Tag Archives: central banks

Twas the Night Before Taper: A Wall Street Holiday Poem

After several months of silence, Mustafa Mond, whom we last heard from in April, has resurfaced. Today, Mr. Mond offers us this holiday poem:

TWAS THE NIGHT BEFORE TAPER

By Mustafa Mond

Twas the night before Taper, when all through the Street
Not a whale was stirring, not even a veep.
The earnings were prepped by accountants with care,
In hopes that bonuses would be much more than fair.

The bankers were settled all smug in their spreads,
While Fed interventions entranced all their heads.
And Barack with his selfie, and Michelle with hers too,
Readjusted their cameras to spy just on you.

When out in the markets there arose such a cry,
Barry sprang from West Wing to see what was nigh.
To the news wires he flew like a bat of hell,
Knowing hestill had the masses to quell.

Markets were speeding, out of control,
The VIX off the charts—who spiked the punch bowl?
When, what to his wondering eyes should appear,
But a great big helicopter with pallets in the rear!

With an exhausted driver, tired of dollar-yen,
And a new co-pilot, it must be St. Ben.
Faster than a flash crash his beneficiaries came,
And he whistled, and shouted, and called them by name!

“Now Blankfein! Now Dimon! Wells Fargo and Citi!
On Gorman! On Moynihan! NYSE and BONY!
To the highest of highs! ‘Til market bears have fled!
After all, in the long run, we’ll all be dead!”

The yield-hungry traders scrambled for carry,
Locking in profits before the curves vary.
And up to the market-top prices arose,
While Barack’s disapproval relentlessly grows.

And then, with the microphones set to full blast,
The media watched carefully for any contrast.
Trading floors went silent, as they are apt to do,
As Fed chairman testimony makes sense to so few.

He spoke all in jargon, acronyms and indices,
Durables and deficits and payrolls and factories.
A big pile of assets he still wants to backstop:
A mortgage, a bankruptcy, a credit default swap.

His data—how thorough! Statistics—such authority!
And his protégé, this Yellen, confirmed with a majority!
His post-Fed retirement expectantly awaits,
No doubt duly hedged for much higher interest rates.

Europe and China, oil exporters like Canada,
The Saudis and Russia, and fiefdoms like Panama,
Listened closely for signs of any new shocks,
But at least they have product–unlike tech stocks!

He was measured, cogent, lacking Greenspan’s grandiloquence,
But the reaction, as always, was irrational exuberance,
As he made quite clear that ZIRP would continue,
And Wall Street rejoiced–“to the discount window!”

Thus ended St. Ben’s last public report
As chairman of the lender of last resort:
Tapering delayed, until 2014,
When St. Ben will no doubt be far from the scene.

He sprang to his chopper, having completed his duties,
Leaving risks to be rated by S&P, Fitch and Moody’s.
And on his way out, they asked, “what of safety nets?”
He cried, “Happy Holidays! And good luck with your debts!”

MustafaMond.signature

Irrational exuberance continues plaguing Bitcoin

2013.12.IgnoranceBank of America has now initiated coverage of bitcoin and puts a fair value price target at US$1,300, which depending on your view, either validates or discredits the digital currency. Personally, I have no skin in this game, I appreciate and am fascinated by the theoretical construct, but am put off by the breathlessly brainless hype surrounding it and one doesn’t have to look far to see bitcoin’s limitations.

With that said now, the BoA report link is here, and as far as I’m concerned, the most important stuff comes in at page 6, in the section entitled, “How to assess Bitcoin’s fair value?”

I admit up front I have yet to come up with a viable answer to this question, but if I may say so, I am expert at recognizing bullshit when I see it. And BoA analysts make what even they concede are very big assumptions here, but if you know the assumptions are “big” (read: unrealistic), then why bother going on about it in the first place?

Anyway, taking this piece by piece, some of the outlandish assumptions that lead to a “fair value” price of $1,300, as far as bitcoin’s value as a medium of exchange:

Given the assumption that Bitcoin will grow to account for the payment of 10% of all on-line shopping, this would suggest that US households would want to have a balance of $1bn worth of Bitcoins.

…given bitcoin’s famous finite supply cap at 21 million units, the math here isn’t quite doing it for me.

What about for the whole world? US GDP is about 20% of World GDP. If we were to assume the same degrees of penetration of e-commerce for the rest of the world and that spending by households outside the US has the same velocity, we get to $5bn worth of Bitcoins for the total desired cash/noncash balance of global on-line shopping.

…sure, but both of those assumptions are not just wrong but shockingly ignorant about how the world outside the United States operates. I don’t need to spell this one out further, do I?

