Today's Fed Decision

silverharp

poor Ben is having problems managing the bond market




good to see Mankiw is scraching his head

http://gregmankiw.blogspot.com/2009/05/yield-curve-is-steep.html

This graph shows the difference between the 10-year and 2-year yields on Treasuries. In general, a steep yield curve--that is, a high value of this variable--is a positive indicator of future economic growth. In many ways, however, this is an unusual downturn, so it is not entirely clear to what extent historical relationships are a useful guide going forward.

Économiste Monétaire

Aye, U.S. 30 year fixed mortgage rates look set to go over 5% soon.

http://www.freddiemac.com/pmms/release.html?week=22&year=2009&display=release

One consistent set of complaints is that the Fed is random with its treasury purchases, there's no real plan for implementing QE and they're nowhere to be found when there's a lot of issuance, like the 7 year yesterday.

silverharp

Économiste Monétaire wrote: »

Aye, U.S. 30 year fixed mortgage rates look set to go over 5% soon.

http://www.freddiemac.com/pmms/release.html?week=22&year=2009&display=release

One consistent set of complaints is that the Fed is random with its treasury purchases, there's no real plan for implementing QE and they're nowhere to be found when there's a lot of issuance, like the 7 year yesterday.

one explanation and its only a guess is that they only intervene when they have a chance of success , if they feel that the intervention would fail they are better leaving things alone.
there will be gurgling sound in the mortgage market if they cant cap rates. It is still my longer term assertion that they will fail

Économiste Monétaire

First it looked as though they would defend the 10 year at 3%, then 3.3% and now people are questioning if it goes to 4%. Someone from the Fed is saying that their goal was never to set rates with the purchase of Agency-backed MBS and Treasuries... Wasn't this one of Ben B's 'green shoots'?

Jaysus, that GDP revision is dismal.

ionix5891

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5402260/Bond-markets-defy-Fed-as-Treasury-yields-spike.html

silverharp

Économiste Monétaire wrote: »

First it looked as though they would defend the 10 year at 3%, then 3.3% and now people are questioning if it goes to 4%. Someone from the Fed is saying that their goal was never to set rates with the purchase of Agency-backed MBS and Treasuries... Wasn't this one of Ben B's 'green shoots'?

here is what they said in March.
http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.




As its Friday

Économiste Monétaire

silverharp wrote: »

I've never bought into this concept, its akin to trying to heat your house by putting a lighter against the thermometer. How someone could talk in terms of excess savings when by one measure there is $30T of excess debt in the US not backed by asset values is beyond me.

Just on this earlier piece by Krugman, Niall Ferguson responds in light of rising Treasury yields, link.

silverharp wrote: »

here is what they said in March.
http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

Aye, but I remember when Bernanke was asked for specifics on the 'green shoots' he mentioned low mortgage rates and an increase in the ability to refinance.

silverharp

good article , It will be interesting to see if Krugman amends his views going forward. Fergusons 70's v 30's argument was interesting, I guess time will tell who's right on that one. I'd say enough time hasnt passed yet , the recent hubris in the markets is eerily like April 1930

[/QUOTE]
"I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.[/QUOTE]

I agree with that, its probably debatable over time if its purely new bonds or just a general reduction of time preference by Bond holders. In as much as I have analysed past credit contractions I'd advise anyone to only hold 4-6 year bonds as there is price risk beyond that and no return closer in, a fulcrum in the curve as it were.



[/QUOTE]
No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report”.[/QUOTE]

I'm still going for the deflation call on this one , I just think the private deflation trumps the Fed's ability to inflate. Niall is looking at a very short term rebound in commodities, there is no evidence yet to say this is the start of a new trend. For now I'd expect the commodities to rollover during the summer.

[/QUOTE=Économiste Monétaire]
but I remember when Bernanke was asked for specifics on the 'green shoots' he mentioned low mortgage rates and an increase in the ability to refinance.[/QUOTE]

I'm sure its key in Ben's head to keep the rates low , but it looks like they have just had their bluff called by the market. The Fed has never been able to manage the long end of the curve over time , it seems to be policy on the fly.

ionix5891

THE HORROR, Bond traders are white with terror

What's happening in bond land? The latest US govt bond auction was for $110 billion. Two years ago the average monthly bond auction total was $5 billion, $10 billion, numbers like that. The US govt finances its debt with bonds. A $2 trillion deficit means $2 trillion in new bonds needs to be issued. Approx. $200 billion a month.

