atp’s posterous

--- est-ce vraiment raisonable? ---

ING CDS: Russia 5y 700/750  Turkey 5y 380/430

--- more of the same, mais c'est toujours bon de revisualiser le tour complet… http://www.guatemala-times.com/opinion/175-year-end/663-will-banks-and-financial-markets-recover-in-2009.html ---

Global financial markets in 2008 experienced their worst crisis since the Great Depression of the 1930's. Major financial institutions went bust; others were bought up on the cheap or survived only after major bailouts. Global stock markets fell by more than 50%; interest-rate spreads skyrocketed; a severe liquidity and credit crunch appeared; and many emerging-market economies staggered to the International Monetary Fund for help.

So what lies ahead in 2009? Is the worst behind us or ahead of us? To answer these questions, we must understand that a vicious circle of economic contraction and worsening financial conditions is underway.

The United States will certainly experience its worst recession in decades, a deep and protracted contraction lasting about 24 months through the end of 2009. Moreover, the entire global economy will contract. There will be recession in the euro zone, the United Kingdom, Continental Europe, Canada, Japan, and the other advanced economies. There is also a risk of a hard landing for emerging-market economies, as trade, financial, and currency links transmit real and financial shocks to them.

In the advanced economies, recession had brought back earlier in 2008 fears of 1970's-style stagflation (a combination of economic stagnation and inflation). But, with aggregate demand falling below growing aggregate supply, slack goods markets will lead to lower inflation as firms' pricing power is restrained. Likewise, rising unemployment will control labor costs and wage growth. These factors, combined with sharply falling commodity prices, will cause inflation in advanced economies to ease toward the 1% level, raising concerns about deflation, not stagflation.

Deflation is dangerous as it leads to a liquidity trap: nominal policy rates cannot fall below zero, so monetary policy becomes ineffective. Falling prices mean that the real cost of capital is high and the real value of nominal debts rise, leading to further declines in consumption and investment - and thus setting in motion a vicious circle in which incomes and jobs are squeezed further, aggravating the fall in demand and prices.

As traditional monetary policy becomes ineffective, other unorthodox policies will continue to be used: policies to bail out investors, financial institutions, and borrowers; massive provision of liquidity to banks in order to ease the credit crunch; and even more radical actions to reduce long-term interest rates on government bonds and narrow the spread between market rates and government bonds.

Today's global crisis was triggered by the collapse of the US housing bubble, but it was not caused by it. America's credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans, and student loans. There was also excess in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will now suffer massive losses in a surge of defaults; in the dangerous and unregulated credit default swap market.

Moreover, these pathologies were not confined to the US. There were housing bubbles in many other countries, fueled by excessive cheap lending that did not reflect underlying risks. There was also a commodity bubble and a private equity and hedge funds bubble. Indeed, we now see the demise of the shadow banking system, the complex of non-bank financial institutions that looked like banks as they borrowed short term and in liquid ways, leveraged a lot, and invested in longer term and illiquid ways.

As a result, the biggest asset and credit bubble in human history is now going bust, with overall credit losses likely to be close to a staggering $2 trillion. Thus, unless governments rapidly recapitalize financial institutions, the credit crunch will become even more severe as losses mount faster than recapitalization and banks are forced to contract credit and lending.

Equity prices and other risky assets have fallen sharply from their peaks of late 2007, but there are still significant downside risks. An emerging consensus suggests that the prices of many risky assets - including equities - have fallen so much that we are at the bottom and a rapid recovery will occur.

But the worst is still ahead of us. In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.

While the risk of a total systemic financial meltdown has been reduced by the actions of the G-7 and other economies to backstop their financial systems, severe vulnerabilities remain. The credit crunch will get worse; deleveraging will continue, as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing more price falls and driving more insolvent financial institutions out of business. A few emerging-market economies will certainly enter a full-blown financial crisis.

So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.

--- mais tout économiste n'est-il pas par définition divorced from reality? http://www.rgemonitor.com/us-monitor/254866/rip_chicago_school_of_economics_1976-2008 ---

Some time ago, I asked if “Milton Friedman was the next economist whose once lauded reputation may soon slide ?”

Turns out it happened much quicker than expected. A long Bloomberg piece, Friedman Would Be Roiled as Chicago Disciples Rue Repudiation, discusses the tarnishment of the Chicago school of thought.

Its long overdue. From the efficient-market theories, to the concept of man as rational profit maximizers, much of the edifice that is was the Chicago school of economics is based on a foundation that is false, disproven or otherwise questionable.

[…]

I disliked the neoclassical price theory. It was authoritarian, a worship of a form of mob rule outside of the usual legal channels. The view that regulation and other government intervention is always inefficient compared to a free market has now been made laughable.  Its always the extremists that seem to control a discipline or school of thought. If I have any dogma, its extremism in all forms is undesirable (I know, radical, huh)

 […]

Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge. Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate. Galbraith, who died in 2006, rejected mathematical models and technical analyses as divorced from reality.”