In addition to its role as a mean for payment for on-line commerce, Bitcoin can be used for transfer of money (e.g. immigrant worker in the US sending remittances back home).

…the average immigrant worker in the US sending remittances back home is a) Latin American, and b) traditionally very distrustful of all financial mechanisms or intermediaries that are not cash; further, this average immigrant worker would require a level of facility with the internet that various studies simply do not bear out.

Western Union, MoneyGram, and Euronet are the three top players in the money transfer industry (with about 20% of the total market share). Let’s assume that Bitcoin becomes one of the top three players in this industry.

…actually, let’s not, for all kinds of practical reasons. See previous two rebuttals to begin with.

A thought just occurred to me: maybe this is a practical joke — like the Onion!

As far as bitcoin somehow serving as a store of value, the entire discussion here appears LSD-induced, with the following statement perhaps being the biggest whopper:

If we were to assume that Bitcoin were to eventually acquire the reputation of silver (which is an extremely ambitious assumption), this suggests that Bitcoin market capitalization for its role as a store of value could reach $5bn.

WHAT?

This is the metaphorical equivalent of saying that assuming gravity were one-tenth its current force, I could leap tall buildings in a single bound…and then going on to design a workout routine that does indeed involve me leaping tall buildings in a single bound.

Someone’s living in unreality and I’m pretty sure it’s not me. 

More evidence of a Bitcoin bubble

If this isn’t proof enough of a Bitcoin bubble, I don’t know what is:

2013 December Bitcoin

Actually you know what? I think there is better proof: THIS.

Ode to Janet Yellen: A Fed Prayer

Yellen PrayerSo Janet Yellen is officially the new Chairperson of the US Federal Reserve Board of Governors. Thanks to whatever anonymous reader just sent me this:

Dearly Beloved,

Let us pray.

Our Fed
Who art in Washington
Yellen be thy name
Thy printing come
Thy will be done by Ben as it is with Janet
And as it was before by Greenspan.
Give us this day our daily 3 billion
And increase us our debts
As we bail out our debtors
And lead us not into inflation
But deliver us from down markets
For thine is the printing, the bubble and the euphoria
Forever till taper
Amen

— Anonymous

Fed tapering, Emerging Markets, Banxico

Thanks to Brent Donnelly from Nomura for this chart showing USDMXN vs 10-year US Treasuries since “tapering” became a new market watchword:

2013.09.20.USDMXN 10 year UST

So what? Here’s so what: For anyone who ever thought Videgaray, Carstens or whoever else had any sway, when push comes to shove, dollar-peso moves almost in lockstep with Fed expectations. Put another way, whenever Bernanke & Co. decide easy money is over and raise interest rates, expect the peso to go back above 13.0+ and stay there (possibly even 14). And if Carstens or whoever replaces him is smart, they’ll keep their hands off. Draw your own conclusions about what that means for Mexican inflation, TIIE, etc.

Plain English: China’s Cash Stash

2013.04.11.China FX ReservesThis little quip from the FT about China’s rising FX reserves made me stop in my tracks:

“Reserves jumped $130bn to $3.44tn – roughly equivalent to the size of the German economy…”

Really?

Yes. Really. You can look it up here.

This now raises some other basic questions: what else is worth $3.4 trillion? Or: what could China buy with that kind of money? How else can we even conceptualize this number?

In the spirit of my previous conceptualization of Facebook’s $100 billion IPO, here are some other ways to conceptualize $3.4 trillion:

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What Central Bank FX Reserves Really Tell Us

The New York Fed has just published what is absolutely mandatory reading for anyone with a stake in the foreign exchange market. It’s a 10-page pdf entitled, “Do Industrialized Countries Hold the Right Foreign Exchange Reserves?” and is one of those rare documents whose entire text is quotable, making excerpting rather difficult, but I’ll try to keep it short. The abstract provides a pretty good summary:

That central banks should hold foreign currency reserves is a key tenet of the post–Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.

And this, from the opening paragraph, is also worth drawing attention to:

To date, the foreign exchange reserves of major industrialized economies have received relatively little attention in public policy circles, with few questions posed regarding their optimal size, composition, and use. Instead, discussion of foreign exchange reserves tends to center on the large holdings of emerging market countries—including China, whose reserves reached about $3 trillion in mid-2012. Foreign currency reserves are also overshadowed in public discussion by the much larger external imbalances that countries amass in the form of trade deficits and surpluses.