Économiste Monétaire

silverharp wrote: »

good article , It will be interesting to see if Krugman amends his views going forward. Fergusons 70's v 30's argument was interesting, I guess time will tell who's right on that one. I'd say enough time hasnt passed yet , the recent hubris in the markets is eerily like April 1930

"I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.

I agree with that, its probably debatable over time if its purely new bonds or just a general reduction of time preference by Bond holders. In as much as I have analysed past credit contractions I'd advise anyone to only hold 4-6 year bonds as there is price risk beyond that and no return closer in, a fulcrum in the curve as it were.

No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report”.

I'm still going for the deflation call on this one , I just think the private deflation trumps the Fed's ability to inflate. Niall is looking at a very short term rebound in commodities, there is no evidence yet to say this is the start of a new trend. For now I'd expect the commodities to rollover during the summer.

Économiste Mon&#233 wrote: »

but I remember when Bernanke was asked for specifics on the 'green shoots' he mentioned low mortgage rates and an increase in the ability to refinance.

I'm sure its key in Ben's head to keep the rates low , but it looks like they have just had their bluff called by the market. The Fed has never been able to manage the long end of the curve over time , it seems to be policy on the fly.

The commodities rise and the drop in the dollar index over the week, gold was back in the high 960-80s, silver up sharply too, seemed to emanate from a fear over inflation. But, I get the view that consumer's won't borrow all the excess reserves to fuel (monetary) inflation, personal income and outlays release on Monday will probably show in favour of your secular deleveraging. Both arguments are appealing. The oil rise could just be an overreaction to the EIA petroleum status numbers.

Some people are viewing the increase in oil as one of the 'green shoots' along with the strong consumer confidence & sentiment indexes; existing home sales, durable goods orders, and weekly jobless claims being better than expected and Dollar LIBOR levelling out at .65%. That GDP number was still horrible, yet reaction seemed pretty mute. I can see why there's optimism, but when people are optimistic with 625k jobless claims there's error in just calling a max, ergo recovery. The inflation fear might show for indirect bids at the next 30 year auction. The Fed still has about $200bn in Treasuries left to buy.

The Euro Area looks pretty weak with the 0% inflation flash estimate, Euribor isn't going where the ECB would like:


If U.S. mortgage rates keep going up the only solution I've heard being discussed is to wipe out a proportion of the principal.

silverharp

Économiste Monétaire wrote: »

The commodities rise and the drop in the dollar index over the week, gold was back in the high 960-80s, silver up sharply too, seemed to emanate from a fear over inflation. But, I get the view that consumer's won't borrow all the excess reserves to fuel (monetary) inflation, personal income and outlays release on Monday will probably show in favour of your secular deleveraging. Both arguments are appealing. The oil rise could just be an overreaction to the EIA petroleum status numbers

From a markets point of view all I see is a crash and a rebound out of that crash , in a way the news follows the markets so you get a falling dollar as everyone gets bullish on stocks etc. . If you include mark to market assets as part of the monetary base then its deflation. What will worry the Fed is that they need rising asset markets to get the credit out the door

Économiste Monétaire wrote: »

Some people are viewing the increase in oil as one of the 'green shoots' along with the strong consumer confidence & sentiment indexes; existing home sales, durable goods orders, and weekly jobless claims being better than expected and Dollar LIBOR levelling out at .65%. That GDP number was still horrible, yet reaction seemed pretty mute. I can see why there's optimism, but when people are optimistic with 625k jobless claims there's error in just calling a max, ergo recovery. The inflation fear might show for indirect bids at the next 30 year auction. The Fed still has about $200bn in Treasuries left to buy.

I guess the positive things you mentioned can all turn on a dime. Accelerate negative credit conditions and all the good stuff goes away. I wouldnt look for any bottom until debt defaults work their way though the system.

Économiste Monétaire wrote: »

The Euro Area looks pretty weak with the 0% inflation flash estimate, Euribor isn't going where the ECB would like:

is that graph showing that market rates are rising against the administered rate?

