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Reinko
328 Comments
Is Bernanke Hinting Something About the Fed's Rate Plans?
At the end of your linked file we have:
This act re-creates the reserve balances that were extinguished on the front leg of the transaction.
You can find it in the one last paragraph, for me this implies that the EXACT value at the end is the same as in the front leg stuff.
In short: It is on banking books where mark to market does not take place very often.
Here is the link again:
www.newyorkfed.org/abo...
Is Bernanke Hinting Something About the Fed's Rate Plans?
I did read the file from your link, but it offers no proof whatsoever that pledged collateral is marked to market value on a daily basis.
If you have some proof I would like that!
All I see that there is some 'haircut' applied, but again the main problem with the primary dealer stuff is that the FED does not make the price for the collateral pledged.
Let me quote from your link:
The collateral pledged by dealers towards the repo has a “haircut” applied, which means they are valued at slightly less than market value. This haircut reflects the underlying risk of the collateral and protects the Fed against a change in its value. Haircuts are therefore specific to classes of collateral. For example, a U.S. Treasury bill might have one haircut rate, while an agency coupon might have a different haircut.
Comment: Haircuts are only a few percent while lots of that mortgage backed securities are just impossible to value because the origins cannot be traced. Therefore most of that MBS can at most be 70 cents on the dollar and in the future it will be worse...
Is Bernanke Hinting Something About the Fed's Rate Plans?
It might very well be that the third party prices the collateral and that it is marked to market value on a daily basis, but the fact that the FED does not put a price on the offered collateral is strange.
Thanks for the link, I have to admit that I still did not flea through the New York FED where a lot of this stuff takes place.
But given the sheer size of the programs, would some significant mark to market from pleged collateral not make the news?
I have never observed such news.
For the time being I do not buy it that the pleged collateral is really worth what it says, because if it truly had such a value you could sell it on the markets so why take the trouble and get treasuries instead? Isn't the official goal to 'provide liquidity'?
When the pleged collateral would truly be that value, exchange with treasuries would not bring more liquidity... Lots of MSB securities simply are not worth their AAA ratings, this is a fact well known.
_________________
To Kingofithaki:
Sorry I was not entirely correct, the mentioned 10 trillion is based on information I have from the Case Schiller index folks but this also includes some (but not all) commercial real estate.
I gave not the correct information, sorry about that.
But if you compare median family income to median housing value over the period 1996 to 2006 you arrive at the staggering conclusion that there could be over 50% of air in the top of the housing market.
And you say there are 11 trillion in house loans outstanding?
Well if you believe the Federal Reserve Z1 detail it is true, link:
www.federalreserve.gov...
It says: Mortgages at 10610.6 billion US$. (Or 11 trillion.)
It also says Federal debt standing at 5244.5 billion.....
Do you believe the total Federal debt is just 5 trillion?
And why not take a look at the total of debt the US financial sector has? It is 15945.7 billion US$ so that sector alone has over one gross domestic product of debt on herself.
This year alone the entire US economy will pick up so much new debt that this is about 20 to 25% of the gross domestic product; this new debt is needed to finance only 1% of GDP growth...
Not a country to invest in if you would ask me.
Preparing for Bear Stearns II?
It is mostly to blame on Alan Greenspan but why blame it on a mentally handicapped person? Alan was the one who brought oceans and oceans of liquidity to the markets, one of the big problems right now is that we have so much non productive money ramming around. Inside the financial institutions lots of that non productive money is already vaporized but there are still countless billions out there bringing nothing but trouble like high oil and commodity prices.
Is Bernanke Hinting Something About the Fed's Rate Plans?
In the link under the column 'non borrowed reserves' you see a minus 124 billion number, for years on a row the real reserves were about plus 40 billion so the FED has about 165 billion in 'grade investment' collateral.
This is also one of the ways to avoid down writings; when it is temporary gone as collateral and is on the balances of the FED, it is not marked to market value.
Conclusion: In reality lots of banks have to be under water when it comes to their reserves, without new capital the tax payer will likely pay the bill over and over again.
Is Bernanke Hinting Something About the Fed's Rate Plans?
The notion of the Fed being the lender of the last resort has helped US stocks and the US dollar recover.
And to Lex: Right now the FED has five programs of 'providing liquidity' to the markets, the total effect on de despository institutions (the commercial banks, not the investment banks) can be seen in the FED h3 release.
Look in the column 'non borrowed reserves', those are the real reserves of the commercial banks. Link:
www.federalreserve.gov.../
You are right with your 'we'll take you MBS crap in exchange for treasuries' but that is only the program for the primary (Federal bond) dealers.
In practice lots of that pleged collateral is worth only 70 cents on the dollar, stuff like that comes from the so called 'banking books' where mark to market value is not done very often.
(Banks have market books and bank books.)
So it is only a matter of time, the down writings will continue for a long long time because some easy calculations yield that there could be up to 10 trillion in US family home equity vaporize.
If from that loss only 20% makes it to the banking books we are looking at 2000 billion in down writings related to family housing only.
