tag:blogger.com,1999:blog-34323687.post5304748240553866548..comments2024-03-28T12:22:11.704+00:00Comments on Macro Man: Ricardian EquivalenceMacro Manhttp://www.blogger.com/profile/12324967552369915949noreply@blogger.comBlogger27125tag:blogger.com,1999:blog-34323687.post-51411220687338490032008-11-29T13:32:00.000+00:002008-11-29T13:32:00.000+00:00Quite a few other comments on sterilization, but:“...Quite a few other comments on sterilization, but:<BR/><BR/>“Regardless, all this "money printing" is being held as excess reserves in the federal reserve system ... it's not like it's currency in circulation.”<BR/><BR/>This isn’t quite true.<BR/><BR/>Base money “held” as excess reserves has also been replicated as an increase in M1 deposit balances in the commercial banking system. It’s just as powerful as currency in circulation. It hasn’t been sterilized at all.<BR/><BR/>Moreover, currency in circulation is a red herring insofar as the identification of sterilization is concerned. CIC is determined as a function of private sector demand, to which central bank supply is a passive response. No central bank can goose system liquidity by forcing the public to hold more notes – it must work through bank reserves or government deposits as a required liability expansion.<BR/><BR/>Finally, government deposits at the Fed have been a form of sterilization to the degree they haven’t been used in disbursements to the commercial banking system. Now government deposits are being wound down, reserves will increase as an offset at least.<BR/><BR/>(Reserves decreased with yesterday’s report I think because FX swaps declined for the first time).<BR/><BR/>All this said, it becomes a question of judgement as to how much unsterilized balance sheet expansion is appropriate to offset deflationary forces in credit. And I agree with your direction there.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-84298465607986527582008-11-27T00:26:00.000+00:002008-11-27T00:26:00.000+00:00@ 10:09, I think this is the biggest Q in the mkts...@ 10:09, I think this is the biggest Q in the mkts at mom, I've heard of a lot of receiving in the longer end from very insensitive players tied to mortgages (esp after yesterday's annoucement, 30s area) and general duration extension in a close to "zirp" world (10s out, Alphaville have some decent tidbits on this). Flight to quality players would have you believe that the only things worth owning require a govt guarantee and until the fear subsides they may be right. Nevertheless I do agree with you in thinking that actual deflation will not occur, but don't want to step in front of the steamroller just yet. Great post and great debate today.<BR/>Cheers, JLAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-68526932061819359512008-11-26T22:09:00.000+00:002008-11-26T22:09:00.000+00:00MM, How can you believe the Treasury bid will sti...MM, <BR/><BR/> How can you believe the Treasury bid will still be there if china has already slowed treasury buying in the past 2 months or so and is already seling agencies. I would also like to hear your opinion on the cause of the recent treasury rally. How can you have lower CB demand, enormous new supply, the fed selling, and still get a rally? Regardless of China's bid, do you think treasuries are fairly priced here? It just seems odd to me that we have the ten year at 3% whilst the fed/treasury have all but promised future inflation. I can think of dozens of reasons why treasuries should go down from here but the only reason for a rally is a severe deflationary recession. I grant you the recession but the deflationary part is very unlikely. It just looks to me like the risk/reward on a treasury short is significantly skewed to the upside.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-88104950731419492952008-11-26T19:32:00.000+00:002008-11-26T19:32:00.000+00:00I think there is a very interesting debate develop...I think there is a very interesting debate developing in the FX world....none of the reserve ccys are attractive anymore in G10!!!<BR/><BR/>Now with all these pumping of liquidity and the devaluing of debts i cannot but think that one should have all of their savings in the undervalued Asian ccys mainly CNY.<BR/><BR/>BRL is interesting but much depends on commodities which i am not so sure how they can go higher...<BR/><BR/>thoughts welcome on any of the aboveAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-73927447532130007792008-11-26T18:08:00.000+00:002008-11-26T18:08:00.000+00:00@Anonymous 5:07 PmAlthough I am not engineer mysel...@Anonymous 5:07 Pm<BR/><BR/>Although I am not engineer myself, this is one of the biggest jokes I heard today. Blaming engineers for their "narrowness, conservative lack of idea " just shows a surprising degree of ignorance and arrogrance. Where do you think those innovation and technologic progress come from? Who should be blamed for the current mess, the former engineer employees or their IVY-league big idea bosses? What contributed to the US century, money and warship, or philolsophers?