Renko charts filter the noise

The chart below shows a Renko chart for the S&P 500 ETF (SPY). Like Point & Figure, these charts focus on price action, independent of time. Notice that the first half of the chart extends from late October 2008 to early March 2009. The second half extends from early March to early December. A big uptrend is underway with trendline support at 108.

091203spyrenko Click this chart for details

Sovereign CDS liquidity snaps

Did the events of last week in Dubai really send jitters through emerging markets? Here's something to ponder in the emerging vs developed market debate  -- an issue aptly summed up in Deutsche Bank's 2010 outlook on Wednesday. On Thursday, Fitch Solutions has provided an update of its sovereign CDS liquidity indices -- and they show that liquidity in CDS for developed markets surpassed that of emerging markets in the last week of November:...

Geithner: TARP to End Soon

Treasury Secretary Timothy Geithner told Congress it was the administration’s intent to “end the $700 billion financial bailout program soon.”

The Associated Press quoted Geithner as suggesting that the government was “close to the point at which we can wind down this program” and end it. The “substantial resources” left in the TARP fund would be then applied towards the national debt.

But does it really matter when TARP ends?

The government, first under Bush/Paulson, now under Obama/Geithner, has set a horrific precedent. Banks, Investment houses and speculators are well aware that the Federal government stands ready to intervene when the screw ups are large enough.

That was one of the lessons of the Bailouts of Bear Stearns and Lehman Brothers. Don’t just mess up, bankers learned . . . but make sure your cock ups are so enormous as to threaten the entire economic system. The perverse moral hazard of the 2008 Bailouts is that it is very likely to encourage greater risk taking in the future, once the current era fades into distant memory.

Energy irony

As FT Alphaville reported, a number of US refineries have had to mothball plants in the last month due to poor product margins. Ironically, this action may now be beginning to boost product cracks (the difference between crude and product prices and what determines refinery profitability). As Stephen Schork reports on Thursday:...

The Fed’s Expanded Balance Sheet

Remarks at the Money Marketeers of New York University, New York City, by Brian P. Sack, Executive Vice President


Overall, the large-scale asset purchases that the Federal Reserve has employed seem to have had their desired effects in terms of reducing longer-term interest rates. These purchases have been an important part of the policy response that the FOMC put in place to foster a sustained economic recovery. Moreover, that conclusion is reassuring for the future, as it suggests that central banks will still have effective policy options should the zero bound threaten again.

However, these asset purchases have ongoing implications for the balance sheet that may require adjustments along other dimensions, such as the implementation of reverse repos, term deposits, asset sales, or other measures. The size, likelihood, and timing of the appropriate adjustments will only become apparent over time, as they will depend on the evolution of the economy and financial markets. They will also depend importantly on the effectiveness of interest on reserves for controlling short-term interest rates in a high reserve environment—a policy regime that has not been fully tested in U.S. markets and that will have to be evaluated in real time.

The Fed’s Market’s Guy Eyes Asset Sales and Rate Increases

Markets live transcript 3 Dec 2009

Markets live chat transcript for the chat ending at 12:13 on 3 Dec 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ) Paul Murphy (PM)   NH:holaNH:it’s 11:03amNH:and time for Markets LiveNH:FT Alphaville’s daily markets discussionNH:Bryce is on the bench todayNH:so...

Bank of England’s QE – the beginning of the end?

The Bank of England published a consultation paper on Thursday morning discussing the possibility of extending the Bank's Asset Purchase Facility scheme for corporate bonds to allow sales as well as purchases. Ostensibly this is a scheme to help market making banks lower the liquidity premium on corporate bonds by being able to tap the Bank of England's supply....

BofA’s strong arm tactics

If Lloyds bondholders thought they were given an offer they couldn't refuse over CoCos, what about Bank of America shareholders. Overnight, BofA announced plans to pay back $45bn of TARP money, using $26.2bn of its owns cash, a $18.8bn equity issues  and $4bn of disposals. And it left shareholders in no doubt as to what would happen if they rejected the capital increase....