The key element here is that this paper only looks at the US, the UK, Switzerland, Japan, Canada, and the euro area, and rightly so as these are the big fish of the global FX market. The brief mention of emerging market countries’ holdings highlights what’s implied in the debate but rarely stated explicitly, so allow me to do so now:

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Charts Of The Day: The Bitcoin-Argentina Connection

On increasing chatter I’ve been hearing about bitcoin, pending devaluation in Argentina and the possible use of bitcoin to circumvent capital controls in Argentina, I had to look at the data.

Bitcoin, for those who aren’t aware, is a virtual currency that exists solely online (I have one previous discussion of it here). I’m not going to put up any links on its origins here because you can honestly just google it and find more than enough info, but the Wikipedia page gives a decent unbiased explanation.

And the operative word in that previous sentence is “unbiased”. Because there’s a rising political element to bitcoin that I really don’t want to get into, but to sum it up, there is a palpable libertarian bent to its propagation if you can sift through all the hype and speculation, good and bad, about its use.

Personally, I think it’s an interesting experiment and am wholly agnostic about its success or legitimacy, but love seeing regulators squirm at the implications of it. To borrow from former US Defense Secretary Donald Rumsfeld, the “unknown unknowns” here are nothing less than staggering.

Actually, here is an interesting profile of bitcoin’s user base for those of you already familiar with it.

And for those of you ready for the advanced class, this is a handy diagram:

2013.03.27.How a bitcoin transaction works

Anyway, on to the data.

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Plain English: Some Thoughts On Bernanke’s LSE Speech

2013.03.26.Bernanke Plain English-helicopter benBernanke gave a speech at the London School of Economics yesterday which is grabbing a lot of attention. Those who have heard or read some of his other non-Fed public lectures over the past few years will recognize that he spent about half of it reviewing some of his favorite historical lessons, mostly sourced from his pre-Fed academic work. But there were some new statements to add to this mix. My interpretation of some of the key themes:

  • The current financial crisis is in fact a classic panic: a systemwide run of “hot money” away from assets whose values suddenly became uncertain.
  • That said, there were some different bells and whistles this time, notably the introduction of new financial instruments, more varied actors beyond just banks and (in my opinion) most vitally, a scale and complexity altogether new.
  • Currency war, which Bernanke chooses to refer to as, “competitive depreciation of exchange rates”, is similarly not new.
  • The accommodative monetary policies central banks around the world have been implementing (read: zero interest rate policy) to support growth do not constitute competitive devaluations, currency wars or whatever term you prefer. The primary reason for this is that domestic demand counts for a lot more than exchange rate meddling and in any event when competitive economies both devalue their currencies, whatever effects result from these devaluations effectively cancel each other out.

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The Carry Trade Is Not Dead – It’s Just Evolved

My Seeking Alpha article last week on the Mexican peso’s post-rate cut rally prompted this response by a reader:

“Capturing the interest rate differencials across currencies used to be an fx trade, but global monetary accomodative policy has taken the juice out of the carry trade for fx traders. The carry trade has increasingly become a fixed income trade where real money has more tolerance for fx volatility in order to capture higher global yields. To that extent, currencies will in fact benefit where there is a belief that local rates are too high.

I don’t expect further rate cuts, Ulysses. I think the 50bp was an attempt at normalization, perhaps partially due to the increase in real money flows into Mexico that were screaming that rates were too high. The irony that you point out about a stronger peso can probably be attributed as much to the ratings upgrade and correlation with a recovering US dollar. Mexico’s reputation for strong policymakers as well as the convergence of business cycles with the USA, makes it a good laggard candidate to get some beta on the USA. That said, it’s a bit overbought and needs to consolidate if it is going to push much lower.”

To the extent that the Mexico exchange-traded fund, which goes by the ticker EWW, correlates with the peso, it looks like this overbuying has already been priced in. Whether looking at this in terms of absolute price or in terms of returns, the March 8 rate cut coincided with a brief bump in the EWW price which has now reversed course, while the peso remains up. This gap will have to close at some point. The question is when:

2013.03.18.MXN EWW YTD price

 

2013.03.18.MXN EWW YTD percent

And here’s what the EWW vs. peso relationship looks like over the past year:

2013.03.18.MXN EWW 1 year

The Carry Trade Is Dead. Long Live The Carry Trade.

2013.03.13.USD MXN BRL Carry TradeMy latest Seeking Alpha article is out, in which I try to make sense of why the Mexican peso is strengthening on the heels of an interest rate cut by the Bank of Mexico on Friday. And the short answer is that the carry trade is dead. Read the rest here, but what I can add to this argument is actually something that I’m surprised nobody has taken me task for in the comments section yet and that is this: the carry trade isn’t entirely dead. Brazil is in all likelihood about to raise rates again and the expectation is that this is going to strengthen the real.

