The US government's programs initiated during the financial crisis have generally died down. The exception here is the Fed's $1.25T agency and GSE-backed MBS purchase program, which has become the greatest remaining source of government intervention in the economy (see chart below). On paper, Fed emergency lending has decreased steadily from October 2008 and continues to decline. These figures misrepresent the massive amount of liquidity and credit-easing still occurring today. Furthermore, the MBS purchase program is unlikely to end anytime soon (it has already been extended once). The financial crisis has taken a large buyer of agency MBS out of the market: foreign holders. This makes the Fed's exit additionally difficult and risky.
Thursday, November 26, 2009
Tuesday, November 17, 2009
Obama in China
At first, it seemed like Obama's visit to China might actually be fruitful after the People's Bank of China issued a report promising an improvement in the yuan's exchange rate mechanism a few days before Obama's arrival. But this move was posturing, an attempt to lessen discussion on this topic and not a sign of coming compromise.
Sunday, November 15, 2009
European Football and Decoupling
When stocks in emerging nations declined more in 2008 than they did in the US, many saw it as proof that decoupling had not yet occurred. Recently the decade-old debate has flared back up, starting with an Economist article titled "Decoupling 2.0" in May 2009. Decoupling 2.0 is the idea that since GDP growth held up well in emerging markets like China, India, and Brazil during 2009, decoupling is real, regardless of how hard equities in these countries might have been pummeled in 2008. In my opinion, the idea of decoupling gives a misleading view of the world economy. Emerging nations may be able to sustain short-term growth, but the drivers of the world economy are still the developed nations. As an example, consider the state of world football, or soccer as it's called here in the US.
Monday, November 9, 2009
Updates: China's Yuan Policy and Bubbles
Two news articles caught my attention this morning because they relate strongly to what I have written about recently on this blog.
Sunday, November 8, 2009
A European Natural Gas Market
Natural gas, unlike crude oil, is not an international market. The US, for example, only imports 3% of its natural gas consumption while importing 43% of its oil. As a result, markets around the world have developed much differently. The North American natural gas market is a completely separate entity that prices natural gas according to supply and demand at different locations. Asia and especially Europe, on the other hand, price natural gas by linking it to the price of oil.
Saturday, November 7, 2009
Rethinking Third Quarter GDP
Third quarter GDP grew 3.5%, beating estimates of 3.2%. Usually this indicates a healthy recover. But this quarter, the growth came entirely from one time adjustments.
3.5% 3rd quarter growth
-1.6% Cash for Clunkers
-.53% First time house buyers credit
-1.0% Stimulus
0.37% GDP growth without one time government programs
Growth without one time government spending is still anemic. No wonder unemployment is greater than 10%.
A Bubble Economy
Bill Gross' November Investment Outlook is a must read. In this piece, Gross alludes to Macbeth's "out, out, brief candle" soliloquy to describe his own fear for the future. This is a very powerful analogy. It seems there is a looming, apocalyptic mood to the markets, as indicated by the steady increase in the VIX. There is a foreboding sense that once stimulus recedes there will be a day of reckoning, when consumer spending will plummet, inflation will surge, and the dollar will crash.
Friday, November 6, 2009
Structural Reform Is More Effective Than Regulation
The discussion on banking reform usually focuses on higher capital requirements, less leverage, and more oversight. In my opinion, this focus is misguided. Repealing the de-regulatory acts of the late 90s might be more effective because structural limitations are generally harder to bypass than something judgement-based, such as risk-weighted capital. I think history is on my side.
Wednesday, November 4, 2009
Obama's Commitment to Palestine and the Stark Realities of Geopolitics
US rhetoric on Israeli settlements has shifted dramatically since President Obama's inauguration. In the first few months after January 20, Obama courted the world, successfully promoting an image of a cooperative, benevolent US. A key part of this was a sterner approach to Israel. Obama demonstrated this by unexpectedly demanding a halt to settlements during his first meeting with Netanyahu. Indeed, Obama mentioned multiple times during his campaign that he advocated a more balanced approach to Israel-Palestine. Six months after inauguration, Obama's Palestine strategy has converged with Bush's.
Tuesday, November 3, 2009
China: "Give Me Balanced Trade, Just Not Yet"
China's repegging to the dollar is critically important to global trade. It gives China a free lunch: not only are China's exports protected by the US dollar's decline, they will increase as the yuan declines relative to other currencies.
Harvard economist Jeffrey Frankel uses regression analysis to determine China's yuan policy. His research shows that in 2005, Beijing de-pegged from the dollar and re-pegged to a basket of the dollar and the euro. According to Frankel, the 20% appreciation of the RMB from 2005 to 2008 was a reflection of the euro's rise against the dollar. Recently, the Chinese have moved back to a dollar peg. Frankel said that "during the most recent period, September 2008-February 2009, all the weight has once again fallen on the US currency. The regime has come full circle, virtually back to what it was in late 2005."
Monday, November 2, 2009
Japan's Debt Trap
It's hard to see how Japan's fiscal situation is anything but a crisis. Its national debt is fast approaching 200% of GDP. Its population is shrinking, meaning transfer payments rise as tax revenues fall. Additionally, Japan's life expectancy is one of the highest in the world. Japan is in a debt trap, where interest expense increases faster than its ability to pay it off.
Though Japan's debt has ballooned, yields have actually decreased. The reason for these low yields is the commitment of Japanese firms and households to Japanese bonds. Japanese debt is very unattractive to an investor, yielding only 1.4% for 10 years. Unsurprisingly, foreign ownership of Japanese bonds is only 6.4% as of last March, down from 7.9% a year ago.
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