Friday, January 30, 2009

At least for a little while, credit markets breathe a sigh of relief

Credit markets are improving. From Fortune:
An appetite for risk has returned to the fixed income market, where investors are beginning to spurn safe, low-yielding treasuries to buy corporate bonds instead. Corporations sold $70 billion worth of debt in the first half of January, according to Bloomberg data, hitting a pace not seen since May.
This is good news. The traders at my firm are giddy with anticipation of a fully functioning credit market (at least in nonfinancials). And certainly, the bond market is slightly less dour about the economy's ability to produce inflation.

The chart illustrates the bond market's expectations of inflation over the next ten years, which is measured as the difference between the 10-yr Treasury and the 10-yr Treasury Inflation-Protected Securities (TIPS). Currently, the market sees prices rising 0.9% for the next ten years. Sounds unbelievable to me, but compared to the low of 0.04% in November, this is certainly an improvement.

However, volatility (as measured by the CBO's VIX index) is still high, so it is entirely possible that the market turns a 180 next week for any number of reasons.

I suspect that eventually, markets will internalize the potential macroeconomic effects of the 6-month 20% annualized real money supply growth.

Credit markets are functioning again - at least in nonfinancials. But this feeling of reprieve could go away just as quickly as it came. The housing market is still flashing red; this is problematic. As of today, the Fed has purchased around $69 billion in MBS (haven't settled yet in the H.41 statement) since the program started on Jan. 5 - I wish that they would be slightly more active here.

Rebecca Wilder


  1. Why is a:

    (%6-mo/6- mo) annualized rate-of-change used for the Real Money Supply (M2/CPI) & a

    ( % y/y) rate-of-change used for your graph depicting Total Bank Loans?

    Doesn’t this mean that in these two cases the monetary lag is constant? Maybe it’s not perfect (but it seems correlated).

    Your not changing the way it is analyzed thru the entire period.

    Say your calculation takes 6 months. So if you have 4- 5 months of data, you have the major portion of the final total number, & even if your estimate is somewhat off, you can, at a minimum, in most cases, determine the trend?

    Good graphs.

  2. The FED has to define, and the keeper of the statistics: survey, collect, calculate, & publish the call reports.

    But reliance on the “data compiled by the FED is subject to the limitations of all analyses based upon broad statistical aggregates, i.e., data cannot be compiled accurately, or by a method which conforms to rigid theoretical concepts”.

    If the catalogue of facts and their measurements (1) don’t correlate, (2) consistently compare, or (3) conclusively prove; the validity of a one’s arguments (theory), then there is a higher probability that the FED’s data is wrong, rather than the time series, or the theory supporting it.

    You can't construct a time series without comparable figures. The FED certainly has not been cooperative in supplying comparable figures. E.g., for a time a figure is not seasonally adjusted, then only seasonally adjusted data are available.

    Data may be revised, reconstructed, or spliced, causing noticeable changes and distortions (not conforming to the original release). Geographical statistical areas may change. Reporting can be delayed, less frequent, or contains unidentified errors.

    The new data overlays (wipes out) the archived data (perhaps when the old data was more accurate & best representative).. I.e., the FED doesn’t keep each iteration of a data series.

    One Reserve bank reports a figure different than the Board of Governors. Then the Reserve bank with the most accurate, and useful figure, is forced to discontinue publishing part of the data (eliminating very valuable information from the maverick bank).

    Virtually all the FED’s reported data, in a given time period, is corrupted or contaminated (not representative). The best that can be done is to disregard absolute figures and use rates-of-change,

  3. From the standpoint of monetary authorities, charged with the responsibility of regulating the money supply, none of the current definitions of money make sense.

    The definitions include numerous items over which the Fed has little or no control (e.g., M2), including many the Fed need not and should not control (currency).

    The definitions also assume there are numerous degrees of “moneyness”, thus confusing liquidity with money (money is the “yardstick” by which the liquidity of all other assets is measured).

    The definitions also ignore the fact that some liquid assets (time deposits) have a direct one-to-one, unvarying , relationship to the volume of demand deposits (DDs), while others affect only the velocity of DDs. The former requires direct regulation; the latter simply is important data for the Fed to use in regulating the money supply.

  4. M2 erroneously includes MMFs in its definition (a sizable #). MMFs are the customer's of the commercial banks. They are financial intermediaries/transmitters.

    Monetary savings are never transferred from the commercial banks TO the intermediaries; rather are monetary savings always transferred THROUGH the intermediaries.

    Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks; nor alter the forms of these assets or liabilities.

    Financial intermediaries (MMFs) lend existing money which has been saved, and all of these savings originate OUTSIDE of the intermediaries (depend on an inflow of savings to finance loans).

    The utilization of these loan-funds, or the activation of monetary savings held by these financial intermediaries, is captured thru the velocity of their transactions (bank debits/withdrawals), and not thru the volume of their bank deposits.

    I.e., from the standpoint of the economy, MMF deposits NEVER LEAVE THE MCB SYSTEM. And the growth of the MMFs is prima facie evidence that existing funds/savings have already been saved/invested/spent, i.e., transferred/transmitted by their owners/savers/creditors to borrowers/debtors.

    I.e., this currently represents a double counting of the money supply

  5. 1/1/2008 42.427
    2/1/2008 41.145
    3/1/2008 39.731
    4/1/2008 41.642
    5/1/2008 43.062
    6/1/2008 41.616
    7/1/2008 42.083
    8/1/2008 42.055
    9/1/2008 42.456
    10/1/2008 46.93
    11/1/2008 50.363
    12/1/2008 53.727
    1/1/2009 62.477

    Member bank required reserves (or reservable liabilities, i.e.,transaction accounts) are growing faster than the normal holiday rates-of-change.

  6. Question: Just read somewhere today (Sat.) that there needed to be more "cheap" credit (receipiant banks need to loan not hoard)- isn't that what got us into a bad situation in the first place?

  7. Definitely, Janie.

    Good point. Banks should not be forced to lend until they can make loans to qualified borrowers. Team Obama keeps harping about how banks need to lend - that just doesn't make sense to me. Eventually this recession will end and lending will begin again, but this week's reports signal to an even later recovery. My, how the tone has changed.


  8. Now they are arguing about keeping the pork in the stimulus package. Same ol',p same ol'. Change sure looks the same as it always has.


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