Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1369.5 | 4.5 | 0.33% |
| Eurostoxx Index | 2298.9 | 7.3 | 0.32% |
| Oil (WTI) | 102.7 | -0.1 | -0.12% |
| LIBOR | 0.466 | -0.001 | -0.11% |
| US Dollar Index (DXY) | 80.09 | 0.206 | 0.26% |
| 10 Year Govt Bond Yield | 1.98% | -0.01% | |
| RPX Composite Real Estate Index | 172 | 0.8 |
Equity futures are rising this morning on better than expected retail sales data. Citi missed earnings estimates and traded down a couple of bucks early, but has recovered as people digest the internals of the earnings report.
Empire Manufacturing came in lower than expected on weakness in China and Europe. While still positive, the pace of expansion has slowed. The forward-looking indicators continue to weaken, which is something to keep an eye on.
Spanish credit default swaps continue to increase in price, and have passed their high from last November during the Greek crisis. 10 year CDS for Spain are trading at 476 basis points. Spain’s GDP is the 12th largest in the world, so any default there will not be as tame as Greece. Their banks are much more household names – Banco Santander has the same market cap as Goldman. Paul Krugman is nonplussed.
11 state AGs sent a letter to Acting FHFA Ed DeMarco urging him to allow principal reductions on Fannie and Fred loans.
Earnings season gets in full swing this week.
Filed under: Morning Report |
All Things in Moderation 
Europe’s economy may be going to hell. Some people are arguing the US should implement an austerity budget, not unlike what countries in Europe have done. Would doing so put us on that same road that europe is on?
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This could conceivably be the single most boring day in the rates markets of the entire year.
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Bsimon, can you define what austerity means in this context? As far as I know, only some of the so-called PIIGS actually have reduced year over year spending and others merely “slowed the rate of increase.” I suspect that many European investors are reluctant to invest in anything due to the impending implosion of the Euro. That may explain their lack of growth versus “austerity.”
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scott:
Still not getting back in, no matter how you tempt me!
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Never trade a dull market…
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Brent:
Never trade a dull market.
Truer words. Got myself in trouble trying to make something of nothing. Never learn.
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” Bsimon, can you define what austerity means in this context?”
I read recently that, St least in some counties, austerity means benefit cuts. If I could recall the source I’d direct you to it.
Perhaps its only amusing to me, but I find it ironic that there is a strong correlation between those who criticize euro economics (socialism!) and those who want to follow them down the austerity path.
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Should Greece cut benefits? If not, what should they cut?
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If not, what should they cut?
Cut loose from the Eurozone?
Probably blew that opportunity.
Cut out graft to the tax collectors and collect a higher % of income taxes lawfully owed? Is that Greece? I don’t recall.
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Mark, not being snarky but how do they then pay any benefits if they leave the Euro? Where’s the money come from?
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McWing:
If they leave the Euro, they can start printing their own money, ie devalue their currency. That solution is not problem free, of course, but that is where the money could come from.
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I should have clarified that where are they going to get money that has any value.
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“Cut out graft to the tax collectors and collect a higher % of income taxes lawfully owed? Is that Greece?”
That is Greece, and perhaps others.
Greece, as the worst case in the union, has few options other than austerity. Germany, France & the UK are more stable & could choose Keynesian stimulus rather than austerity. We should carefully examine their experience before choosing the same path. What it looks like from my non-professional’s perspective is that our modest stimulus has contributed to a modest recovery, while the EU is still going in the wrong direction.
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Well, Japan has followed the basic Keynsian / ZIRP policy being advocated by Paul Krugman for over two decades and has almost no growth to show for it. They went from being the worlds largest creditor nation to having a debt to GDP ratio of 2.2x. The Nikkei 225 peaked close to 40,000 in 1989 and is currently trading around 9,500 or so. The Japanese banks did their huge capital raises in the late 90s, so it isn’t that either.
The problem is that no one can explain why that prescription didn’t work in Japan. And until someone can explain why it will be different for us, then I can’t see getting behind it. Most of the explanations are bullshit (We moved sooner, we are smarter, blah blah blah) None of them explain why, if we follow the exact same policies, the results will be any different.
FWIW, if the economy has peaked and we experience a mild recession early 2013, then we are really following in the Japanese model. And the Paul Krugman prescription will be “more Kowbell.”