And what the value is all that collaterized debt obligation stuff is, nobody knows but it is still often 'investment grade AAA' rated and thus acceptable for the FED to take as collateral.
In case you still think the FED has it all under control because they understand the situation: At the end of 2006 Bernanke stated that the high housing prices were just a mere reflection of a strong US economy...
Is There Really an Inflation Conundrum?
It is over 50 trillion in direct debt (so not included future obligations for Social Security and so), this debt includes consumer debt, mortgates, HELOC, car loans, State and Federal debt and so on and so on.
Raising just 1% from 2% to 3% will drive interest costs up for most of that 50 trillion of debt. And thus 500 billion US$ in yearly interest costs.....
But there is hope glooming on the horizon: At the Federal Reserve website I found a line of credit that is indeed declining (anyway it looks like it is declining). It is in the g20 file:
www.federalreserve.gov.../
Now we only wait for the rest of the debt to unwind...
Fannie and Freddie: Let’s Call the Whole Thing Off
Same thing for the bond insurers; also a nutty business model in a price driven competition environment.
It was only waiting until the thing blew up, it was a long wait but I am very satisfied to see my insights coming out in detail...
Defending the Market's Maginot Line
You missed a little detail in the Maginot Line; with just 30 or 40 points more down on the S&P index we are looking at a decade flat for the first time in history.....
Until now all one decade further points have always been upwards, but just another 40 points in S&P decline will finally ring some message home in those weird weird bull heads.
(By the way, I did not find this S&P detail myself, honors go to Barry)
Today's Payrolls Number - How Bad Will It Be?
I myself stopped trading on the non farm payrolls because I once made a yearlong list and wrote down the reported number and the revisions from previous reported numbers.
The conclusion was: the reported figures are not reliable, more often than not it is later downward revised.
On the other hand, when you use the 8 variable from above, you could use a few to make regression models. It would be a lot of work for only a once a month event but if the regression model(s) are relatively good it might pay off.
While Iran Threat Keeps Oil Elevated, U.S. Stocks and Dollar Slip
Finally OPEC is talking some sense and we must not forget that the latest time the Iranians went on an agressive war was somewhere in the 19th century...
Until now there is no quantum of proof that the Iranians are indeed building nuclear weapons, I follow this for years and there is not one quantum of proof.
There is only stupid talk by stupid generals.
Beside this many years ago I explained to the Iranians how to build bunkers that could withstand the US bunker busters.
Lately the USA had a brand new model of far bigger bunker busters but in case the Iranians have followed my bunker building advices the new bunker busters are not a real threat.
The trick is very simple: Since bunker busters are very 'needle like' shaped all you have to do is destabilize the tip of the weapon at impact.
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On the paragraph 'US Manufacturing Improves':
In the first place the reported 50.2 in some vague statistic falls inside the white noise range, that means it is not statistical significant.
In the second place, it is related to exports so it has nothing to do with local USA demand.
When the US$ declines it is rather logical exports climb...
US Dollar: Back to the Drawing Board
But for months on a row I am looking at a ECB that after every meeting tells that consumer inflation is anchored. They never offer any kind of proof for that statement (in fact it is not true at all, most labor unions keep an eagle eye on inflation).
The whole problem is: The ECB likely truly thinks that inflation is anchored...
Beside this there is the problem of operette central banks like those of France and Italy, it would be better to kick them out of the Euro zone and give them their old strong currencies back. Yet in the meantime this is not possible and we have to live with these mental dwarfs.
So lets hope the ECB will raise at least 25 basis point at least one time, I have learned to be humble by now...
Interdependence Key Factor in Financial System Stability
A very interesting part of the BIS speak was, quote:
The BIS said that in the early part of this decade, central banks had failed to set interest rates high enough to restrain an unsustainable credit boom.
This is the most clear signal until now against the jokes of Alan Greenspan, but we must not forget the ECB hang low too with the interest rates although M3 money growth was not a bad as in the USA. For me it is utterly strange that no central banker spoke out during those long lost years, nobody said they should lock Alan up in jail.
Another quote:
And it warned that while the U.S. dollar's depreciation against other major currencies has so far been "remarkably orderly," that might not continue to be the case. "Foreign investors in U.S. dollar assets have seen big losses," it said. "While unlikely ... a sudden rush for the exits cannot be ruled out completely."
Comment: Indeed when you read the TICS data month in month out you understand there is a large pool of sucker investors in the world that have more money than brains. Why buy US treasuries when the coupon and maturing can only be paid by the selling of more treasuries?????
Isn't that known as a Ponzi scheme?
Think Inflation in the U.S. Is Bad? Listen Up
And even now lots of them would like to keep the peg in place while commen sense would be to peg it against a basket of currencies.
But if they are too stupid to understand elementary economical reasoning, let the inflation learn them elementary economics!
The peg was stupid in the first place...
Bill Gross To 'President' Obama: Double The Deficit
In the year 2005 American home owners took about 750 billion from their home equity but the economy began smelling sour in 2006 when home prices began to decline.
So another 500 billion is far not enough, therefore my proposal is:
Each and every US citizen one million US$ every year...