That’s the phrase that best sums up the Chicago School: “Divorced from Reality.”

---bonne glissade en 2009, que je nous osons souhaiter aussi excitante que 2008! http://www.nakedcapitalism.com/2008/12/banking-industry-sinking-faster-than.html ---

A useful piece at the Wall Street Journal discusses the poor prospects for the US banking industry, which will in aggregate post a fourth quarter loss despite heroic interventions by the Fed and Treasury.

The article makes much of recent and almost-certain-to-get-worse bank credit losses as the economy continues to deteriorate. Commercial real estate vacancies, particularly of retail space, are starting to mount. Construction loans were an important business for local and regional banks; a high proportion almost assuredly no longer look viable. And we of course have the grim outlook for credit cards and ongoing weakness in housing.

But the credit losses are masking a second problem: banks' earnings engine in broken. As many have noted, as long as they are taking losses, they are not terribly keen to extend new credit.

But more serious is the fact that banks had shifted their business model to be more depended on fee income, and much of that was related to the securitization of real estate. Pending changes in credit card rules will dampen down some of the non-interest charges banks could formerly extract. Similarly, a world where the Federal government has become the 800 pound gorilla provider of mortgage credit offers far fewer fee opportunities to banks (and that's even before considering that transaction volumes are down too).

And as we (and others) have complained, "Where's my bailout?" maybe it's time we also start on the less catchy but no less important, "Where's the good bank/bad bank?" Until the dud assets are recognized, sold off, and banks recapitalized or liquidated, the industry will have a heavy millstone around its neck.

From the Wall Street Journal:

Banks and savings institutions in the U.S. appear headed for their first overall quarterly loss since 1990, as troubled loans pile up faster than the federal government's unprecedented efforts to aid the battered industry....

"The earnings power for this industry has absolutely collapsed," says Eric Hovde, chief executive of Hovde Capital Advisors LLC, a money-management firm in Washington that specializes in financial services.

Nearly a quarter of U.S. financial institutions reported a net loss for the quarter ended Sept. 30. The percentage is likely to climb when fourth-quarter results are announced in January, with some analysts predicting that even stalwarts like J.P. Morgan Chase & Co. could tumble into the red....

The glum fourth quarter is an ominous sign for 2009. The U.S. government so far has poured $169 billion into more than 130 financial institutions through its Troubled Asset Relief Program, according to Keefe, Bruyette & Woods Inc. But some banks already are looking for more money or hoarding their existing capital in expectation of another awful year.

Yves here. Repeat after me: you need recapitalization AND price discovery. The near pathological avoidance of the latter by the officialdom would seem to support widespread suspicions that making asset to market, or even a realistic notion of longer-term value, would confirm that the industry is insolvent.

Back to the article:

In the past few weeks, some analysts have cut 2009 earnings forecasts and stock-price targets for a slew of big and small banks. These analysts expect rising unemployment to trigger deeper losses on credit cards, mortgages and home-equity loans as more consumers fall behind on their bills. Combined with newer problems rippling through commercial real-estate and other types of loans, many banks will need to bolster loan-loss provisions, eroding profits further.

"We believe that deteriorating economic conditions will cause asset quality to get worse in 2009, revealing the inadequacy of loan-loss reserves and impairing profitability," Jonathan Glionna, an analyst at Barclays Capital, said in a report earlier this month. Nonperforming assets among the 27 financial institutions he covers will rise to $125 billion in the fourth quarter from $43 billion a year earlier, he estimates.

By the end of next year, the figure could top $200 billion, he said.....

--- voila, la politique monétaire US est désormais officiellement japonisée ---

In normal times there is a severe constraint on the type of monetary expansion announced yesterday. This constraint is the fear of provoking inflationary expectations and thereby suffering a back-up in bond yields which would counteract the stimulative effects of monetary easing. But in the present situation, deflationary expectations are so powerful (TIPS yields now imply basically zero inflation for the next 10 years) that the Fed and other central banks can engage in quantitative easing without any fears of a backlash in the bond market.

In fact, these days, the Fed actually wants financial markets and the general public to start worrying about inflation. Firstly, if investment is withdrawn from bonds and money markets, it can only go into real assets where it will generate economic activity—equities, property, industrial bonds, commodities and so on—and this is precisely what the central banks want to happen. Secondly, if consumers start worrying about inflation instead of deflation, they will bring forward their spending plans instead of delaying them, and this is also exactly what the doctor ordered. Thirdly, and most importantly, inflation would reduce long-term debt burdens and assist an orderly deleveraging process, whereas continued deflation would increase debt burdens and make deleveraging far more difficult.

--- j'aurais bien aimé pouvoir ajouter un graph montrant le ratio de l3 assets vs. tier 1 capital. http://www.bankofcanada.ca/en/fsr/2008/fsr_1208.pdf ---

Capital-adequacy ratios, a common regulatory metric under the Basel accords, provide some insight into bank leverage, since capital is shown as a share of riskweighted assets.