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-40564345422719476232008-11-26T17:12:00.000+00:002008-11-26T17:12:00.000+00:00Yeah, I agree with you, ‘printed capital’ is merel...Yeah, I agree with you, ‘printed capital’ is merely replacing decimated capital. <BR/>Seems to me though that the program announced yesterday upped the ante, as the $600bn could be sprayed outside the banking system, to participants who may give it a little velocity; whether they choose to do so I don’t know. <BR/>RJAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-46356900672277439862008-11-26T17:07:00.000+00:002008-11-26T17:07:00.000+00:00@Anonymous 2:30 Pm"But remember China is run by en...@Anonymous 2:30 Pm<BR/><BR/>"But remember China is run by engineers and not politicians!!! "<BR/><BR/>That's the problem. This whole financial fiasco was engineered by the former engineers and mathematicians who were recruited by Wallstreet. Why will it be any different in China. In general, Engineers are too narrowly focused and do not have a broad view of all aspects of "living." <BR/><BR/>True innovation requires free thinkers; risk takers. Until China opens up its society and promotes ideas, then there can be no China century.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-72306393075493643702008-11-26T16:55:00.000+00:002008-11-26T16:55:00.000+00:00Currency in circulation on the Fed's balance sheet...Currency in circulation on the Fed's balance sheet has barely moved...so the "printing press" isn't dropping benjamins on street corners. The point of today's piece is that the money going from the Fed's purchases will be retained on balance sheet to compensate for writedowns of turds and other future losses...rather than spent on financial assets.Macro Manhttps://www.blogger.com/profile/12324967552369915949noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-25766106392578824232008-11-26T16:47:00.000+00:002008-11-26T16:47:00.000+00:00How is the purchase of MBS and Agency debt not cur...How is the purchase of MBS and Agency debt not currency in circulation, Macro Man? <BR/>That’s freshly minted reserve’s going to anyone who owns those securities. <BR/>RJAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-24551596280024425442008-11-26T15:45:00.000+00:002008-11-26T15:45:00.000+00:00Anon @ 3.15, OK , I see where they are no longer a...Anon @ 3.15, OK , I see where they are no longer adding to the Treasury's deposit account in the FR system....so point taken on the SFB's. I knew they had announced an intention to do so, but hadn't seen that they'd stopped already. <BR/><BR/>Regardless, all this "money printing" is being held as excess reserves in the federal reserve system..it's not like it's currency in circulation.Macro Manhttps://www.blogger.com/profile/12324967552369915949noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-16890530819969961062008-11-26T15:41:00.000+00:002008-11-26T15:41:00.000+00:00Too many 'unreliable' data on China albeit agreein...Too many 'unreliable' data on China albeit agreeing on macro China potential on RMB revaluation.<BR/><BR/>While USD looks toast come this time next year given current bazooka lending process winds up, I honestly don't see how Euro would hold it's value. <BR/><BR/>On BRICs, I'd agree on their potential but who is gonna buy their exports while their local discretionary incomes are nowhere near the US, the EU, and Japan.<BR/><BR/>I see a prolonged recession but give credits to Barack for so far handling the formation of much needed powerful economical team, i.e. final appointment of Volcker.<BR/><BR/>AOAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-6527232369413927492008-11-26T15:22:00.000+00:002008-11-26T15:22:00.000+00:00happy gobble gobble!!awesome mm post as usual!TY n...happy gobble gobble!!<BR/><BR/>awesome mm post as usual!<BR/><BR/>TY new contract high! if american housing truly is the major problem, perhaps this shock and awe is the only way to get the mortgage rates down, they have refused to drop thus far...<BR/><BR/>An estimated 700 hedge funds may go out of business by the end of the year, an increase of 24 percent from 2007, according to Chicago-based Hedge Fund Research Inc...would think vicious tax loss selling is on deck to end the year, and with commercials short the SP and selling net -50k contracts of crude last weeks cot report, seems to support that view<BR/><BR/>-deacAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-21130081411619797532008-11-26T15:15:00.000+00:002008-11-26T15:15:00.000+00:00a) special financing bills are finished now and b)...a) special financing bills are finished now and b) no more selling of treasuries either. if they didn't do these things a)the monetary base would not change b)their balance sheet wouldn't grow, which would not then be quantitative easing. this is the whole point - they've given up sterilising their injections of cash... they're "printing" new money to buy assets. this is what "helicopter ben" is all about.