HAHA!!!

This is the happiest crash of my life!!! (so far)

Obamaman the Hypocrite

Obamaman is taking hypocracy to US soverign debt levels. He wages 2 wars and declares himself the Commander-in-Chief of the greatest army on the face of the world - and accepts the Nobel Peace prize. Pulled out the army from Iraq and put more troops in Afghanistan. And now he says that he is not helping out a bunch of "fat cat bankers"! Yes Mr. President, give banks free money and expect them to sit on it. Very intelligent. You are either totally clueless about finance and economics or you are just going around gassing "Yes we can".

If the free economy had been allowed to run its course, we would have fewer but stronger banks and probably another year of recession. In my opinion, the global economy can not take any more of Ben Bernanke's Keynesianism. He should be replaced by Volker or Galbriath or Stilgitz: people who can think beyond their PhD thesis.

As always, TED puts the thought in a better perspective.

Flight to Safety

Continuing from the post below:

1. Some time back, the FED decided to hold the federal fund rate between 0 to 25 bps.
2. The 3M t-bill rate touched 0%.
3. 30 yr TSY yields are currently at 2.6%

Such low yields for treasuries imply a strong deflationary/depressionary expectation among market participants.

Let us now consider the following scenarios:

1. Inflation: With most central banks providing free money to the markets in a coordinated effort to ward of a global depression, it is only a matter of time before market participants regain their calm and start taking advantage and treasury yields become negative on a inflation adjusted basis.
2. Crash: As soon as there is any hint of a recovery, money managers who have parked their funds in treasuries will start selling to invest in other asset classes not ready to miss the next upturn.

Which brings us to the question, who is going to fund the US fiscal deficit now? Treasuries will certainly have to yield more for anybody to be willing to invest in them. Assuming that Paulson lives up to the Goldman name, with TARP, he has not only created the world's biggest hedge fund, but if the markets recover, he will have earned the US Treasury enough money for them to pay back all their fiscal deficit. If such rosy scenario does not unfold, 126 bps will be a small price to pay for as 5yr USTSY CDS.

Credit Crisis of 2015

Lets see what caused the current credit crisis:
1. Low interest rates
2. Greedy people

Now, we should examine the solution that our policymakers have come up with to tide over the current crisis:

Give people not billions but trillions of dollars of free money.

And these are not normal people, it is the best of the best, the investment bankers who get this money to play with while the government charges them nothing for this free paper (0-25bps does not count). Previous attempts at 0% interest and similar fiscal stimulus have been have so successful, that it took Japan 15 years to get out of a recession.

The next crisis is probably going to be bigger and better than this one...I just hope I've made my millions by then and have retired and have cash strapped behind my toilet not is some s***t backed security.

U.S. Pockets Aren't Deep Enough to Win Yuan Row

(Very well said!!)
By William Pesek

Almost two years after a modest currency revaluation, China is still thumbing its nose at U.S. demands for big gains in the yuan.

Last week, officials in Beijing seemed to yawn as Charles Schumer, a U.S. senator pushing for tariffs on Chinese imports, predicted that a new measure aimed at forcing China to boost the yuan will pass Congress by next year.

The U.S. also imposed tariffs on imports of Chinese coated paper. China's response was summed up by central bank researcher Tang Xu who said a stronger currency alone won't solve U.S. trade disputes. Traders were equally unmoved by the U.S. action.

In Japan, meanwhile, neither the government nor investors seemed concerned about a U.S. senator's proposal to require Asia's biggest economy to stop holding down the yen. ``It's time for our government to hold Japan accountable for what amounts to illegal trade subsidies,'' Michigan Democratic Senator Debbie Stabenow said last week.

What gives? You would expect the U.S. to have more sway in markets. It does, after all, print the reserve currency. And while China is growing 10 percent, India isn't far behind and Japan is recovering, the $13 trillion U.S. economy is still proving hard to replace.

One explanation for the U.S.'s waning clout in foreign- exchange markets is something that gets little attention: the country's lack of currency reserves.

Short on Reserves

Certain benefits come from printing the most-used currency, having great sway over the International Monetary Fund and being the pre-eminent economic power. It means you can get away with more. In the U.S.'s case, it's massive current-account and budget deficits, negligible household savings and a pricy military quagmire in the Middle East.

Even so, the U.S.'s $41 billion of currency reserves seem puny compared with China's $1.07 trillion, Japan's $884 billion and even Malaysia's $82 billion. At the moment, the U.S. has fewer reserves than Nigeria's $42 billion, Indonesia's $46 billion and Poland's $49 billion.

All this makes the U.S. look (a) highly confident about its financial condition, (b) complacent amid a growing number of global imbalances, or (c) arrogant. There's little doubt that, if asked, U.S. President George W. Bush and his Treasury secretary, Henry Paulson, would say (a) is the right answer.

Bretton Woods II

There's some merit to the view, considering the so-called Bretton Woods II world in which we live. The breakdown of the post-World War II system centered on the gold standard led to a kind of dollar standard. Many nations adopted the dollar as a new anchor, either formally or informally pegging currencies to it. When you're the U.S., who needs reserves?

Yet in a world littered with risks -- from slowing U.S. growth to global imbalances to terrorism to bird flu to the yen- carry trade to overheating in the Chinese economy -- one wonders how wise it is for the U.S. to have so few reserves.

That's especially true when you consider that the U.S. has arguably lost control of the dollar. With its economy facing big challenges, the U.S. probably wants a weaker currency for the same reasons everyone else does. How much control does the U.S. have, though, when overseas investors -- Asian governments among them -- own its bond market?