Marvell Technology Net Up; Novell Net Loss

Marvell Technology Group Ltd third quarter revenues rose 1.5% to $803.1 million and net income rose 184.3% to $201.6 million or 31 cents a share. Novell, Inc fourth quarter revenues fell 12% to $215.6 million and net loss was $255.7 million or 74 cents a share.

Q&A: Former Fed Official Poole on Bernanke and Politics

During his time as president of the Federal Reserve Bank of St. Louis, William Poole was known for saying what was on his mind. He did so in late July when he concluded that Fed Chairman Ben Bernanke had risked the central bank’s political independence through his policy actions and therefore “does not deserve reappointment.”

Now Mr. Poole, who stepped down from the Fed in March 2008, says he’s worried about measures in Congress that would curtail the central bank’s independence on monetary policy.  We talked with him about some of the heat on the Fed and Senate Democrats’ proposal to alter the governance of the 12 regional Fed banks. Excerpts:

How is Chairman Bernanke faring politically?

I think Chairman Bernanke was insufficiently sensitive to the political risks that he was creating for the Federal Reserve by his extraordinarily expansive interpretation of the Federal Reserve Act. That now is what’s coming to pass. … The origin of the situation today is that the Federal Reserve’s widespread activity in what are basically fiscal policy decisions — in granting credit to various private entities — has raised issues about whether the Federal Reserve has exceeded its appropriate authority.

What about the attacks on the Fed for its regulatory record?

There’s a widespread perception of Federal Reserve regulatory failure. I think the Fed has gotten a bum rap on that. Much of that is Monday morning quarterbacking. Of course, Congress itself is not without blame in the whole housing fiasco. So some of this may be scapegoating the Fed for what happened. I think there were terrible failures in risk management in the banks, investment banks and hedge funds that bought the subprime paper, and I don’t excuse that at all. But certainly the federal government contributed mightily through Fannie Mae, Freddie Mac and all of its encouragement of subprime lending.

What do you think of the proposal (by Senate Banking Committee Chairman Chris Dodd) for the White House to appoint the chairmen of regional Fed bank boards?

It puts a much greater Washington stamp on central bank governance. I believe that the independence of the central bank is extremely important for monetary policy and that that independence flows from the role of the private sector directors in the reserve banks, and their role in selecting the presidents. I think this is an element of great strength in our system.

… To me what is much more logical to happen is to have the reserve bank presidents themselves appointed by the Washington process. That would be much more logical than the directors. I would not be surprised if this is a stratagem. The thinking would be that in a conference committee or at the last minute, to change it so that the reserve bank presidents themselves are either removed from the FOMC or are appointed by the president and confirmed by the Senate.

What would be the implication of greater Washington stamp?  Would the regional boards then skew their views to what the White House wants?

What I think would probably happen is that it would work a little bit like the way appointments do throughout the United States that have a strong political component to them. For example, district court appointments really get vetted through the party in power. It just makes the whole thing a lot more political to have it run through Washington.

How would political appointments actually affect policy?

The candidates to be chosen would be vetted through the political process. It would mean that the people who are politically active are the ones who would most likely be appointed. … It would alter discussion but it would also be a potential avenue for political interference with monetary policy.

Let’s suppose you get into a situation in which you have the reserve bank chairmen from all over country vetted by the administration in power, which I think is the natural thing that would happen. Every one of them would be beholden or would be selected by the administration then in power. Now suppose that the Federal Reserve is in a situation where it believes it’s important to raise interest rates and it’s politically controversial. I could easily imagine, even predict, that the White House would be in touch with the directors that they had put in place to try to influence the course of monetary policy. It seems to me that’s a high probability.

So do you think that happens now with the Fed’s governors in Washington who are appointed by the White House?

