Zoltan Pozsar may have swapped his day job as senior adviser to the U.S. Department of the Treasury to that of a director in Credit Suisse’ global strategy and research department, but that hasn’t stopped him pursuing his favourite subject area: the plumbing of the shadow banking system.
Readers may remember that Pozsar’s last report set out the compelling theory of money hierarchy.
Pozsar is back now with a follow-up to that report, no less compelling, entitled Levered Betas and Wholesale Funding in the Context of Secular Stagnation in which he expands on many of the original themes.
The key proposition this time is that real money investors are being forced to plug asset-liability mismatches — brought on by shifting demographics — with leveraged bond portfolio positions, because this allows them to generate equity-like returns with bond-portfolio levels of volatility. Read more
No, this isn’t going to be another FT Alphaville post pontificating over what money is or isn’t. We’ve had plenty of that.
Instead, precisely because nobody can really agree on what money is or isn’t, we’re going to take the basic position that money is an amalgamation of many different things and totally subjective to the holder and acceptor.
Just that somehow, for the purposes of trade and, you know, peace and quiet, we in civil and ordered society carry on the pretence that money represents a common value set amongst us all, and therefore don’t mind when it’s treated in a fungible manner. Read more
This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC.
But it’s hardly a revelation.
We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages.
Goldman even blessed us with a more recent update about the shenanigans in March: Read more
Alert, alert! Matt Taibbi of Vampire Squid fame has discovered contango in a five-page mega opus for Rolling Stone magazine, in which he blames all the usual names for crimes against markets, people and everything good in the world. It’s also a running continuation of his “everything is rigged” theme.
But it’s a terribly nauseating read for anyone following the story since 2008.
First off, Taibbi turns out to be a dependable repackager of other people’s stories. Facts and ideas unearthed by others are borrowed and twisted until they fit his own version of reality (often without citation or attribution). Case in point, the “vampire squid” description is surprisingly similar to popular writer ‘Coin’ Harvey’s 1894 description of the Rothschild bank as a black octopus stretching its tentacles around the world.
True, Taibbi never claimed to have come up with the term himself and perhaps it is just a coincidence, but one can’t deny he’s benefited immensely from borrowing it and applying it to Goldman Sachs. Read more
From Rio Tinto’s Alcan performance statement on Thursday (our emphasis):
Rio Tinto Alcan’s underlying earnings of $557 million were $503 million higher than in 2012, and EBITDA margins improved, despite a nine per cent decline in LME prices over the period. Growing momentum from the cost reduction initiatives, increased volumes and a rise in market premia were the main drivers.
Market premia on aluminium shipments have continued to perform strongly during 2013. This has been supported by a balanced physical supply/demand picture, despite significant LME inventories, much of which remains tied up in financing deals due to higher forward prices and low interest rates. Cash cost improvements lifted earnings by $392 million ($574 million pre-tax). The savings included greater production efficiencies and lower prices of raw materials, lower functional costs and increased production from Yarwun and Alma. These were partly offset by heavy rainfall in Queensland earlier in the year, which reduced earnings by around $40 million.
According to the latest bi-annual European repo survey by ICMA, released on Wednesday, the market for repo in Europe shrunk to €5.5tn in December 2013 from €6tn in June 2013 — a sharp decline by any means.
As the ICMA press release notes: Read more
In our money entanglement posts this week, we presented the view that a nation’s money should not be judged as a neutral and interchangeable stock of identical value units, since it’s actually made up of a web of competing monies, issued by many different entities.
These units appear to be identical, however, because system preferences — especially during periods of economic stability — encourage convergence to the most liquid and most money-like of all the units: namely the state currency.
In reality, however, not all money units are created equal.
It is during financial panics that the market is violently reminded of the inherent inequality of the money that circulates through the system. The panic grows as the market realises the money market is so entangled there is no efficient way of segregating corrupted value units from trusted units, at least not without turning to overt collateralisation. Read more
Give unto Caesar what is Caesar’s
Following on from our previous post, there are a number of reasons why banks choose to voluntarily fund and capitalise themselves when — thanks to the power of their own seigniorage — they don’t have to. Read more
In our previous post we argued that one of the reasons QE may have failed to perform as expected, especially when it comes to stimulating price levels and employment, is because the modern monetary system isn’t what many believe it to be. Or at the very least, money doesn’t work exactly the way many economists and analysts believe it does.
