Tomorrow is LTRO DAY in Europe as the ECB will reveal the size of its next tranche of 3-year loans made available at the BALANCE SHEET RECESSION rate of 1%. Several rumors tried to upset the market today as “insider gnomes” floated one story after another that the size of the LTRO would be 280 BILLION EUROS, which is at the low-end of current GUESSTIMATES. Each time the equity markets broke on the rumors, they snapped immediately back as the global financial system is floating on an ocean of liquidity. Higher OIL? NO PROBLEM, MAN! SOVEREIGN SOLVENCY ISSUES? NO PROBLEM!
Posts Tagged ‘Ron Paul’
It is that time on the calendar when the FOMC gathers to discuss the economic landscape and analyze the output of flawed models to set a course with the a strong sense of absolute certainty of their convictions … at least until the next crisis. Many analysts are spewing the concept of another QE program so as to give the recent improving data some extra lift to insure that the recent growth has legs. It would be a bad decision for many reasons but the top three arguing against any new QE program are:
Even as the rumors of a massive IMF intervention to support Italy faded into the New York close the equity were buoyed by the robust start to the HOLIDAY SHOPPING SEASON. Increased sales and no bad news from Europe left the risk on (deleveraging halted) for at least another day. The 2/10 Italian curve aided the rally as the curve MOVED 50 BASIS POINTS AND CLAWED BACK TO A POSITIVE SLOPE. IN YESTERDAY’S BLOG IT WAS NOTED THAT THE 2/10 CURVES OF THE SPANISH AND ITALIAN DEBT MARKETS WERE NOW AN IMPORTANT INDICATOR OF DEBT STRESS AND FEARS FOR THE ECONOMIES OF THOSE ON THE PRECIPICE OF CRISIS.
The Fed Chairman’s remarks at Jackson Hole left those hoping for QE3 disappointed. The Wall Street crowd who have grown addicted to the “Greenspan Put” and its help in sustaining the BULL in equities were aghast that Ben failed to maintain the monetary injection. Mr. Bernanke backed off of aggressive new policy and did not mention wealth effect of the PORTFOLIO BALANCE CHANNEL. While in the serene surroundings of the Grand Tetons, it seems the FED Chairman has learned that the Fed cannot be held hostage to the daily machinations of Wall Street and the markets and fiscal policy stewards are going to have to be patient in regards to further monetary support.
Jobless claims, GDP, consumer sentiment … all meaningless as the Bernanke speech at 9 a.m. CST takes precedence. The financial world awaits to hear if the FED CHAIRMAN will deliver another gift like last August’s Portfolio Balance Channel speech. While QE2 did not commence until November, the groundwork was laid in August and the plan delivered at the September FOMC meeting. The markets well understood that the intent of Jackson Hole precipitated the equity market rally that began in September.
It was time for the FED Chairman to make his legislated appearance to Congress and Mr. Bernanke rightly refrained from being dragged into the battle over the budget. I have criticized the FED Chairman more than a month ago when he offered an opinion on the budget resolution. Fiscal issues are the purview of CONGRESS and the FED risks its independent stature if it wants to opine of the CONGRESSIONAL PREROGATIVE. Congressmen and women tried to get Bernanke to wade into the muddied waters and finally he flippantly said that legislators get paid the “big bucks” to make fiscal policy.
Paragraphs two and three of the FOMC statement remind all concerned that the FED has a dual mandate. In fulfilling that statutory mandate, the FED is using all tools at its disposal to fulfill that mandate. Paragraph two said, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.” Then in paragraph three it said: “To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate….”
Something to put on your radar screens for the new year: contingent capital, or CoCo bonds. These instruments are contingent convertible and will be a very respected form of TIER 1 capital under the foggy regulations of Basel 3. The regulators like these instruments as they are DEBT that converts to equity if/when the bank-in-question’s equity/capital ratio falls below a certain level. Rather than the BOND holders getting a free ride and the equity owners bearing the burden with an equity raise, the CoCos will automatically convert to EQUITY, which will lower the level of DEBT and increase equity capital to a regulatory acceptable level. Credit Suisse announced it’s going to do a $30 billion CoCo so you can be certain that other large multinational banks will be joining in. It has yet to be determined what effect CoCos will have on the markets overall. If its popularity catches on, as I suspect, it could provide a boost to the global behemoths as it would lower the need to float more stock to reach the needed capital levels.