Which raises the next question: Why is the Mexican peso resorting to the theory of interest rate parity while the Brazilian real is is adhering to the anti-theory of interest rate parity in the form of the carry trade?

Stay tuned.

Translation of the Bank of Mexico’s Monetary Policy Announcement on Friday

2013.03.11.Banxico Agustin CarstensAs you may or may not have heard, the Bank of Mexico cut its benchmark interest rate on Friday by 50 points to 4 percent. This is kind of a big deal for reasons I’ll get into in a separate comment. But for the time being I just wanted the full text of the statement in English for easy referencing and nobody else seems to be carrying this, so I just did the translation. More to come shortly.

Here’s the original link in Spanish from Banxico’s website.

Here’s the translation (bold emphasis mine):

March 8, 2013

Monetary Policy Announcement

The Bank of Mexico has decided to reduce the interbank interest rate by 50 points to 4.0 percent.

The global economy continues showing signs of weakness. In the United States growth in 2013 is expected to be lower than in 2012 and important downside risks are prevalent. In particular, the recovery of economic activity and employment, supported in large part by monetary policy, is being affected by necessary fiscal consolidation.

In the Eurozone, economic activity continues without showing signs of recovery. Furthermore, regarding economic recovery, uncertainty continues about the effect necessary fiscal adjustments will have, the health of the European financial system and the possibility of major political instability, particularly among the peripheral economies.

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Making A Case For Buying Chile and Selling Mexico

2013.02.27.The Case for Buying Chile and Selling MexicoWhat I’m about to put here has gone through many evolutions. The latest came out in the form of a Seeking Alpha article which I just had published the other day under the headline, “A Preliminary Case For Chile Over Mexico.”

For a couple of weeks now I’ve been looking at the merits of either buying the Chile ETF (ticker: ECH), shorting the Mexico ETF (ticker: EWW) or both. And by the way things have been looking recently, not only do my instincts look about right, but I may have even missed the boat. For those who have been watching the elections in Italy, the fallout for the euro has been pretty hard, on the order of 300 bps in Monday alone. So what does this have to do with Latin America? Well, a lot, actually. I initially wrote about this back in June last year for Seeking Alpha here, and apparently my thesis still holds.

The storyline as I see it is pretty simple.

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Chart of the Day: Obama, Stock-Picker Extraordinaire

This is kind of hilarious actually:

2013.02.14.ObamaSP500

Sourced from the Atlantic.

Central Banking Today: Game Theory Now More Than Ever

Take a look at this recent column from PIMCO’s Mohamed El-Erian and try to tell me otherwise:

With many other policy makers essentially missing in action, central banks find themselves in leadership roles not out of choice but necessity. Given imperfect tools, their involvement entails, to use the US Federal Reserve chairman Ben Bernanke’s phrase, “benefits, costs and risks”. They believe that macroeconomic benefits will outweigh the collateral damage; and they hope that they will buy sufficient time for others to respond properly and for economies to heal endogenously.

The dilemma of modern central banking was captured well last week by incoming BoE governor Mark Carney in his testimony to the UK House of Commons Treasury committee. While recognising the risks of further QE, the current Bank of Canada chief argued that central banks should act to avoid sluggish growth raising the natural unemployment rate via hysteresis.

The fundamental problem is that central banks are pursuing too many objectives with too few instruments. That is why outcomes consistently fall short of their expectations; and also why talk of exit is repeatedly shelved.

Absent better support from other policy makers, central banks will be dragged deeper into policy experimentation. Meanwhile, with incentive structures failing to align properly, perverse reactions are clear – from persistent (and, in Europe’s case, increasing) policy complacency elsewhere to distorted market functioning leading to potentially harmful resource allocations.

Then there is the biggest issue of all: the effects of unconventional monetary measures are likely to become volatile and highly binary if a growing number of central banks around the world feel they have no choice but to join the current western policy stance.

A larger global shift to expansionary monetary policy would enhance the probability of triggering “wealth effects” and “animal spirits”: the two channels through which policy-bolstered asset prices translate into better economic fundamentals. With that, the greater the likelihood of a pivot from “supported growth” to “genuine growth”.

However, relative pricing channels, including currency relationship, would be crippled if too many central banks were to opt for the same policy. Harmful beggar-thy-neighbour effects would amplify damage from artificial surges in asset prices that encourage irresponsible risk taking, fuel “bad inflation” and worsen the risk of disorderly economic and financial deleveraging.