As Tyler Cowen noted on Tuesday:
Milton Friedman, some time ago, wrote that money was for the most part neutral, and that the new money rapidly mixes in with the old. That made sense to me at the time, and it nudged me away from Austrian views, yet we have seen decidedly non-neutral effects from the various QEs and the periodic taper talk.
The interesting thing about this year’s US government shutdown/debt ceiling fiasco was the extent to which markets chose to ignore the chaos in Washington. Indeed, taper tantrum proved much more destabilising then the system’s brief flirtation with a self-made US default. (Perhaps because it was clear from the onset the bluff was not executable?)
Now that the threat is behind us (until next time), there is also a general perception that we got away from the episode relatively unscathed.
Alas, it was not necessarily so. Collateral markets did wobble. Read more
Since 2008, it’s somehow become conventional wisdom in regulatory and policy circles to deem shadow banking undesirable, risky or inherently unstable.
And yet, as SoberLook heroically alluded to on Wednesday, that may be a somewhat small-minded way to look at the phenomenon. Shadow banking is arguably as much an endogenous response mechanism to an under-banked area of the economy as it is a silo for risk and instability. In fact, if risk and instability end up concentrating in the shadow banking area it’s only because more conventional forms of banking have left those areas behind. Read more
… was convincing the world there wasn’t a taper.
The Fed’s Fixed Rate Full-Allotment Reverse Repo (FRFARRP) facility kicked off in trial mode on Monday, and as pointed out by Manmohan Singh on FT Alphaville earlier on Monday, the facility may prove just as significant — if not more significant — than the Fed’s non-taper move last Thursday.
This is because, when you get to the nitty-gritty of it, the initiation of what we’d like to call ‘FARPs‘ is the polar opposite of QE. Read more
This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF.
Some central banks (Fed, Bank of England) have become large repositories of good collateral as a result of their QE policies. But excess reserves at central banks are not the same thing as good collateral that circulates through the non-bank/bank nexus. Read more
A letter lands from the 12 Presidents of the Federal Reserve, led by consistent money market fund critic Eric Rosengren. Reform has been a marathon and they are going to run along behind the SEC waving a big stick until it is finished: Read more
Wonkblog and Reuters draw our attention to a potential bubble arising in classic cars.
Both cite research from Knight Frank’s Q2, 2013, luxury investment index.
As KF’s research noted:
Continued price growth in the classic car sector and an upturn in the performance of investment-grade wines helped to boost the value of KFLII by 7% in the 12 months to the end of June 2013. This matches the increase in the value of residential property in prime central London over the same period and is in stark contrast to the 23% fall in the price of gold since June 2012. The FTSE 100 index of UK listed equities performed slightly better, rising by 12%. Over a 10-year period, however, KFLII (+174%), has significantly outperformed the FTSE 100 (+55%), although gold still remains the top mainstream-asset performer (+273%).
When it comes to understanding the Fed’s recently touted — but initially overlooked — fixed-rate, full-allotment overnight reverse repurchase agreement facility, Cardiff covered pretty much all the bases here.
That said, there was a great quote recently in a follow up piece with FT colleagues. Barclays’ Joseph Abate said the facility resembled an “all you can eat collateral buffet” due to the fact that the trade would provide a fully collateralised investment opportunity with the Fed to almost all parts of the financial market. Read more
We’ve seen explanations of how the famous Chinese copper (and other commodity collateral) LC financing trade works in the past.
But here’s a particularly good one from Goldman Sachs’ big report on China’s credit environment, which was out last week. The diagram also explains how SAFE’s new regulations are likely to restrict the trade from now on: Read more
So, remember how the paying back of ECB LTRO loans was signalled as awfully good news for everyone?
Also, how it was seen as unlikely that Eonia would detach too much from policy rates or cause inadvertent Eurozone rate bifurcation as a result (which some in the market were sceptical of)? Read more
Should peripheral banks like the latest ECB collateral moves?