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-8518154397799968512008-11-26T14:43:00.000+00:002008-11-26T14:43:00.000+00:00Anon @ 2:20 PM,Social systematic flaws and the tec...Anon @ 2:20 PM,<BR/><BR/>Social systematic flaws and the technology are two major problems in China now. There are some serious challenges. <BR/><BR/>Sean,<BR/><BR/>Although I agree with you on many issues, there is one exception: the infrastructure in China is not in excess but imbalance. In the inland crowded parts of China, the basic infrastructure is desperately in need. <BR/><BR/>MM,<BR/><BR/>I doubt the RMB appreciation is justified. Part of trade imbalance is caused by the trade restriction policies from U.S. and EU sides. Capital outflow would increase for the next 2 years IMO for China.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-68171561958874580352008-11-26T14:21:00.000+00:002008-11-26T14:21:00.000+00:00"the Indonesian Duri crude is now trading under $3..."the Indonesian Duri crude is now trading under $30!!! That would suggest very little demand indeed from Asian-based consumers of distillates....such as....oh....China."<BR/><BR/>If that's the case, why is the heat crack not lower?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-14744980410464948112008-11-26T14:20:00.000+00:002008-11-26T14:20:00.000+00:00Just discovered this blog. Very interesting commen...Just discovered this blog. Very interesting comments. My 2 cents the $ has been pricing in long term strong economy that turned out to be based on excessive credit. USA was not that great after all. While the US has to rebuild is balance sheet the Euro area has only to rebuild its P&L. In addition I dont see why you guys so negative on China it may turn out to be like Japan but only in 20 years when economic development is completed. This crisis is exactly what China needed capital will flow to long term growth and the only thing that was threatening China's growth ie natural resources, is now in their favor. The main thing to watch in China is social unrest and protectionism. But remember China is run by engineers and not politicians!!! So long term patterns in FX will resume $ portfolio allocation will start to decrease again the euro will gently rise and Asian and Brazilian currencies will raise. Hopefully Russia will start to become more understandable. the main beneficiaries will be BRICs equity markets. Try to run a DCF for a BRIC company with declining discount rates: cash-flows NPV just explodes.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-65377689750469401302008-11-26T14:16:00.000+00:002008-11-26T14:16:00.000+00:00typo : take any chart of credit spreads (investmen...typo : take any chart of credit spreads (investment grade or riskier) and they have a very decent relationship with equity volatility(VIX). credit tightens, equity volatility declines, equity rally.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-40101490813374026112008-11-26T14:09:00.000+00:002008-11-26T14:09:00.000+00:00The biggest contradiction i believe in markets cur...The biggest contradiction i believe in markets currently is "equities are a sell, credit is a buy". I just don't see it at the macro level. Lets keep it simple - take any chart of credit spreads (investment grade or riskier) and they have a very decent relationship (VIX). Actually credit has led the way through this mess. How can credit spreads tighten, and equity volatility fall without causing a significant rally in equities (look at VIX vs SPX). Its a very meaningful upside risk, provided all the 'experts' are right on credit. I would play it through optionality. Selling limited downside (december08 put spread) to buy further dated upside in US or European major equity index looks like a good risk reward trade. Market feels binary at moment, i'm 60% for a market rally. 40% for a sell off. You can structure trade for zero outlay and contain your P&L loss on downside but very nice payoff on upside. Nothing happens, didn't cost you anything. Volatility term structure nicely inverted.