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
You’ll remember this from last year, we’re sure:
Our main finding is that, on average, [rural Indian] households earn negative returns on their investments in cows and buffaloes if labor is valued at market wages: we estimate average returns of negative 64% and negative 39% for cows and buffaloes respectively. If we value the household’s own labor at zero, estimated average returns increase, to negative 6% for cows and positive 13% for buffaloes… if cows and buffaloes earn such low, even negative, economic returns, why would rural Indian households continue to invest in them?
That, from Anagol, Etang and Karlan, led to a host of speculation about various economic and cultural factors which might explain India’s ability to slide past the “central tenets of capitalism”… h/t’s to the Onion all round. Read more
A recent paper by Ricardo Caballero and Emmanuel Farhi challenges some of the assumptions underpinning the current stance of monetary policy in the developed world, arguing that both quantitative easing and forward guidance are unlikely to be very effective.
The authors also add new dimensions to the commonly accepted New Keynesian wisdom on liquidity traps and fiscal policy, which they only partly agree with. Read more
Our word for capital famously comes from the French for livestock, cheptel. And people are generally bullish about milking investments, and finding cash cows. Still, watch out for herd mentality (herd in Latin, pecus, giving us pecuniary).
Sadly none of those puns made it into a Gates Foundation-backed NBER paper released on Monday (H/T Modeled Behavior):
CONTINUED EXISTENCE OF COWS DISPROVES CENTRAL TENETS OF CAPITALISM?
(Update: which refers to… this)
But no matter. The paper has found something astonishing about cattle as an investment in rural India, with implications for financial liberalisation across the developing world: Read more
The sum and substance, in a couple of slides:
HQC stands for “High Quality Collateral”, and FTQ is “Flight to Quality”. Click to enlarge.
The charts are from a special presentation included in the fiscal Q2 report by the Treasury Department’s Office of Debt Management. Read more
Financial pundits, academics, fund managers and analysts all have an amazing tendency to over-complicate matters.
Sometimes, however, it takes just one person spelling out the obvious to really get to the root of the problem. Read more
Okay. Negative interest rates have now gone fully mainstream in the UK thanks to this week’s testimony by Bank of England deputy governor Paul Tucker.
Even the Daily Mail is writing about it.
But a number of major misunderstandings are popping up as a result. So let us try to clear some of them up. Read more
Further dispatches from the Danish Institute for International Studies’ conference in Copenhagen on “Central Banking at a crossroads”.
Today we focus on the new age of collateral-based finance and the presentation given by Manmohan Singh (speaking in an independent capacity rather than as a representative of the IMF). Read more
Frances Coppola has whipped up an absolutely fabulous commentary on the BIS paper on safe assets, which cuts straight to the point:
“the purpose of government debt is not to fund government spending. It is to provide safe assets.”
Quite the rally in T-bills… continuing apace on Friday, now that the Transaction Account Guarantee has become increasingly, quietly, talked about in the past tense ahead of a year-end renewal deadline.
(Chart of the 1-year T-bill, click to enlarge. The yield on a T-bill maturing in January was close to zero at pixel time) Read more
The abstract from the latest paper by Peter T. Leeson entitled “Human Sacrifice” (H/T Tyler Cowen at Marginal Revolution): Read more
A safe assets-themed argument in three charts, from Barclays’ latest global outlook. (Click to enlarge)
There was a seemingly minor item in the FOMC minutes released yesterday that didn’t get much attention but that, naturally, interested us quite a bit.
The participants noted that the Fed staff had presented an analysis showing “substantial capacity for additional purchases without disrupting market functioning”. But the staff part of the minutes offered no details of this analysis. Read more
The calls for QE3 continue to rage.
But as FT Alphaville has discussed at length, QE3 in its conventional guise — freshly minted base money in exchange for US government bonds — might not really be an option due to the squeeze it causes in the US Treasury market. Read more
FT contributing blogger Gavyn Davies recently wrote about the impact of what he called a disaster risk premia on bond yields — something the FT’s Gillian Tett has also followed up on here.
In both cases, the authors suggest that bond yields have disconnected from credit derivative valuations — not because the derivatives are incorrectly priced, but because bonds now feature an embedded risk premium. Goodbye risk-free. Read more
Izzy already did a great job giving the house sentiment about the dismissive Goldman Sachs note on safe assets, but we wanted to add a few quick points.
This isn’t just gratuitous piling on or a therapeutic exercise or a reflexive defence of our earlier posts. To the extent that others hold what we believe are the note’s misconceptions, it’s best to discuss them out in the open, loudly if need be. Read more
First of all, a big congratulations to Goldman Sachs for jumping on board the safe assets debate approximately 12 months late.
And, in so doing, challenging (but not really challenging) what we still think is the biggest trend of the post-crisis era. Read more
It’s chapter three of the latest Global Financial Stability Report, and it is especially good on the varying roles of safe assets in global financial stability, mispricing before the crisis and the decline in quantity since, and the tricky path ahead for reform.
– From the introduction, how’s this for a strong declarative opening… Read more
Just when you thought no more could be written about collateral, shadow banking and repo, Manmohan Singh and Peter Stella come together to bring us a new paper on the core essence of money and collateral.
The story so far: the world has been plagued by a shortage of safe collateral and an over-dependence on shadow-bank funding, all of which has led to a breakdown in repo markets and secured funding, which is having more of an effect on financial markets than many first anticipated. Read more
Like so many others, FT Alphaville has spent much of the past year thinking about collateral shortages in the shadow banking system and how safe assets function as a kind of currency.
But it’s about time someone actually calculated just how much money these assets might represent. Read more
A familiar theme in this year’s Barclays Equity Gilt Study (57th edition, just out)…
Presenting, one of the best accounts of how the current crisis came about that we’ve read to date.
It comes courtesy of Benoît Cœuré, member of the executive board of the ECB, and should be required reading for every player in financial markets, if not every technocrat the world over. Read more
Marc Faber, publisher of the Gloom, Boom and Doom report, tells Bloomberg TV on Friday (our emphasis):
I wouldn’t say they are particularly attractive but, look, I am in Switzerland at the moment. The 10 Year government bond yields is 0.7% and you can buy quality companies and they have a dividend yield of maybe 3%. Relative to government bonds, equities are attractive. If you really think it through and you are bearish as I am and you think the whole financial system will one day collapse, maybe three years or five years or 10 years, one day there’ll be a reset and everything will be essentially started anew. Then you are better off in equities than in government bonds because a lot of government bonds will either default or they will have to print so much money that the purchasing power of money will depreciate very rapidly.
So, “financial repression” is everywhere — or is it? In Part 1, we gave you a recap of the concept from a recent BIS paper.
At the back of the paper are critiques from Ignazio Visco and from Alan M. Taylor. Both commentators commend the paper while introducing some important caveats that are worth bearing in mind when trying to relate the idea to the current crisis. Read more
Presenting the unwanted mutant offspring of the most important chart in the world*…