Con-tango

Archived entries for Economy

July 25, 2006
In Economy, Views
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CDO or collateral damage?

I was participating in JD Hamilton’s excellent presentation on the yield curve — I sure do recommend a visit, when I ran into the CDOs or Collateralized debt obligations.

All I can say this stuff is literally… dynamite; and the whole financial industry is sitting on top of them…

June 29, 2006
In Economy, Views
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Let me start by suggesting that you read what Morgan Stanley’s economists have to say. It’s a rare occassion when they get together to discuss the prospects of the economy, so I encourage you not to miss this opportunity to read (part I and part II of) their debate.

With a very broad brush, we may describe the discussion as focussing on the effects of shrinking global liquidity. Joachim Fells sets the tone by positing the following remarks:

With less liquidity available to chase asset prices higher, a correction in asset prices seemed like a logical response.
Note that both the 1994 bond market crash and the popping of the equity
bubble in 2000 were preceded by sharp contractions in excess liquidity. The contraction in 1994 was of course due to the Fed’s tightening operation in that year and caused a major bond market crash. And the contraction of 2000 reflected global monetary tightening and preceded the bursting of the equity bubble.

Richard Berner highlights the chilling similarities of the pre downturn markers of ’94 to our actual situation,

Call me old-fashioned but I think the common thread between 1994 and
today is the Fed’s and other central banks’ efforts to pre-empt
inflation in the context of upside surprises to growth. At the start of 1994, no trader I spoke to thought that rates could go up by 100bp, much less 300bp. Growth kept surprising to the upside through the end of the year. The dollar sank, core intermediate PPI prices accelerated sharply, core CPI inflation rose by 50bp, and University of Michigan inflation expectations were rising.
Sound familiar? In my view it’s the shift in market expectations from a
Fed that simply normalizes rates to one that could actually hurt you
that triggered the mini global margin call.

May 22, 2006
In Economy, Views
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Inflation ripples?

I must admit Its taken me a while to get some sort of a handle on last week’s surprising drop in securities and commodities prices.

First, I strongly recommend reading Mission Impossible by Bill Gross. I think he summarizes quite clearly the overbearing economic markers of the past few years.

He draws the following picture:

The
thought was this: the center of global production was drifting towards
a high savings rate region – Asia. The resultant “savings glut,” to use
Bernanke’s term, would be recirculated into U.S. and Euroland bond
markets to build up “insurance” reserves but also to place a ceiling on
domestic currency appreciation. China was seen as the main culprit but
even Japan was involved in this game of competitive “real” devaluation.
The deal was a win-win for all parties. Asia got to grow their domestic
economies, Japan got to emerge from years of deflation, and the U.S.
got to import cheap goods and cheap money in order to stoke their
housing/asset markets. Euroland prospered as well.

Although
the “stability” produced many inherent disequilibriums including the
U.S. consuming 80% of the world’s excess savings reflected in an $800
billion current account deficit, there seemed nothing impossible about this
mission, I suppose. And there’s nothing improbable about its continuing
either until China/Japan are in closer proximity to their destinations
– China to eventually have a self-sustaining, internally demand
balanced economy and Japan to have permanently exorcised the D word
from its lexicon.

So, what has changed in this cozy arrangement, although deficit laden, to precipitate the markets; and will this deterioration continue?

May 17, 2006
In Economy, Views
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Copper margin quadrupled

In two weeks Clearnet has quadrupled the margin requirement to trade copper at the LME; no wonder commodities are acting giddily…

Source: KITCO

May 17, 2006
In Economy, Views
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OPEC’s 2006 demand estimate

What a press release… you
can’t get any more words into this OPEC report and shamelessly say less.

What were they trying to convey?

May 16, 2006
In Economy, Views
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A slowdown, not

The surprise fall in the trade deficit (to $62 billion, as reported last week by the BEA); was taken quite harshly by the markets, and in
particular commodities where prices fell sharply –the
consensus explanation: lower oil imports meant a falling
US demand.

My curiosity was piqued by FTX reneging Brad Setser’s lower oil imports to explain a wishful
declining demand and correcting US trade deficit…

May 4, 2006
In Economy, Views
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$900 billion in NPLs in China

Earnst & Young, the accounting firm, puts China’s non performing loans at an unexpected high level, $900 billion USD, surpassing their $875 billion USD reserve level.

FT update May 16: E & Y retracted the report

E&Y retracted the report, saying its estimate of bad debts for the
country’s big four state banks "cannot be supported and … is
factually erroneous".
(big snip)
In a statement issued with the retraction of its report, E&Y
resolved the conflict firmly in favour of its auditors, saying the
official figure was "computed on a regulatory and accounting standard
based on objective evidence of impairment". In a separate statement
yesterday, the accountant said the NPL report had erred by treating "unverified forecast data compiled by others as if it were historic
information".

Humm… an auditor feeling the pinch?