Économiste Monétaire

silverharp wrote: »

From a markets point of view all I see is a crash and a rebound out of that crash , in a way the news follows the markets so you get a falling dollar as everyone gets bullish on stocks etc. . If you include mark to market assets as part of the monetary base then its deflation. What will worry the Fed is that they need rising asset markets to get the credit out the door

Which is why they're trying to place a bottom on the housing market so consumers will have something to leverage themselves against. Who wants to borrow all the reserves they're putting in the system to drive inflation?

silverharp wrote: »

I guess the positive things you mentioned can all turn on a dime. Accelerate negative credit conditions and all the good stuff goes away. I wouldnt look for any bottom until debt defaults work their way though the system.

I'm not saying that I've jumped on the 'green shoots' bandwagon, rather outlining some of the "leading" indicators people are fixated with. If one considers the U.S. hopes of rapid recovery to be forlorn, then Irish hopes for rapid recovery are... delusional?

silverharp wrote: »

is that graph showing that market rates are rising against the administered rate?

Aye, it's just weird that the trend is up if you consider that the ECB will supply unlimited funds at a fixed rate for 12 months come June.

silverharp

Économiste Monétaire wrote: »

Which is why they're trying to place a bottom on the housing market so consumers will have something to leverage themselves against. Who wants to borrow all the reserves they're putting in the system to drive inflation?

There is still a lot of Alt-A resets ahead, and I gather that the pipeline business was hit badly when rates were jumping around in the last couple of weeks, so it goes to show how the Fed can be made powerless if the market has other ideas.

silverharp

from the mish blog

http://4.bp.blogspot.com/_nSTO-vZpSgc/Siv54tjgl3I/AAAAAAAAGPo/7HhtUF998Q0/s1600-h/unemployment+projections.png

As noted, the Fed had a mere 10% chance the unemployment numbers get as high as the adverse scenario. The adverse scenario for 2009 has already been exceeded unless you think unemployment has peaked and is going lower over the next several months.



http://globaleconomicanalysis.blogspot.com/2009/06/optimistic-unemployment-and-housing.html

Économiste Monétaire

The magnitude of the monthly change is staying relatively constant, looking at the last 3 months. If this trend continues, you're looking at 11-12% unemployment by the end of this year :eek:. Check out some of the slides from a Krugman lecture a few days ago and the link to the O'Rourke-Eichengreen series.

Économiste Monétaire

A quick comparison of unemployment rates to previous recessions. (Grey areas indicate a recession as defined by the NBER Business Cycle Dating Committee.)

silverharp

EM, thanks for the links, a reun of at least some of the 1930's statistics is a real possibility. I was surprised recently at Krugman saying that the rising bond rates was a good sign. The one imprtantant statistic that O'Rourke-Eichengreen missed out on is the long bond rates which will increase along the lines of the 1930's


The SF Fed came out with the piece linked below, with a write up of it below. When the numbers came out of Friday there wasnt any comment about the reduction in hours.

http://www.scribd.com/doc/16224439/SF-Fed

Posted by Tyler Durden at 2:21 PM
Another refreshingly objective piece from the San Fran Fed, this time dealing with the question of whether to expect a recovery in employment; the Fed comes out with what sounds like a resounding no.

Even more dramatic, however, has been the break from past patterns in the number of workers who are involuntarily employed part-time. Numerous reports tell of workers being furloughed for a set number of days in a month or asked to work fewer hours each day.These anecdotes are supported by the monthly data. Indeed, the number of workers employed part-time against their wishes is at historical highs.The fraction of the labor force that reports working part-time for economic reasons has increased from 3.0% in December 2007 to 5.8% in April 2009.This increase has been broad-based, occurring in a wide range of occupations. Moreover, the reduction in hours has not been trivial, with more than half of such workers experiencing reductions of five hours per week or more.

What does all this mean for the labor market? We combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization. We plot this measure in Figure 3, which shows that the labor market has considerably more slackthan the official unemployment rate indicates.The figure extends this labor underutilization measure using the Blue Chip consensus forecast for the unemployment rate as a benchmark and then adding a share of involuntary part-time workers based on the proportion of workers in that category to the unemployed during the current recession. This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-WorldWar II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.

Économiste Monétaire

Thanks for the link, good piece. I was watching some coverage of the SF Fed article, it seemed to dampen the bullish mood. Not good news for private consumption going forward and individual debt delinquencies.

eamonnm79

Économiste Monétaire wrote: »

The magnitude of the monthly change is staying relatively constant, looking at the last 3 months. If this trend continues, you're looking at 11-12% unemployment by the end of this year :eek:. Check out some of the slides from a Krugman lecture a few days ago and the link to the O'Rourke-Eichengreen series.

Also bear this in mind.
http://www.ritholtz.com/blog/wp-content/uploads/2009/06/birthdeathgdp1.jpg

source bloomberg:eek:

oh yeah and this too.
http://www.mybudget360.com/real-unemployment-situation-approximately-26000000-unemployed-or-underemployed-job-growth-in-10-per-hour-jobs-while-20-per-hour-jobs-disappear/

Économiste Monétaire

Mankiw on deflation.

Krugman on the illusion of good housing start numbers and UI claims.

silverharp

Économiste Monétaire wrote: »

Mankiw on deflation.

He seems a bit complacent?, even if you end up with a "benign" Japanese 90's experience, they had a severe deflation if you add asset prices in.
I have to say the green shoots are looking a bit weedy at the moment. Credit card write offs, State budgets being blown out of the water, freight indexes are awful. 3 more banks closed on Friday.

Économiste Monétaire

silverharp wrote: »

He seems a bit complacent?, even if you end up with a "benign" Japanese 90's experience, they had a severe deflation if you add asset prices in.
I have to say the green shoots are looking a bit weedy at the moment. Credit card write offs, State budgets being blown out of the water, freight indexes are awful. 3 more banks closed on Friday.

You could say he's being slightly short-sighted on the overall inflation-deflation debate, monetary-contraction-induced-deflation takes quite a while to set in. On the green shoots, as you said before, the areas people are focusing on can change quite acutely every week. I like Mish's piece on the Flow of Funds data.

silverharp

Économiste Monétaire wrote: »

You could say he's being slightly short-sighted on the overall inflation-deflation debate, monetary-contraction-induced-deflation takes quite a while to set in. On the green shoots, as you said before, the areas people are focusing on can change quite acutely every week. I like Mish's piece on the Flow of Funds data.

There seems to be a turn happening in the credit markets , I've not really looked at Flow of Funds Data before but would tie in for sure.
If you compare 07 with 29 we are roughly at 20 months since the high in the stock markets, there seems to be the start of a liquidity shortage at the short end of the curve similar to what occured in mid 31.

Économiste Monétaire

Bernanke took quite a hammering on the Hill today. Here's the Fed's statement, released today, after the FOMC meeting:

The Federal Reserve on Thursday announced extensions of and modifications to a number of its liquidity programs. Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time. As a consequence, to promote financial stability and support the flow of credit to households and businesses, the Federal Reserve is extending a number of facilities through early 2010. At the same time, in light of the improvement in financial conditions and reduced usage of some facilities, the Federal Reserve is trimming the size and changing the terms of some facilities.

Specifically, the Board of Governors approved extension through February 1, 2010, of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The expiration date for the Term Asset-Backed Securities Loan Facility (TALF) currently remains set at December 31, 2009. The Term Auction Facility (TAF) does not have a fixed expiration date.

The extension of the TSLF also required the approval of the Federal Open Market Committee (FOMC), as that facility is established under the joint authority of the Board and the FOMC.

In addition, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to February 1. The Federal Reserve action to extend the swap lines was taken by the FOMC.

The Federal Reserve also announced changes to certain liquidity programs in light of the improvement in financial conditions and the associated reduction in usage of some facilities. Specifically, the Federal Reserve trimmed the size of upcoming TAF auctions, because the amount of credit extended under that facility has been well below the offered amount. In view of very weak demand at TSLF Schedule 1 auctions and TSLF Options Program auctions over recent months, auctions under these programs will be suspended. The frequency of Schedule 2 TSLF auctions will be reduced to one every four weeks and the offered amount will be reduced. The authorization for the Money Market Investor Funding Facility (MMIFF) was not extended, and an additional administrative criterion was established for use of the AMLF. If necessary in view of evolving market conditions, the Federal Reserve will increase the size of TAF auctions and resume TSLF operations that have been suspended.

The Board and the FOMC will continue to monitor closely the condition of financial markets and the need for and effectiveness of the Federal Reserve's special liquidity facilities and arrangements. Should the recent improvements in market conditions continue, the Board and the FOMC currently anticipate that a number of these facilities may not need to be extended beyond February 1. However, if financial stresses do not moderate as expected, the Board and the FOMC are prepared to extend the terms of some or all of the facilities as needed to promote financial stability and economic growth. The public will receive timely notice of planned extensions, discontinuations, or modifications of Federal Reserve programs.

TAF and Swap Lines

In recent months, conditions in wholesale funding markets have improved, and partly as a result, usage of the TAF and the dollar facilities provided by foreign central banks has declined notably. For some time, amounts bid at TAF auctions have fallen short of the amounts auctioned. In view of the decreasing need for TAF funding, the Board has reduced the amounts auctioned at the biweekly auctions of TAF funds from $150 billion to $125 billion, effective with the auction to be held on July 13. The Federal Reserve anticipates that, if market conditions continue to improve in coming months, TAF funding will be reduced gradually further.

The extension of the dollar liquidity swap arrangements through February 1 currently applies to the swap lines between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank. The extension of the foreign currency swap arrangements currently applies to the swap lines between the Federal Reserve and the Bank of England, the European Central Bank, and the Swiss National Bank. The Bank of Japan will consider extensions of the dollar liquidity swap and the foreign-currency liquidity swap arrangements with the Federal Reserve and will announce its decision following its next Monetary Policy Meeting.

TSLF and PDCF

The Federal Reserve extended the TSLF, with certain modifications, and the PDCF through February 1.

In view of the considerable progress to date in deleveraging by primary dealers and dealers' improved access to funding in the market for repurchase agreements, activity at the TSLF has fallen notably. In response, the Board and the FOMC approved certain modifications to the TSLF. In particular, TSLF auctions backed by Schedule 1 collateral (Treasury, agency debt, and agency-guaranteed mortgage-backed securities) will be suspended, effective July 1. Also, the Federal Reserve suspended the TSLF Options Program (TOP), effective with maturity of outstanding June TOP options. TSLF auctions backed by Schedule 2 collateral (Schedule 1 collateral and investment-grade corporate, municipal, mortgage-backed, and asset-backed securities) will now be conducted every four weeks, rather than every two weeks, and the total amount offered under the TSLF will be reduced to $75 billion. The Federal Reserve anticipates that the amounts auctioned under the TSLF will be scaled back further over time as permitted by market conditions. However, the Federal Reserve is prepared to resume Schedule 1 TSLF operations and TOP auctions and to increase the frequency and size of Schedule 2 auctions if warranted by evolving market conditions.

Although the amount outstanding under the PDCF is currently zero, the Board believes it appropriate to continue to provide the PDCF as a backstop liquidity facility for primary dealers in the near term, while financial market conditions remain somewhat fragile.

AMLF, CPFF, and MMIFF

The Board extended the authorizations for the AMLF and the CPFF through February 1, 2010. The authorization for the MMIFF, which expires on October 30, 2009, was not extended.

Usage of the AMLF has declined considerably as market conditions have improved. Nonetheless, in view of the continued fragility in market conditions, the Board judged it appropriate to extend the authorization for the AMLF. To help ensure that the AMLF is used for its intended purpose of providing a temporary liquidity backstop to money market mutual funds (MMMFs), the Federal Reserve established a redemption threshold whereby a MMMF would have to experience material outflows--defined as at least 5 percent of net assets in a single day or at least 10 percent of net assets within the prior five business days--before it can sell asset-backed commercial paper (ABCP) that would be eligible collateral for AMLF loans to depository institutions and bank holding companies. Any eligible ABCP purchased from a MMMF that has experienced redemptions at these thresholds could be pledged to AMLF at any time within the five business days following the date that the threshold level of redemptions was reached.

The Board similarly judged that market conditions warranted the extension of the CPFF through February 1 in order to help ensure the access of U.S. businesses to short-term funding. Interest rates posted on the CPFF are at levels that are increasingly unattractive for many borrowers as market conditions improve, and accordingly usage of the CPFF is declining fairly steadily. In these circumstances, the Board judged that modifications to the CPFF were not necessary at this time.

