Pressure points

So much for traction. Macro Man was just starting to get excited yesterday at lower equities and USD/JPY, then at 3.10 pm London time every market in the world seemed to put in a V (or a lambda.) In the end, the traction that Macro Man and others experienced in the "re-emergence" of Q1 trends resembled that of the chap on the left.

Yesterday, the TSLF was undersubscribed...which must mean that everything is sorted, A-OK, and hunky-dory, right? If banks needed liquidity, surely they would have bid for it?!?!

Not so fast. Macro Man isn't sure what is wrong with the TSLF, but he's pretty sure that something is wrong with it; the participation rates have, in aggregate, been much lower for the TSLF than the TAF. Moreover, this week's TAF was heavily oversubscribed and awarded at a level ABOVE prevailing LIBOR rates. What that means is that banks were so desperate for liquidity that they were bidding for secured borrowing, with a haircut, from the Fed at a higher rate than they could ostensibly borrow sans haircut and collateral from each other. No wonder modern-day accounting is so screwy!

Moreover, there are interesting things afoot in the UK. Sure, the Bank cut rates yesterday down to 5%....but LIBOR isn't moving. Indeed, 3 month LIBOR is indicating today at unchanged from yesterday, and at a tasty 92 bps spread to base rates, the highest since two prior climactic crisis points. So unfortunately for everyone who bought the front end of the short sterling strip on the basis that the UK economy is buggered, while they may be right about Britain, they're still losing money.
The G7 meetings this weekend will no doubt look to address the issue, but at this juncture it's uncertain what they can do. There's a fascinating paper from John Taylor and John Williams on the FRBSF website suggesting that counterparty risk is what's driving spreads, and that the TAF is having no discernible impact. Macro Man stands by his view that the endgame here is the US and other governments writing a bit fat check to buy all the unwanted crap off of banks' balance sheets and holding it til maturity.

Further signs that the worm has turned in the global economy came from China's trade data, which showed a rebound in the surplus....but still left that surplus much smaller than the levels prevailing in 2007. China appears to be getting hit by twin headwinds; not only has demand slowed in their export markets, but their terms of trade has deteriorated markedly. The spread between export and import growth is at its most disadvantageous level since 2004, and export growth on its own is at its lowest level since 2002, when the world was slowly emerging from its last recession.
At the risk of beating a dead horse, by linking their domestic currencies to the dollar at undervalued levels, mercantilists and oil producers are forcing the required USD adjustment to manifest itself in other ways...not only against other floating currencies, but increasingly against commodity prices via the invoice currency effect. At some point, this will become a real public policy issue for China, the Middle East, et al., when they realize that not only is inflation not going away, but that an increasing cohort of their populations are struggling to feed themselves.

Perhaps then we'll finally get the badly needed multilateral buy-in to facilitate the currency adjustments required to rebalance the world and, ironically enough, enrich the developing world.