The stock market went up today when Ben Bernanke said what I have been saying, which is that US economic growth is not only weak, but appears to be weakening further. Why do stocks go up when the economy weakens? The answer is the Bernanke Put. Each of the last three times when economic growth was slumping, the Fed eased and stock prices soared. Although Bernanke didn’t say it, investors were betting today that the Fed will take action again. The problem is that the Fed easing is becoming less and less effective. It is the law of diminishing returns.
The Economist shares some views on banking and the (non) role of supply and demand in banking.
THE crisis has taught people a lot about the banking industry and the thought processes of its leaders. These lessons can be distilled into four golden rules.
1. The laws of supply and demand do not apply. When food producers compete to supply a supermarket, the retailer has the luxury of selecting the lowest bidder. But when it comes to investment banking, wages are very high even though the number of applicants is vastly greater than the number of posts. If the same was true of, say, hospital cleaning, wages would be slashed
An investment bank, like a supermarket, demands a certain quality standard: it will not hire just anybody. But whereas it may be easy to identify a rotten banana, it is harder to be sure which trainee will be the next Nick Leeson and which the potential George Soros. That gives executives an excuse when things go wrong. (full reading here).
Rickards on the LIBOR scandal, Geithner and Fed. If $500 trillion of swaps are based on LIBOR and the rate was manipulated by 10 basis points over five years, that’s $2.5 trillion of fraudulent transactions — more than the combined capital of the nation’s five largest banks, Rickards explains. “Congress may have to step in to limit the damages because it would threaten the banking system.”
Full video below.
Guest post by Peter Tchir of TF Market Advisors.
So Germany issued some Bundesschatzanweisungen (affectionately known as “Schatz”) at a negative yield. So 2 year bonds, with no coupon, were issued above par creating a negative yield, and the demand was strong.
What does this mean? Why lend money to Germany for 2 years and receive no interest and get let money back than you gave today? And it cannot just be retail investors. This has to include bond managers and even hedge funds who charge a fee to earn zero. So they must have a play in mind. There has to be a reason they are buying bonds at zero and negative yields.
- Squeezenshorts? It cannot just be a short squeeze. While many investors have been short German debt as a bet that it will cost Germany a lot of money to bail out Europe, there are just too many investors who view it as a safe haven. So it cannot be short covering.
- Deflation? Could it be that investors are so worried about deflation that they will accept a negative return from a safe counterparty? That could play a part, but there are better ways to express that view. Also many of the most likely “deflationary economic collapse” scenarios center around Europe, so why invest in a currency that would probably get hurt?
- Deutschemarks? Is this really a bet on currency break-up? Are investors expecting that either weak countries will be kicked out of the Euro, providing for currency appreciation? If so, why not just buy the Euro outright? Are they hoping to get converted to Deutschemarks? If you think Germany will go for Deutschemarks then you could be buying German bonds at these yields in the hope of getting paid back in a strong currency? That makes some sense as your downside by lending to Germany is limited, with some potential upside, but a Euro break-up might not result in bond conversion.
Paul Krugman wonders why others worry about inflation when he sees no evidence of inflationary trends:
Joe Wiesenthal makes the well-known point that aside from certain euro area countries, yields on sovereign debt have plunged since 2007; investors are rushing to buy sovereign debt, not fleeing it. I was a bit surprised by his description of this insight as being non-”mainstream”; I guess it depends on your definition of mainstream. But surely the notion that what we have is largely a process of private-sector deleveraging, with government deficits the consequence of this process, and interest rates low because we have an excess of desired saving, is pretty widespread (and backed by a lot of empirical evidence).
And there’s also a lot of discussion, which I’m ambivalent about, concerning the supposed shortage of safe assets; this is coming from bank research departments as well as academics, it’s a frequent topic on FT Alphaville, and so on. So Joe didn’t seem to me to be saying anything radical.
But those comments! It’s not just that the commenters disagree; they seem to regard Joe as some kind of space alien (or, for those who had the misfortune to see me on Squawk Box, a unicorn); they consider it just crazy and laughable to suggest that we aren’t facing an immense crisis of public deficits with Zimbabwe-style inflation just around the corner.
Krugman, of course, thinks it crazy and laughable that in the face of years of decreasing interest rates that anyone would believe that inflation could still be a menace. In fact, Krugman has made the point multiple times that more inflation would be a good thing, by decreasing the value of debt and thus allowing the private sector to deleverage a little quicker.
On Monday permabear Edwards was pointed out the SPX might be nearing the ultimate death cross. Doug Short examines the subject closer and reaches somewhat different conclusions.
James Ross, the University Architect at UNC Wilmington and an astute observer of the economy, called my attention to an amusing Business Insiderpiece published yesterday: The S&P Is On The Verge Of The Ultimate Death Cross. The piece mentions a note published Monday by Societe Generale analyst Albert Edwards, who points out that the S&P is on the verge of an “ultimate” death cross. And what, pray tell, is that? A 50-200 moving average crossover, based on months, not days (or even weeks).
So let’s check this out. The S&P 500 only dates back to March 1957. Since that time the 50-month MA has never crossed below the 200 month MA. The closest it came was the June 1978 monthly close, which gave us a 2.09 point spread between the 50-month (92.09) and the 200-month (90.00). During the 55-plus years that the S&P 500 has existed, there has never been an “Ultimate” Death Cross.
At the end of last month, the spread was a little over 11 points.