Given the overall improvement in market conditions and the continued availability of the AMLF and the CPFF, the Board believed that it was not necessary to extend the authorization for the MMIFF.

Just on the 12 month LTRO that was announced by the ECB in May:

silverharp wrote: »

is that graph showing that market rates are rising against the administered rate?

Économiste Monétaire wrote: »

Aye, it's just weird that the trend is up if you consider that the ECB will supply unlimited funds at a fixed rate for 12 months come June.

Yesterday the ECB auctioned €442.2405 billion in the first 12 month Longer-term Refinancing Operation (LTRO). To put that in perspective, the last 182 day LTRO auction only allocated about €36 billion back in April. The auction produced quite a large effect on 3 month Euribor, with the rate dropping to 1.145% today (being 1.224% last Friday).



Here's a graph on MROs over the last three years if anyone is interested in ECB actions:

(The red area is the difference between what the bids amounted to and what was allocated in the auctions.)

silverharp

This is a quarterly forecast: the Unemployment Rate in Q2 was higher than the "more adverse" scenario. Note also that the unemployment rate has already exceeded the peak of the "baseline scenario".

Économiste Monétaire

There will also be a continuing attrition in headline unemployment numbers by reclassifications to discouraged workers.

silverharp

Économiste Monétaire wrote: »

There will also be a continuing attrition in headline unemployment numbers by reclassifications to discouraged workers.

are you saying that the broader measure may diverge from headline? I guess the question is how many new houseowners lose their jobs which will feed into default rates.

Économiste Monétaire

Eventually, people will give up actively searching for a job and fall into that 'discouraged worker' bracket because they haven't looked for work in the last 4 weeks. Add on about a million to the headline unemployment figure. This is a pretty interesting graph:

silverharp

Économiste Monétaire wrote: »

Eventually, people will give up actively searching for a job and fall into that 'discouraged worker' bracket because they haven't looked for work in the last 4 weeks. Add on about a million to the headline unemployment figure. This is a pretty interesting graph:

pretty scary graph that, given how early we are into this , the fact that it has already surpassed prior peaks speaks volumes, the graph below shows the 2 measures quite well




I'll stick with my old forecast for now 12% min in 2010 and rising into 2011, where I'd expect financial markets to start finding bottoms
http://www.boards.ie/vbulletin/showpost.php?p=59971545&postcount=28

Économiste Monétaire

Is that the U-6 measure? (The headline unemployment rate from the BLS, that's at 9.5%, being U-3).

silverharp wrote: »

I guess the question is how many new houseowners lose their jobs which will feed into default rates.

Delinquency rates are still rising at an alarming pace. For anyone interested: a quick summary of the U.S. housing market:

http://www2.standardandpoors.com/spf/pdf/index/2009-06_Residential_Real_Estate_Indicators.pdf

silverharp

Économiste Monétaire wrote: »

Is that the U-6 measure? (The headline unemployment rate from the BLS, that's at 9.5%, being U-3)

U6
http://www.bls.gov/news.release/empsit.t12.htm

Économiste Monétaire wrote: »

Delinquency rates are still rising at an alarming pace. For anyone interested: a quick summary of the U.S. housing market:

and no reason why it should turn around anytime soon, hence Benny's attempts to keep interest rates low however they are stuggling/failing further out the curve



http://www.bloomberg.com/apps/news?pid=20601109&sid=aQ_ZgC75Zfyw


About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

Économiste Monétaire

Krugman: The paradox of thrift — for real

silverharp

Économiste Monétaire wrote: »

Krugman: The paradox of thrift — for real

I find the model a bit contrived, isnt it easier to just say that there is a deleveraging process on going and the consequences are that interest rate policy stops working (the recent move by Sweden's central bank to move one if its rates to minus -.25% shows that central bankers still have a sense of humour) and an effect wll be that individuals will save/rebuild their balance sheets, especially if other savings vehicles have been wiped out, property, shares, pensions etc.

Économiste Monétaire

Whoops, I thought I replied to this before.

silverharp wrote: »

I find the model a bit contrived, isnt it easier to just say that there is a deleveraging process on going and the consequences are that interest rate policy stops working (the recent move by Sweden's central bank to move one if its rates to minus -.25% shows that central bankers still have a sense of humour) and an effect wll be that individuals will save/rebuild their balance sheets, especially if other savings vehicles have been wiped out, property, shares, pensions etc.