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-73603815677328653132008-11-26T13:28:00.000+00:002008-11-26T13:28:00.000+00:00Anon @ 12.12, while I agree this is socializing th...Anon @ 12.12, while I agree this is socializing the risk, I have a different, perhaps elitist take on the usual "Joe Sixpack gets screwed" conclusion. The "rich" have a higher savings rate than middle quintiles, and bear a disproportionate tax burden...while income and wealth are concentrated in the top 5% of earners, the tax burden is even more concentrated among that same population. Moreover, while not many middle class Joes bought CDO turds, I wonder how many investment bank VPs lied on their subprime mortgage apps. <BR/><BR/>Anon @ 12.11, as far as I know they are still selling off treasury holdings, however. <BR/><BR/>Anon@ 12.22, I agree that all fiat currencies look like crap, which is another argument against the dollar bear trade...what are you going to buy against it? In a non-deflationary world, I suppose I could see the case for gold- but the difference between gold and currencies is that one is a physical asset that u have to pay cash (which, if the theory is right, will be in short supply) for, while the other can be don via forwards that entail no delivery whatsoever and much less upfront collateral.<BR/><BR/>The obviuous currency that <I>should </I> appreciate is, ironically, the RMB....all the more so if they are actually exporting petro products. The monthly trade numbers are reaching all time highs...and yet the RMB has ground to a halt- because Voldemort (PBOC) is still playing silly buggers and buying $ like it's going out of style.<BR/><BR/>And that, Sean, is why I think the bid for Treasuries will still be there.Macro Manhttps://www.blogger.com/profile/12324967552369915949noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-56420081608810516632008-11-26T12:59:00.000+00:002008-11-26T12:59:00.000+00:00Ref: Indonesian Duri crudeAlthough Indonesia is an...Ref: Indonesian Duri crude<BR/>Although Indonesia is an OPEC member, fact is that the country effectively has stopped exporting any crude due domestic demand higher (or equal) to its oil production.<BR/>Hence, I'm not sure Duri therefore is a good benchmark for China's oil demand/import.Better use Malaysia oil price(2008 771kbday output) or even China itself (2008 3,797kbday ouput!) ,which has now become an aggressive oil product exporter (eg:gasoline!)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-73667555929101395842008-11-26T12:47:00.000+00:002008-11-26T12:47:00.000+00:00Agree re China (but not rally potential) I've been...Agree re China (but not rally potential) I've been a mega bear on the Chinese 'miracle' all year, and their latest wheeze to pour even more concrete into unproductive capital investment is repeating the failed Japanese model of the 1990's; the next shock will be the extent of China's slowdown and just how dubious official statistics will prove in hindsight. They certainly won't be buying many more Treasuries...Sean Maherhttps://www.blogger.com/profile/11706813218805999161noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-75468250227798658232008-11-26T12:22:00.001+00:002008-11-26T12:22:00.001+00:00Anon 11.52,Agreed on devaluation part, but see nor...Anon 11.52,<BR/><BR/>Agreed on devaluation part, but see nor reason why metals and/or commodities go higher in a major serious global recession-depression environment.<BR/><BR/>Macro Man,<BR/><BR/>Simply brilliant observations again. Would you agree on most fiat currencies yet to price in 'a devaluation' scenario?<BR/><BR/>AOAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-58625860660801842272008-11-26T12:22:00.000+00:002008-11-26T12:22:00.000+00:00Ricardian equivalence - the Benjamins being spraye...Ricardian equivalence - the Benjamins being sprayed around will go to fill the hole created by deleveraging...Very good. But is this not just another way of saying the bail-out socialises the losses. The burden shifts to Joe six-pack et al, and his progeny. That must have a depressing effect long-term? If the losses were borne here and now by those who created them we might get over it and move on but what is happening drags out the problem - read Japan.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-45360984166188439272008-11-26T12:11:00.000+00:002008-11-26T12:11:00.000+00:00I thought they have quit sterilizing recently? The...I thought they have quit sterilizing recently? The SFP program was abandoned a couple of weeks ago..Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-30991308126178626482008-11-26T11:52:00.000+00:002008-11-26T11:52:00.000+00:00they are deflating their debt.....only a question ...they are deflating their debt.....only a question of time before others follow.<BR/><BR/>we are entering a new world, which is not priced in at all in the FX market. ALL ccys in G10 will devalue substantially and the only ones left standing are those with c/a surpluses, low inflation, somewhat high growth, low debt, i.e. good fundamentals......also metals will go a lot higher...<BR/><BR/>in fx be short G10, be long the good parts of EM versus short the bad parts of EMAnonymousnoreply@blogger.com