I think that probably the way it happens now is there are ongoing, almost continuous discussions between the chairman and the Secretary of the Treasury. There are no doubt occasions when there will be a conversation that suggests that the timing might not be right or whatever.

The reserve banks are so explicitly nonpolitical and the reserve bank boards and the presidents of the reserve banks are appointed in such a nonpolitical fashion that there is very little chance that there would be an exercise of political leverage on those boards and presidents.

Goldman Sachs – because we’re worth it

Okay, here it is - 14 pages which explain why Goldmanites deserve all that money. And basically what it boils down to is this; they are smarter and more profitable than anyone else. Selected highlights and graphics from Goldman Sachs Compensation Practices. We operate in a human capital driven industry where we compete for the best talent available globally --- Compensation for institutional financial services companies is the equivalent of other industries' COGS and SG&A....

Isildur1, Big Pots, and Further Adventures in Online Poker

I have written here a couple of times recently about the paroxysm that has struck high-stake online poker. A player with the Tolkien-esque nickname Isildur1 has turned things upside-down, generating massive pots and taking on multiple top players simultaneously. While Isildur1 has been up as much as $6m, he is now closer to break-even on his epic run.

His run may be less torrid, but the effects are still there to be seen as the following figure shows. Check the proportion of the largest online poker pots of 2009 that were played in the last few weeks. Remarkable stuff.


FX is changing

Harpal Sandhu, chief executive officer of a systems firm called  Integral Development, is trying to change the way forex markets function. Specifically, he wants technology to even-out the jagged playing field, where conflicts of interest abound and where rules apply to some market players but not to others....

[Outlook 2010] Goldman sees 2010 as ‘exciting, with risks!’

Has Goldman Sachs, beset with a public image problem, turned global economic cheerleader by way of compensation? The bank has just released its Global Economic Outlook for next year and beyond (Title: "The Outlook for 2010/11: Exciting, with risks!") and it looks like they're even more optimistic on global GDP growth for 2010 than they were for 2009 -- a year for which they originally forecast GDP growth below consensus (of 2 per cent) but nevertheless a touch too high at 0.6 per cent....

Fed Watch: Bubbles and Policy

Tim Duy discusses the type of bubble-popping strategy the Fed ought to pursue:

Bubbles and Policy, by Tim Duy: The Wall Street Journal carried a front page article today detailing changing views at the Federal Reserve regarding the policy treatment of emerging bubbles of speculative activity. Much of the ground has been well tread. Is monetary policy or regulatory policy the best mechanism to address bubbles? I tend to favor the latter category, should we have a regulatory environment that is not essentially captured by those policymakers are supposed to regulate. Interest rate policy is a rather blunt weapon that kills indiscriminately. For instance, I am sympathetic with the view that interest rates were not necessarily too low during the build up of the housing bubble. Indeed, relatively low rates of investment (equipment and software) growth suggests that real rates were actually too high. But capital flowed to housing instead of more productive investment activities because that was the path of least resistance. Policymakers could have chosen to put some grit on that path by, for example, aggressively evaluating lending standards with regards to products such as "Liar's Loans," etc., but chose to follow a hands off approach.
What caught my attention in the article was this passage:
Yet the question of whether and how to tackle bubbles before they burst is becoming a growing concern amid fears of new bubbles developing in commodities markets and in emerging economies. Gold prices are up more than 50% in a year's time. China's Shanghai Composite stock index is up more than 75% this year. Stocks in Brazil are up even more. Oil prices have rebounded. They remain far below last year's peaks but a return to those highs could fuel inflation in goods and services more directly than tech stocks or housing did.
I think it is important to recognize what bubbles should be the focus of Federal Reserve concerns. After all, the Fed is charged with maintaining price stability and maximum sustainable employment in the United States. Why should the Fed be concerned with housing prices in Hong Kong or stock prices in Brazil and China? Don't those bubbles fall under the responsible of foreign central banks? It seems clear that in such cases, the extent of the Fed's concerns should be limited to the regulatory arena. Are US based banks lending into those bubbles, thereby setting the stage for negative feedback loops? If so, raise capital requirements on that lending, tighten underwriting standards, etc. Just don't derail the US recovery by raising rates to pop a bubble in Brazil.
I will admit that oil prices can be a bit more tricky. The gains in oil prices seem silly given ongoing evidence that the world is awash in oil. From the WSJ:
Café owner Ken Kennard sees the glut in the global oil market as a potential environmental threat to this sleepy seaside tourist hub.
Mr. Kennard is worried about a fleet of oil tankers -- almost 40 in all, each packing hundreds of thousands of barrels of crude and oil-derived products -- that have anchored several miles off the coast of southeast England in recent months.
The heavy traffic stems from a near-record excess oil supply, a byproduct of the recession, that is prompting producers to stash oil offshore until they can find customers. The excess supply hasn't stopped oil prices from surging almost 80% this year and padding the pockets of big oil producers like Royal Dutch Shell PLC and the Organization of Petroleum Exporting Countries.
To be sure, some of the rise in the price of oil is attributable to the decline in the Dollar, a natural consequence of low US interest rates and an important channel for the transmission of monetary policy. But it is not clear that higher oil prices necessarily yield additional core inflationary pressure given the current institutional arrangements between labor and management. The recent experience has been that individuals were not able to convert high inflation expectations in 2008 into higher wages. Instead, the opposite occurred as consumption sunk and unemployment skyrocketed. All of which means the Fed would need to think long and hard about leaning against the oil price increase if that entailed contractionary monetary policies; the costs are potentially high relative to the benefits. Here again, though, regulators need to be carefully evaluating the nature of lending into the oil space.
My views on this topic have shifted somewhat over the past two years. In early 2008, I was concerned that the Fed's rush to lower rates was contributing to destructive oil price bubble. But, in retrospect, nations that pegged to the Dollar and thus imported the Fed's easy policy were just as much, if not more, to blame, as those central banks failed to maintain policies appropriate for domestic conditions.
In short, the Fed does need to be aware of the full set of consequences of their policy stance. But bubbles abroad should not prevent the Fed from adopting the right policy stance for the US economy. Indeed, many of the bubbles discussed now clearly should not be the responsibility of the Fed.

“Worrisome Thoughts on the Way to the Jobs Summit”

Robert Reich is looking past the jobs forum, and he's worried:

Worrisome Thoughts on the Way to the Jobs Summit, by Robert Reich: Most ideas for creating more jobs assume jobs will return when the economy recovers. So the immediate goal is to accelerate the process. ...
But here's the real worry. The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that's been going on for years but which the Great Recession has dramatically accelerated.
Under the pressure of this awful recession, many companies have found ways to cut their payrolls for good. They’ve discovered that new software and computer technologies have made workers in Asia and Latin America just about as productive as Americans, and that the Internet allows far more work to be efficiently outsourced abroad.
This means many Americans won’t be rehired unless they’re willing to settle for much lower wages and benefits. Today's official unemployment numbers hide the extent to which Americans are already on this path. Among those with jobs, a large and growing number have had to accept lower pay... Or they've lost higher-paying jobs and are now in a new ones that pays less.
Yet reducing unemployment by cutting wages merely exchanges one problem for another. ... So let's be clear: The goal isn’t just more jobs. It's more jobs with good wages. Which means the fix isn’t just temporary measures to accelerate a jobs recovery, but permanent new investments in the productivity of Americans.

What sort of investments? Big ones that span many years: early childhood education for every young child, excellent K-12, fully-funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good health care, more basic R&D that's done here in the U.S.,... a power grid that's up to the task, and so on.

Without these sorts of productivity-enhancing investments, a steadily increasing number of Americans will be priced out of competition in world economy. More and more Americans will face a Hobson's choice of no job or a job with lousy wages. It's already happening.