Perhaps that's why the U.S. tries to influence other currencies; it realizes it has lost control of its currency and interest rates to foreigners. Given that arrangement, the U.S. may want to be careful slapping around China and Japan, its two biggest debt customers.

Reserve Bubble?

One could argue that Asia has created a reserve bubble. There would seem to be better uses for the trillions of dollars on which Asian central banks are sitting. Also, monetary authorities may have reached the point of no return in their ability to reverse course or manage their massive holdings.

Yet the U.S. decision to boost its foreign reserves by just $10 billion in 10 years (they were $31 billion in 1997) was either a shrewd move or a mistake. Only time will tell.

In the meantime, the U.S. should expect more shrugging from officials in Beijing and Tokyo on currency matters. China's need to create millions of jobs to keep the peace trumps the desire to make nice with the U.S. Japan also remains unwilling to try living without a weak exchange rate.

Besides, what is the U.S. going to do about it? Intervene in currency markets to strengthen the yuan or yen with less money than either Bill Gates or Warren Buffett has? It's doubtful.

If there's any positive spin here for the U.S. it's that it now has two potential saviors in the event of a crisis. The credit crunch known as the Panic of 1907 forced the U.S. to turn to one man for financial aid: J.P. Morgan. The White House now has at least two wildly rich men to call if the dollar plunges and reserves run low.

The truth is that when it comes to swaying currency markets, the U.S. has little money to put where its mouth is.

India's Monetary Woes

By- Andy Mukherjee
Any bank with spare cash in the vault would have made a killing in India this week.

The interest rate in the overnight, inter-bank call money market shot up to a staggering 62.5 percent yesterday, from just about 5 percent on March 15.

On the central bank's online trading system, call rates soared as high as 70 percent.

This surge has taken place even when the Indian central bank's policy rates have remained unchanged in this period. The Reserve Bank of India borrows surplus funds in the banking system at 6 percent and lends, when needed, at 7.5 percent.

The cash crunch is temporary, caused by companies drawing down their bank balances to meet the March 15 deadline for making tax payments.

When the government spends this money, funds will come back into the banking system, probably before the end of the month.

Yet, the cash squeeze sheds light on the peculiar challenges of monetary policy in India.

Such a spike, if it were to occur in a developed country, would be associated with the collapse of a large hedge fund or a massive terrorist attack. It would be a sign of panic.

Tax payment is a humdrum, annual event with entirely predictable consequences for liquidity. Why should it become such a huge issue in India? And why this year?

It's hard to believe that the volatility resulted from a lacuna in the central bank's forecasting ability.

Clashing Objectives

Banking-system liquidity in India has become painfully volatile as monetary-policy goals have begun clashing with exchange-rate objectives.

As a result, one week the system is in surplus mode, the next week there's a glaring deficit.

With inflation beginning to crawl up since September, easy money conditions have been untenable for a while.

And yet, with inflows of overseas investment accelerating, the Reserve Bank ended up buying almost $8 billion of the U.S. currency from November to January to keep the rupee from rising too much, too quickly.

Then, to contain the spill of domestic liquidity from its dollar purchases, the central bank had to preempt funds in the banking system by increasing the ratio of deposits that commercial banks have to set aside as cash.

The results haven't been great. Inflation is running at 6.5 percent, a full percentage point higher than the Reserve Bank's tolerance level. And the rupee, at 43.47 to the dollar, is at its strongest in 19 months.

Running Out of Collateral

And now, there's a cash crunch.

To borrow from the central bank's Liquidity Adjustment Facility, or LAF, at the prescribed 7.5 percent rate, banks need to offer government securities as collateral.

The trouble is that as much as 25 percent of commercial banks' deposits that have to be compulsorily invested in government debt is considered ``statutory liquidity.''

These so-called SLR securities don't qualify as collateral.

Most Indian banks have already liquidated their excess investments in government debt to satisfy strong credit growth. That constrains their ability to borrow from the Reserve Bank.

Hence the desperate rush to raise funds at 70 percent.

The Indian central bank uses two benchmarks for overnight money, when most others make do with one key rate.

Presumably, the Indian monetary authority wants to exercise greater control at the short end of the yield curve.

Credibility Question

For that reason, it's important to make the call rate stick to a preset path: The credibility of the central bank depends on maintaining the sanctity of its interest-rate corridor.

When banks start borrowing at almost 10 times the rate at which the central bank offers to provide liquidity, the entire debt market becomes nervous.

Sure enough, trading volumes in the Indian government bond market yesterday slumped to next to nothing.

To be fair to the central bank, it had warned lenders of this scenario in its monetary-policy statement of Jan. 31.

``Banks need to recognize that shortage of SLR securities could constrain their recourse to LAF liquidity, which can turn adverse in critical times, forcing them to resort to uncollateralized exposures and attendant risks,'' Governor Y.V. Reddy had said.

The message is clear: Until the central bank achieves a demonstrable victory over inflation, it will keep a tight leash on liquidity. The rupee will remain in short supply.

That will be great for carry traders.

The current scarcity of rupees has ended up making the rupee ``the carry currency of choice in Asia,'' says Shahab Jalinoos, a Singapore-based strategist at ABN Amro Bank NV.

One-month rupee forwards offer an attractive annualized yield of 16 percent, according to my Bloomberg.

Yesterday, the central bank clarified that banks could borrow from it to lend in the call money market.

This should restore sanity for the time being.

In the medium term, banks will have to raise more deposits to ease their cash crunch, or they will have to stop lending.