream Nat Gas firms (end-buyers) hedge with forward contracts and options to try and protect against supply/demand malfunctions that could result from seasonal ebbs/flows.
I really don't like the "it's going to be a long, cold winter = high demand = higher price" argument. Do you really think Nat Gas firms don't read their farmer's almanacs and watch the weather? Give me a better basis than that...

Oct 04 08:27 AM stocknerd wrote:

> Can we say bottom? Winter is coming, demand goes up.

Research in Motion: Reports of Sales Death Are Greatly Exaggerated

There's no longer that good news=good news & bad news=good news magic spell over the market. I like RIMM right now for a few reasons. They're a great relative strength play whether or not the market goes to hell again. Having taken their licks with a very conservative outlook, they've set themselves up to only surprise. The fundamentals are still very cushy and attractive.
Fact of the matter is, Balsillie hasn't been caught up in the hype. What a difference we've seen between the companies' earnings from August and those from September. The hype is waning and I think we're going to see a lot of 4q misses or downward forcast revisions from those early reporters. Not to mention that GS's downgrade of RIMM really stuck it to the stock yesterday. GS will [re]upgrade RIMM soon enough; just in time for itself to buy low then sell it high.
Ockham-- I wouldn't use PEs as any guide right now. 09 was too turbulant, I would use a Schiller-like 3 or 5 year moving average.

Apollo REIT IPO to Target Stressed Commercial Real Estate Market

Has anyone noticed what bunk this IPO is?
ARI is heading full-steam into the business that no bank will touch: fixed, long-term loan underwriting. They're originating and buying the mortgages themselves. They're toast unless the Fed can keep rates this low for another 30 years.
The prospectus I obtained last week from the roadshow made no mention of interest rate risk. There could've been a revision since, I suppose? (Actually, the SEC doesn't require a proper risk disclosure on prospectuses; but it's a material disclosure nonetheless.)
It takes a lot more cash and a lot more APIs to carry US CRE through the 2011-13 debt roll and ARM nightmare. No portfolio selection methodology no [strictly urban] geographical diversification will save API from a systemic shock. I hope more firms can syndicate to supplement their cause. From the roadshow I got the impression that API's an implicit interest of the government, so we'll see.
They're aiming at quality and "senior performing CMBS" etc, but I'd bet my reputation that at least 20% of their portfolio ends up in mezz.

The Good Ol' DJIA 1930 vs 2009 Overlay

Graham, Jason & Michael--
I'd love to see one of you do a post about downside triggers (Swine Flu, Ireland/Latvia/Spain, trade-war, Iran, etc.). It'd be great to float your ideas then open it to a forum discussion.

On Sep 22 11:56 AM Jason Tillberg wrote:

> Yet nearly all Governments have used it's citizens taxing ability
> to backstop such collapses. I am looking toward Ireland and Latvia
> for the bank collapse.. like Iceland.

The Epicurean Dealmaker just says Mao: Time to let a hundred investment banks bloom. It's time for deconsolidation of finance; the more nodes in the network, the more robust it is, with a smaller likelihood of catastrophe.

Derryl,
To play devil's advocate, allow me to pose a few questions for the sake of intelligent conversation:
The objective of free enterprise is growth. Many smaller banks will all vie for growth y/y, m/m, etc. Growth will come quite easily and quite organically at first. The small banks don't even need to compete directly with one another for business if they're geographically segregated; nevertheless, a few will inevitably reach that point where they're pushing the envelope of becoming "bigger" banks.
How do you prevent that? You can't contain that small bank within a region/county/city if you want to accomodate growth. You can't forbid the best in breed from bringing its superior business model into new markets. Ideals like "economies of scale" and "synergies" are a business' natural want. Businesses & their employees burn-out when you elimiate that growth incentive by capping potential.
Further, limiting enterprise to a "small" entity landscape is a good way of stripping an economy of any long term real growth potential.