As the FT’s Michael Steen reports, the central bank will now accept “ABS with a lower credit rating and at a lower haircut” than it had done previously, going below the previous triple-A minimum. It could mean another €20bn of collateral eligible to post at the ECB for funding, Steen notes.
But there’s something else… Read more
So, a plurality of the Finnish public may just agree with FT Alphaville.
Click to enlarge. That’s a Gallup poll by Helsingin Sanomat on the Finnish government’s Greek ‘collateral’. Read more
The working theme at FT Alphaville towers is that we’re in somewhat of a damned if we do taper/suspend QE, and damned if we keep going with it.
There is, as we’ve long been noting, good reason to suspect the economy cannot handle any more quantitative easing in its traditional form.
What’s more, we now know that even the whiff of tapering — which is anything but an unwind, as we’ve noted here – can cause undue chaos in risk assets. In which case, perhaps tapering isn’t as much of an option as many believe it to be.
After all, QE reflects the sovereign put. It’s the government subsidy which takes volatility away. If you stop dishing it out, there’s every chance bad things may happen.
And the following chart, which comes to us by way of Aurelija Augulyte, reflects this relationship perfectly: Read more
Courtesy of Bloomberg, a fine addition to FT Alphaville’s ongoing coverage of the “collateralise everything” trend:
Goldman Sachs Group Inc. (GS) accepted almost 15,000 bottles of fine wine as loan collateral from a former high-ranking executive, according to a regulatory filing last month. Andrew Cader, a former senior director at Goldman Sachs’s specialist-trading unit, pledged a secured interest in the wines, which are primarily from the Burgundy and Bordeaux regions of France, the filing showed. Read more
It’s been our mantra at FT Alphaville for a while, but finally someone from the ‘serious’ analyst space seems to agree with our hypothesis that commodity collateralisation — incentivised by low rates and excess liquidity — is having a larger impact on inventories and commodity prices than most people appreciate.
Here’s an extract from one of oil market veteran Philip K. Verleger’s recent articles on the relationship between interest rates and inventories (our emphasis): Read more
FT Alphaville was cordially invited to talk about the collateralisation of commodities at two separate conferences this past month. We thank IHS Global and the Association des Economiste Quebcois for the opportunity.
The crux of our argument was that you can’t really understand what’s going on in commodity markets unless you appreciate that commodities are no longer a pure consumption-based market. Read more
Somehow — was it the ludicrous secrecy, maybe? — you could tell this was coming.
On Wednesday, Jan Hurri at Taloussanomat took advantage of the Finnish government’s recent doc dump in order to reach a conclusion about its deal for ‘collateral’ on Greek bailout loans: Read more
FT Alphaville attended the Sifma collateral conference last week. We found these slides, used by Greg Lyons of Debevoise & Plimpton, to be a very useful explainer of upcoming regulatory reforms (click to open pdf):
This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF. This is the second part of a series looking at the role of pledged collateral in an IS/LM framework.
Price of money and Price of collateral
In some countries like the US and the UK, the price of money and money market rates are not market-determined due to IOER (interest on excess reserves), and this affects other short end rates. In the US, for example, Fannie Mae and Freddie Mac and other non-depository institutions are not eligible for IOER. This leads to market segmentation and forms a wedge in the money market rates. Read more
This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF.
The concept of financial collateral (or pledged collateral that can be re-used in the markets) was not fully developed in academia in the late 1990s. Activities such as securities lending, repo, OTC derivatives and rehypothecation were still in their infancy—both in volume and sophistication. Read more
There’s been a lot of speculation about what really drove the volatile gold price move this month. Some are still defiantly searching for conspiracies or under-handed activities by authorities.
But it’s probably Nouriel Roubini who has provided one of the best and most logical explanations. In his opinion every bit of the gold move can be explained by shifting inflation expectations. Read more
We just saw this post from Pragmatic Capitalism’s Cullen Roche on the supply of assets.
It offers a nice chart showing net issuance of “safe” assets, from Citi’s research team: