Commentaries
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from Rolfe Winkler:
Lunchtime Links 12-27
How overhauling derivatives died (Smith/Lynch, WSJ)
Debt ceiling raised $290 billion (Rogers, Politico) Another Xmas Eve vote. Dems had wanted to raise the ceiling at least $1.8 trillion to avoid having to raise it again before midterm elections, but they didn't have the votes. Congress has bought itself about 4-6 weeks of breathing room. Senate Repubs made a showing of not voting for the measure, but had they been in the majority, you can bet they'd have done the same to avert default.
At tiny rates, saving money costs investors (Strom, NYT) "Duh" is the obvious response to this piece. Savers have been getting hammered ever since the Fed started dropping rates two years ago. Yet it's well written and important to see in the paper of record. It makes the point that low rates are forcing many folks to chase risk. Low nominal rates would be fine IF the Fed were allowing the economy to delever/deflate as it clearly needs to. If the cost of goods/services is falling, then rates can be zero and savers still come out ahead. But the CPI has stayed positive, so savers lose. Of course punishing savers is precisely what economists like Paul "paradox-of-thrift" Krugman and Greg "confiscate-cash" Mankiw say is needed for the economy to recover. Krugman wants to steal savings via shock-and-awe deficit spending, i.e. future taxation. Mankiw would literally confiscate a portion of unspent savings.
Good news alert: Hunting trash for cash (Hudak, Orlando Sentinel) The recession is causing us to produce less trash. This is problematic for Covanta, which burns trash to create energy. But it's great for the environment.
Investors see farms as way to grow Detroit (Huffstutter, LA Times) Urban renewal...
Higher NAIRU doesn’t equal higher interest rates
Goldman Sachs analyst Peter Berezin is jumping into the debate about the impact of a rising NAIRU – a measure of unemployment equilibrium. Felix Salmon posted on it here back on Sept. 29 and quoted PIMCO’s Mohamed El-Erian saying that 7% seems “reasonable.”
Berezin notes that the CBO estimates NAIRU at 4.8%. If it increases to the 5.8% used in the early 1990s, it still wouldn’t have a meaningful impact on the Fed’s monetary policy, which is why people care about NAIRU in the first place. Berein says a 1 percentage point jump in NAIRU should lead to a corresponding 2 percentage point increase in the Fed funds rate. That would take the so-called optimal fed funds rate (which takes into consideration the extraordinary measures like quantitative easing) to -3.5% from -5.5%. Even using El-Erian’s “reasonable” 7% level would still keep the optimal fed funds in the negative.
A compelling case for carry in Treasuries
Under normal circumstances, U.S. Treasuries should probably be getting clobbered.
The worst of the credit crisis is over, the economy is expected to snap back in the second half of the year, and the appetite for riskier, higher-yielding assets should be siphoning off demand from boring, safe-haven assets like Treasuries.
Treasury yields not adding up
What is going on with U.S. Treasury yields? Can nothing nudge them from their current low-laying perch? Something seems very out of whack, but let’s just agree not to call it a conundrum.
There’s plenty out there that should be ratcheting up interest rates. The U.S. stock market has been on fire, with the S&P 500 still hovering near its best levels since October, the White House is projecting $9 trillion in debt over the next 10 years, the economy is showing signs of improvement (a bond very unfriendly development), and a flood of new debt is already washing over the U.S. Treasury market
Israel’s central bank first to tighten
So much for waiting for the jet lag to wear off. Stanley Fischer, the Bank of Israel’s governor and listed as an attendee at this weekend’s Jackson Hole symposium in Wyoming, is first among central banker governors to push interest rates higher since July.
From Reuters:
The Bank of Israel said on Monday it increased its key short-term lending rate by a quarter-point to 0.75 percent to help inflation get back to its 1-3 percent target.
Bernanke: Back to Clark Kent
Having averted a disaster, cartoon superheroes typically revert to their bland civilian identities. With the recession loosening its grip, Ben Bernanke is trying a similar trick.
After a period of heroic boldness and creativity, the Fed is determined to be dull. Wednesday’s statement from the Federal Open Market Committee may well be calculated to bore.
Goldman’s trading secret
LONDON, July 22 (Reuters) – Goldman Sachs last week reported record net revenues from trading and principal investments ($10.8 billion) during the three months ending June, with the major contribution coming from the fixed income, currencies and commodities segment ($6.8 billion).
Most commentators ascribe the firm’s stunning performance, and strong results reported by some of its peers to luck (a rising market lifts all boats); brilliance (trading strategies that are just smarter than everyone else); being one of the last men standing (benefiting from the lessening of competition in many of the markets in which Goldman operates); or some combination of all three.
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The Wall