On Sep 22 08:44 PM derryl wrote:

> I pretty much always prefer free enterprise to oligopoly. Many smaller
> banks, rather than a few big ones, would be more likely to tailor
> products to their local clientele. And they would compete for customers,
> The US has plenty of banks but they are trying to compete against
> the Wall St leviathans who presently enjoy free money from the Fed.
> How do you compete against "free"?

Citigroup (C) analysts aren't mincing words about the rally in junk bonds, where yields have narrowed by 80 basis points relative to benchmark in two weeks: "This is starting to become a bit ridiculous."

Good spot, I actually hadn't seen that yet. It's important to keep your eye on Gross--whether you agree or not--because he does swing a large club.
That being said, I can't post an SA comment without a bit of sarcasm, so I'll add this: Bill Gross encourages Treasury buying, no way!


On Sep 21 03:55 PM ETFdesk.com wrote:

> Seems like Bill Gross is also seconding that opinion: He's advising
> to sell risk : equitues, corp and HY bonds and buy Treasuries: see
> article..
>
> www.etfdesk.com/headli...

Citigroup (C) analysts aren't mincing words about the rally in junk bonds, where yields have narrowed by 80 basis points relative to benchmark in two weeks: "This is starting to become a bit ridiculous."

Shameless plug for my own article, but certainly an unnoticed engine for this latest junk rally: "Sept 15: IRS has empowered servicers of securitized mortgages to modify loans starting Wednesday. The new legislation provides for modifications of loan terms--even in those mortgages that are performing--as long as there is reasonable cause to justify to concessions."
Very important, seekingalpha.com/artic...

Where Does the Dollar Go from Here?

Deflation in a debt based system loaded with debt means that the debt gets relatively larger. From there, the system is faced with two options:
1. Inflate to reign-in the relative cost of that debt
2. forgive the debt/renegotiate/restr... loans/make concessions
Neither are loaded with much consequence as long as you have an endogenous economy. But, we of course participate in a globalized system. We operate in a severe current account deficit. Because we're so dependant on financing from foreign sources, our global standing is under attack. Not only that, but we're also at the point where we can't even function autonomously if we were to turn protectionist & isolating ourselves (however unrealistic of an option anyway). From a natural resources point of view (e.g. oil), from a liabilities point of view (e.g. Social Security), from a banking point of view (e.g. I'm not sure, but I doubt our banks can finance their domestic obligations without foreign cash flows), I think the US can't stand on its own two legs.

On Sep 16 11:36 PM Jason Tillberg wrote:

> Credit destruction will bring back a strong dollar. There's still
> tremendous amount of debt outstanding and there are many deflationary
> forces still.
>
> -Wages not rising and wont
> -Rents unlikely to rise anytime soon, especially if incomes are not
> rising
> -Economic recovery will be anemic in my opinion
>
> Deflation in a debt based money system loaded with debt will mean
> dollars should be in demand as that's whats needed to pay off debt.
>
>
> Had government allowed debt to evaporate instead of backing with
> US taxpayer (our kids and grandkids) , the interest on that debt
> will continue to be a major drag on the economy.
>
> All that has already been done and we still have -1.7 inflation (deflation)
> ..
>
> ... Who knows what's under the table with respect to the folks who
> want a new world order financial system to replace the dollar. Regardless,
> the debt is still there and bankers want it paid back...with interest!

Where Does the Dollar Go from Here?

Agreed. However, the US govt allowing devaluation is conceding that the situation is out of anyone's control. That's the equivalent of doing nothing; devaluation is hardly a strategy. Not to mention the whole "rock and a hard place" argument: I think it's clear that the US chose inflation over deflation since March, favoring a battered global standing to utter insolvency. Now we're seeing the flight of capital associated with an inflated currency, so the inflation stunt is up.
My, oh my, we left the Greenspan era with a comfy, cozy feeling of security: we thought a central bank could control the economy like moving pieces on a chess-board. Now, it's like we're stuck with nothing in defense of our king.


On Sep 16 03:11 PM Donald Ingram wrote:

>
> ? = Devaluation. Plain &amp; Simple.