[…]

However, to avoid any distortions that may be introduced by assumptions regarding the risk-weighting of assets, it is also important to monitor capital adequacy in non-risk-weighted terms.

Indeed, OSFI requires that non-risk-weighted regulatory bank leverage cannot exceed an asset-to-capital multiple of 20 (although some large banks may be given permission to reach a limit of 23). Similar rules are in place for U.S. commercial banks.

--- intéressant point de vue ---

Growth vs. De-leveraging. Lastly, we conclude that when we try to integrate the issue of economic stimulation and the de-leveraging required by an acute capital shortage, we can see the bar chart below: In the US, 1% of growth is equivalent to about an extra US$140bn of GDP. 1% de-leveraging is equivalent to US$350bn. So, we can see the evils of debt deflation. The forces of deflation from de-leveraging are much greater than the forces of economic stimulation.

--- déjà qu'ils vont morfler sur les défauts, si en plus ils doivent couper leurs fees… http://ftalphaville.ft.com/blog/2008/12/15/50412/us-credit-card-refor ---

The US banking industry could lose billions of dollars in annual interest payments, according to a study that warns of credit card lenders raising prices after a regulatory overhaul, the FT said. The Federal Reserve board will meet this week to finalise changes to rules governing the $970bn credit card business. These rules would impose strict disclosure standards on credit card lenders and prohibit common pricing practices that have drawn fire for exposing borrowers to unforeseen costs. Widely hailed by consumer groups as urgently needed reforms to protect borrowers, the changes could lead to the banking industry losing more than $10bn in annual interest payments, says a study by the law firm Morrison & Foerster. This could prompt credit card lenders to raise prices and tighten lending standards, reducing the availability of credit for US consumers.

--- my preferred comment on madoff so far. worth reading the whole piece: http://nihoncassandra.blogspot.com/ ---

Well it seemed to me that the "split-strike conversions" were profit shifting bookeeping tools. Money invested in the feeders did obtain split-strike conversion positions on their books that had an implied "yield" equal to their return but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles and were "phontom" positions vs. Madoff securities. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage from bank lines and financing sources. It could be in anything and everything. He could be doing mutual fund timing, or mutual-fund market impact trades. Credit arbitrage. Funding coiiup d'etats in Africa. or buying GSCI commodity swaps. More plausibly, he could be doing option and index-option market impact trades since he was ostensibly at the center of market flow, or he could be at the center of a loan-sharking network across America earning 50%pa, and here he was passing a paltry 9% back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have have thought he was both??!!

Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many others investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense. It just didn't add up. Even Jim Simons earns it. There is no free lunch.

--- les derniers datapoints du trade deficit et libor annonceraient-ils le grand déclin de l'USD? quoi déjà? un peu tôt non? funding pressure n'a pas dit son dernier mot à mon avis…  http://macro-man.blogspot.com/2008/12/bad-news.html ---

The US flow of funds data were released yesterday, and they were a shocker. US household wealth is now falling at the sharpest rate in the history of the series (which covers most of the postwar era), superseding the collapse of the dot-com bubble. Unlike 2002, however, there are no further bubbles to inflate to save the consumer's bacon. The confluence of collapsing wealth and a terrible labour market form the crux of what has been Macro Man's base-case view for the past couple of quarters- a bone-crushing, consumer-led recession.

A natural outcome of this view has been an expectation that US savings rates would rise (which they are starting to), global trade volumes would decline (which they are), and that the US trade deficit would contract sharply, thereby supporting the dollar. Here's where we run into a spot of bother.

While it's not Macro Man's style to jettison a core view on the basis of one data point, he must confess to being troubled by yesterday's US trade figures. Rather than narrowing, as he expected, in October, the trade deficit actually widened slightly, despite the collapse in oil prices. Indeed, exports declined more in dollar terms than imports, despite being a much smaller percentage of overall trade. That's not what Macro Man wanted to see.

Indeed, the deficit excluding petroleum seems to be widening back out thanks to the drop in exports. Could it really be the case that US exporters failed to hedge any futures receivables when EUR/USD was above 1.50? Macro Man isn't sure what to make of this, but it wasn't part of the game plan.

Nor, indeed, was a smooth money-market passage into year-end. Instead of squeezing higher, as has been the case over the past few quarter-ends, LIBOR rates are actually coming in hard.

Hmmmm. If the US trade deficit fails to narrow and there is no further funding pressure, two of the major supports for the dollar will have been taken away. Certainly the market is rendering this interpretation, as EUR/USD appears to have broken out of its little trading range of the past couple of months.

Of course, an alternative explanation is that it is December, liquidity is appalling, and some punters have decided to have a go at pushing the dollar lower with little to no opposition. Macro Man requires more data before he can render judgment on whether the dollar bull case has evaporated (though he remains highly dubious of the notion of EUR as a store of value), but he's seen enough to encourage him to flatten what modest exposures he's got.