“The Economics and Policy of Illegal Immigration in the United States”

Gordon Hanson on illegal immigration:

The Economics and Policy of Illegal Immigration in the United States, by Gordon H. Hanson: Executive Summary Policymakers across the political spectrum share a belief that high levels of illegal immigration are an indictment of the current immigration policy regime. An estimated 12 million unauthorized immigrants live in the United States, and the past decade saw an average of 500,000 illegal entrants per year. Until recently, the presence of unauthorized immigrants was unofficially tolerated. But since 2001, policymakers have poured huge resources into securing US borders, ports, and airports; and since 2006, a growing range of policies has targeted unauthorized immigrants within the country and their employers.

Notwithstanding these efforts, no agreement has materialized on a system to replace the status quo and, in particular, to divert illegal flows to legal ones. Policy inaction is a result not only of a partisan divide in Washington, but also of the underlying economic reality that despite its faults, illegal immigration has been hugely beneficial to many US employers, often providing benefits that the current legal immigration system does not.

Unauthorized immigrants provide a ready source of manpower in agriculture, construction, food processing, building cleaning and maintenance, and other low-end jobs, at a time when the share of low-skilled native-born individuals in the US labor force has fallen dramatically.

Not only do unauthorized immigrants provide an important source of low-skilled labor, they also respond to market conditions in ways that legal immigration presently cannot, making them particularly appealing to US employers. Illegal inflows broadly track economic performance, rising during periods of expansion and stalling during downturns (including the present one). By contrast, legal flows for low-skilled workers are both very small and relatively unresponsive to economic conditions. Green cards are almost entirely unavailable to low-skilled workers; while the two main low-skilled temporary visa programs (H-2A and H-2B) vary little over the economic cycle and in any case represent scarcely 1 percent of the current unauthorized population, making them an inconsequential component of domestic low-skilled employment.

Despite all this, illegal immigration’s overall impact on the US economy is small. Low-skilled native workers who compete with unauthorized immigrants are the clearest losers. US employers, on the other hand, gain from lower labor costs and the ability to use their land, capital, and technology more productively. The stakes are highest for the unauthorized immigrants themselves, who see very substantial income gains after migrating. If we exclude these immigrants from the calculus, however (as domestic policymakers are naturally inclined to do), the small net gain that remains after subtracting US workers’ losses from US employers’ gains is tiny. And if we account for the small fiscal burden that unauthorized immigrants impose, the overall economic benefit is close enough to zero to be essentially a wash.

Where does this leave policymakers? Any new reform effort will have to take a stand on preventing versus facilitating inflows of low-skilled foreign labor. Legislation is expected to embrace aspects of two different strategies: enforcement strategies designed to prevent illegal immigration, and accommodation strategies designed to divert illegal flows through legal channels using legalization and expanded legal options for future prospective migrants.

Since US spending on enforcement activities is already very high, sizeable increases in enforcement resources could easily cost far more than the tax savings they generated from reduced illegal presence in the United States. Because the net impact of illegal immigration on the US economy does not appear to be very large, one would be hard pressed to justify a substantial increase in spending on border and interior enforcement, at least in terms of its aggregate economic return.

A more constructive immigration policy would aim to generate maximum productivity gains to the US economy while limiting the fiscal cost and keeping enforcement spending contained. Effectively, this means converting existing inflows of illegal immigrants into legal flows. It does not have to mean increasing the total number of low-skilled foreign workers in the labor force. Policies designed to achieve this would:

  • provide sufficient legal channels of entry to low-skilled workers by expanding legal options for immigration while maintaining reasonable enforcement of immigration laws;
  • allow inflows to fluctuate with the economy;
  • create incentives for both employers and immigrants to play by the rules by ensuring meaningful enforcement at US worksites and rewarding workers for their compliance by giving them the chance to seek legal permanent residence; and
  • mitigate the fiscal impact of low-skilled immigration by charging a fee for legal entry or taxing employers.

links for 2009-12-02