Pretty much, it would also seem to promote a government fiscal consolidation argument.

Krugman on the 10 year yield about two weeks ago. 10Y is back up to the 360 range already. The 2Y/10Y is still at 250-ish.

I saw this on the Calculated Risk blog last week, it's just an extension of the option ARM graph you posted: Reset Chart from Credit Suisse has a Major Error.

The excitement around new housing starts today in perspective:

silverharp

some observations from Mish on US housing.

http://globaleconomicanalysis.blogspot.com/2009/07/american-dream-or-american-nightmare.html

Green Shoots or Kudzu?

The most recent report on home foreclosures was very ugly. The second quarter foreclosure rate was at 889,000. Annualized, that is about 3.5 Million homes foreclosed upon in 2009. The national stats for homeowners in the US in 2007 was about 75 million homes owner occupied. The National Association of Realtors is projecting 5.5 million homes to be sold in 2009.

Additionally, this report highlights that 8.3 million households are now underwater and at risk of "walk aways". 2.2 million more will be underwater if we go down in prices another 5%. Option ARMS are just beginning to be reset and those numbers will peak in August of 2011 and will most likely drive all of these numbers higher with higher mortgage payments. These are all published numbers from non government agencies.

Here is a summary


US Households: 75 Million
2009 Projected Foreclosures: 3.5 Million (1 of every 21 households)
2009 Projected Home Sales 5.5 Million
Inventory of Foreclosures 2 1/2 years (assuming 25% of home sales are foreclosures)
Number of Homes Underwater 8.8. million (1 of every 8.5 households)
Number of Households underwater if prices decline another 5%: 11 Million (1 of every 6.8 households)

The American dream of owning a home has quickly turned into a nightmare of monumental proportions going well beyond almost anyone's wildest and darkest thoughts.

As unemployment rises above 10% and more Americans are faced with their homes being underwater, the bottom in this market is years away and will be a drag on our economy like never seen before. Home ownership will never rebound to the 75 million again as millions look for cheaper rent and an opportunity to repair their balance sheets

silverharp

http://www.dol.gov/opa/media/press/eta/ui/current.htm

The Dept of Labour weekly report have 139K unemployed coming off continuing claims for the week and into the extended claims. The obvious point to make is that although they are falling out of the headline rate they are not finding jobs.

Économiste Monétaire

Hmmm, the headline unemployment rate fell today (from 9.5% to 9.4%). There was a sizeable drop on the labour force, though, of about 420,000. This attrition doesn't follow over to the broader measures of labour underutilisation (like U-4 and U-6), which is something I find quite odd.

Hasschu

Comstock Newsletter - Deleveraging the US economy.
Some excellent graphs.

http://www.comstockfunds.com/(X(1)S(3bwvxm2mymiixryf20te4045))/default.aspx?act=Newsletter.aspx&category=SpecialReport&newsletterid=1473&menugroup=Home

silverharp

Économiste Monétaire wrote: »

Hmmm, the headline unemployment rate fell today (from 9.5% to 9.4%). There was a sizeable drop on the labour force, though, of about 420,000. This attrition doesn't follow over to the broader measures of labour underutilisation (like U-4 and U-6), which is something I find quite odd.

People are dropping out of the workforce and the length of time of unemployment is still going up.

Économiste Monétaire

Two interesting articles from The Economist this week:

AIG, Fannie Mae and Freddie Mac:The Toxic Trio

On QE policies (with a greater emphasis on the Fed):
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14214898


The Fed's statement on Wednesday after the FOMC meeting:

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

From the Calculated Risk blog:
American CoreLogic: More than 15.2 Million Mortgage Holders Underwater

Check the negative equity graph at the end. :eek:

eamonnm79

Marc Faber, an economist based in Hongkong is saying that the big crash is yet to come. With these US figures on housing and I have seen others showing that the fed is pumpeing 30 billion a day into the market, I am starting to think he is right.