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” Japan has followed the basic Keynsian / ZIRP policy being advocated by Paul Krugman for over two decades and has almost no growth to show for it”
What did they spend the money on?
What is/was their cost of debt? We can still borrow at extremely low rates; was that true for Japan?
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bsimon:
We can still borrow at extremely low rates; was that true for Japan?
Yes, it was…and still is. The last 10yr JGB (Japanese Government Bond) was issued in March with a coupon of 1%. The last 10y US government bond was issued in Feb with a coupon of 2%. Japan’s borrowing cost in yen is lower than the US’s in $.
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Scott, didn’t Japan first address the bust of their balloon with austerity, for many years? It seems to me they were eight years into austerity before revising to deficits plus EZ money. Maybe I recollect poorly, but I though they even had an historic change of party in power after several years.
Patient as the Japanese are as a nation, I think a lot of stuff passed them by, and no “central policy” was going to work well until the spirit that made SONY and TOYOTA world innovators caught fire again. Is that too simplistic?
Or incorrect, either as to my recollection or my surmise?
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mark:
Scott, didn’t Japan first address the bust of their balloon with austerity, for many years?
I don’t think so. If you look here (page 576), you will see that after the bubble burst in 1990, Japan began running regular and increasing budget deficits, rising in every year from 1991 to 1995. It did spike even higher in 1998, but clearly Keynesian deficit spending was a part of their program almost immediately.
Also, the Bank of Japan began lowering its key interest rate almost immediately, dropping it from 6% in 1990 to .5% by late 1995.
Regarding political changes of the party in power, that could be. I confess my knowledge of Japanese politics is not what it could be.
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” Japan’s borrowing cost in yen is lower than the US’s in $.”
At first blush that doesn’t seem to make sense. Perhaps it is wrapped in a currency bet.
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bsmion:
At first blush that doesn’t seem to make sense.
Why not?
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bsimon:
At first blush that doesn’t seem to make sense.
I’ve been pondering why you might think this. I’m guessing it is because you imagine that US credit is at least as good as Japanese credit, and so the US should be able to borrow at least as cheaply as Japan. What you are ignoring is that the cost of borrowing is not just a function of credit quality, but also the rate environment in the currency in which one is borrowing. If the US government were to issue yen bonds, it could surely issue debt at least as cheaply as Japan, but what would it do with the yen? And where would it get the yen to make coupon payments?
Perhaps this is what you were referring to as a “currency bet”. Yes, the rate differential is currency related, but it doesn’t have anything to do with a currency bet. In fact, if the US were to issue yen bonds in order to get the lower absolute rate of interest available in yen, that would be a currency bet, namely a bet on the future ability to convert $ receipts (taxes) into yen at a rate equivalent to or better than the current exchange rate, in order to be able to make the coupon payments owed and actually realize the lower rate of interest in dollars.
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Scott, regarding ppg 1, I was thinking from the international buyer’s perspective, not the issuer’s. But you’re saying the bond markets aren’t directly comparable that way. So, holders of yen are placing a higher relative value on the security of gov’t debt than are holders of US dollars.
Thanks for the.info.
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bsimon:
So, holders of yen are placing a higher relative value on the security of gov’t debt than are holders of US dollars.
Not necessarily. There could simply be fewer investments competing for yen than dollars.
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bsimon:
I was sort of in a rush when I posted my last. So by way of further explanation, imagine you are holding yen that you want to invest, but you are in a currency environment with a very high savings rate, little or no economic growth, and existing corporations with high cash balances. What are you to do with your money? You don’t want to buy existing equity where there is little or no growth prospects. It is hard to invest in debt issuance because, as hoarders of cash, companies don’t need to borrow and are not expanding in any event, and for those that are borrowing, there is tons of cash competing for their business because of the high savings rate. So, unless you are willing to take foreign exchange risk and invest outside of your home currency, you are going to end up having to settle on a much lower yield for comparable credit risks than you would in a different currency.
So it is not really that yen holders place a higher value on the security of government debt. It’s just that they have fewer places to put their money, so the government can command cheaper money. That’s actually one of the points of lowering interest rates on government debt to such low levels, ie make government debt so unprofitable to hold that investors are encouraged to take more on more risky investments to achieve higher yields, in the hopes of spurring economic growth.
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