How Zimbabwe’s public account is worth less than an iPad

2013.02.04.100-trillion-dollar-note-zimbabweOr iPod, or dinner and drinks for four in certain cities, or most plane tickets…

Fareed Zakaria, on his weekly GPS show, ran a segment on this story yesterday. I’ve been trying to find the video clip of this particular segment but for some reason it isn’t listed on the GPS blog. I did however find a transcript of the segment for some reason published on a website called “Electric Light and Power“. In any event I thought it worth keeping track of, so here it is cut-and-pasted:
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Chart of the Day: Frontier Markets Fixed Income Yields

We would be wise remind ourselves first of the definition of the impossible trinity: it is impossible to have (a) a fixed exchange rate, (b) absence of capital controls and (c) an independent monetary policy.

Remember that. I’m going to come back to that.

So Silk Invest has this going on:

“The chart on the right hand side compares currencies in terms of Purchasing Power Parity. What the graph tells us is that the adjusted value of the Brazilian Real is similar to the US$, while most frontier market currencies are systematically undervalued.”

2013.01.23.Frontier Markets yields

The problem I’ve always had with Purchasing Power Parity is that it assumes equivalent standards of living across markets when in fact that is very rarely the case. Put another way, a dollar may buy more in Brazil than in Vietnam, but this says nothing about what the average citizen in either of those countries needs to sustain a living.

But that’s an argument for another time and another context. Otherwise, this is a very compelling chart. A couple things off the top of my head:

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Mexico’s last locally-owned bank, democracy today and PRI 2.0

When was the last time you heard a bank openly and unabashedly praise an incoming political leader or party? I’m not talking about some vast conspiracy thing here; I mean this quite literally. Imagine it: a new political leader is “democratically” elected and one of the largest banks in the country publicly praises the incoming political leadership, telling all its customers and investors and anyone else who will listen that a new day has begun and good times are here to stay. Sounds sort of…propagandistic, doesn’t it? Sounds like

Well, Banorte, which happens to be the last remaining fully Mexican-owned bank, has of late been sending out research notes with a level of subservience and puerility really unbecoming itself. In chronological order:

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The IMF finally considers nuance in capital controls policy

After a three-year review of its policy on capital controls, the IMF is reversing its stance, effectively connoting a status for the institution that brings to mind a certain Kent ‘Flounder’ Dorfman:

Sure, the IMF has said it favors macro prudential policies and sure, it gave limp support for austerity due in part to the screamingly obvious distortions near-zero interests rates are causing. But a couple of these big-pic takeaways from the IMF’s recently issued report are worth noting and indicate a very different tune than the usual liberalize-at-all-expense advice the IMF has become famous for (emphasis mine):

Liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh the costs, as it could have significant domestic and multilateral effects. Countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner. There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times.

Rapid capital inflow surges or disruptive outflows can create policy challenges. Appropriate policy responses comprise a range of measures, and involve both countries that are recipients of capital flows and those from which flows originate. For countries that have to manage the macroeconomic and financial stability risks associated with inflow surges or disruptive outflows, a key role needs to be played by macroeconomic policies, including monetary, fiscal, and exchange rate management, as well as by sound financial supervision and regulation and strong institutions. In certain circumstances, capital flow management measures can be useful. They should not, however, substitute for warranted macroeconomic adjustment.

While it’s nice to have the IMF join a party that has been underway for a few years now, I would remind everyone of a couple of things. One, there are many variables that influence capital flows into developing countries, and while monetary policy in the US and Europe is a major factor, it is far from the only one. Macro environment matters, relative yields matter, “currency wars” and just plain wars, to name a few, also matter.

I also should note that I have not yet read the full paper but I suspect that when I do I will have more to say about this. In the meantime, new readers looking for more on cap controls might try the following:

Previously related reading:
A non-ideological defense of capital controls here.

A non-ideological rebuttal of capital controls here.

FT coverage here and here.

Competing views on China’s Yuan Renminbi overtaking the US dollar

Last week, the Economist went to press first:

“…a number of countries, including India, Malaysia, the Philippines and Russia, appear to have slipped anchor since the financial crisis. Comparing the past two years with the pre-crisis years (from July 2005 to July 2008), they show that the dollar’s influence has declined in 38 cases.

The greenback has in the past played a dominant role in East Asia. But if anything, the region is now on a yuan standard. Seven currencies in the region now follow the yuan, or redback, more closely than the green (see chart). When the dollar moves by 1%, East Asia’s currencies move in the same direction by 0.38% on average. When the yuan moves, they shift by 0.53%.”

Four days later, we heard from Franklin Templeton’s Mark Mobius:

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