AIB recently stated that 25%, on top of 10% already there, of its mortgages were in some kinda dodgy status.

worrying indeed.:eek:

Hasschu

The gloomy prognosis would be accurate except for the fact that America is too big to fail. America is awash in safe haven Persian Gulf money as well as nowhere else to stash it Chinese money. Even the ECB holds dollar denominated assets. When the Persian Gulf and China are propping you up you will not fall. America will fumble and bumble its way out of debt because it has no other option. How it does it is a concern for everybody else. It would be safe to assume that pain for Americans will be minimized. That means the easy way out and that means inflation and a depreciating currency. Welcome to the new Italy but not as serious as if it was the new Argentina. Remember hope springs eternal in the human breast. I think that was by an English poet, the Irish version has added "and to hell with the rest".

Économiste Monétaire

A nice update to the NY Fed's Credit Conditions Map.

http://data.newyorkfed.org/creditconditions/

Économiste Monétaire

Bernanke to be reappointed as Fed Chairman by Obama today. Link.

Économiste Monétaire

Positive U.S. house price numbers today. Case-Shiller U.S. National HPI turned positive (q/q) for the first time since Q1: 2006.

Anonymous1987

Criticism of Bernanke here

silverharp

Économiste Monétaire wrote: »

Positive U.S. house price numbers today. Case-Shiller U.S. National HPI turned positive (q/q) for the first time since Q1: 2006.

Mortgage default rates are still rising , it would seem that the banks are either behind in processing reposessions or are avoiding recognising losses and are keeping properties off the market. More downside risk going forward imo

Économiste Monétaire

silverharp wrote: »

Mortgage default rates are still rising , it would seem that the banks are either behind in processing reposessions or are avoiding recognising losses and are keeping properties off the market. More downside risk going forward imo

They are, and you're possibly correct; I have no idea where house prices are going. Calculated Risk had some nice stuff in lieu of the positive Q/Q numbers.

http://www.calculatedriskblog.com/2009/08/case-shiller-house-price-index.html

http://www.calculatedriskblog.com/2009/08/house-prices-real-prices-price-to-rent.html

http://www.calculatedriskblog.com/2009/08/comment-on-house-prices.html

http://www.calculatedriskblog.com/2009/08/new-home-sales-increase-in-july.html

http://www.calculatedriskblog.com/2009/08/distressing-gap-ratio-of-existing-to.html

From what I can see, residential mortgage lending (stock) is still on a negative path in the U.S. so that can't be good.

Edit: Two Economist articles on Bernanke's reappointment:
http://www.economist.com/opinion/displaystory.cfm?story_id=14303777
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14327657

A slightly broader piece on the future of central banks:
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14303627

silverharp

Mish had a good piece during the week

http://globaleconomicanalysis.blogspot.com/2009/08/huge-plunge-in-mortgage-cure-rates.html

"In 2006 less than 3% of prime loans were delinquent and nearly half of them cured. Currently close to 6.5% of prime mortgages are delinquent (another 3% are in foreclosure). Worse yet, the cure rate is miserable. Even reworked loans quickly sink back into delinquency."

A slightly broader piece on the future of central banks:

good article!


I caught this last week, a video (19min) of a talk that Australian Economist Steve Keen. I've only watched his part (embedded) but his focus appears to be heading off bubbles.

http://www.debtdeflation.com/blogs/2009/08/15/video-of-whitlam-institute-talk/?cp=2


his powerpoint slides
http://www.debtdeflation.com/blogs/wp-content/uploads/2009/07/KeenGFCScaleCausesConsequences.ppt

Économiste Monétaire

silverharp wrote: »

I caught this last week, a video (19min) of a talk that Australian Economist Steve Keen. I've only watched his part (embedded) but his focus appears to be heading off bubbles.

http://www.debtdeflation.com/blogs/2009/08/15/video-of-whitlam-institute-talk/?cp=2


his powerpoint slides
http://www.debtdeflation.com/blogs/wp-content/uploads/2009/07/KeenGFCScaleCausesConsequences.ppt

Interesting video and views on debt, good speaker as-well (although he might need to tone down the arrogance a tad ).

I'm not sure why he's saying the money multiplier is the same as the long-run neutrality of money (rational expectations), though. It's just a way of explaining multiple deposit creation and I'm not aware of the paper 20 years ago that "falsified" this—unless he's referring how it's presented in textbooks, the simple 1/reserve requirement without any other considerations.