Two for the road

From: The Market Today Online

1) A Bloomberg report says that banks are increasingly having to consider riskier assets to maintain margins because of the Fed’s activity in their markets. The report says that banks are looking at subprime auto paper, company loans, and commercial mortgages as a way to put assets with yield on the books. Anecdotally, we see more and more bank portfolio managers looking around the fixed income arena to see where they can find yield without creating excessive risk exposure.

Pushing for yield enhancement in this economic climate will most likely provide another level of risk to the financial system. With projections for continued 'lack luster' economic growth - how will this play out over the next year for the banking community: more risk - potentially more reward; or more risk and potentially more stress?

2) Fed Chairman Bernanke, responding to questions after a speech in Cleveland yesterday, said that the U.S. is dealing with a "national crisis" in the jobs market. "We’ve had close to 10 percent unemployment now for a number of years and, of the people who are unemployed, about 45 percent have been unemployed for six months or more. This is unheard of," he said. He urged fiscal discipline at the event.

Bernanke talking about 'fiscal discipline' ! ! ! Now that is a good one! Since when is over zealous leverage a 'fiscal discipline'????

Economist Nouriel Roubini says:

I don't know that I agree with his assessment of the value of fiscal stimulus (especially the growing level of debt - that is one of main the drivers of our current economic woes) but the economic affairs of our world are certainly not on a stable track for growth and strong economic results in the near term...and we do seem to be seeing quite a bit of history repeating itself...but on a much grander scale than in the 1930's...its now totally global.

Roubini: Economic Crises Will Lead To War
Monday, September 26, 2011 08:07 AM
By: Julie Crawshaw

Economist Nouriel Roubini says fiscal austerity could bring economic calamity followed by war.

"I’m not predicting World War III but seriously, if there was a global financial crisis after the first one, then we go into depression: the political and social instability in Europe and other advanced economies is going to become extremely severe," Roubini tells Emerging Markets.

"And that’s something we have to worry about."

"In the 1930s, because we made a major policy mistake, we went through financial instability, defaults, currency devaluations, printing money, capital controls, trade wars, populism, a bunch of radical, populist, aggressive regimes coming to power from Germany to Italy to Spain to Japan, and then we ended up with World War II."

Roubini believes that increasing fiscal austerity at a time when private demand is falling again will lead to another global depression.

"We’re going to make exactly the same mistake like during the Great Depression, when we took away the fiscal stimulus too soon," says Roubini. “That is a huge risk right now."

Nor will China be exempt from economic ills. "China is going to have in two years its own hard landing," Roubini says.

"There’s so much overcapacity, from real estate to infrastructure to manufacturing that unless they change their growth model to rely more on consumption and less on fixed investment, eventually there will be a hard landing in China. So it’s not any more an issue of net exports."

The Wall Street Journal reports China's massive economic-stimulus program has supported near double-digit growth, but also stoked inflation, piled up debt and fueled another unwelcome development: social unrest.

In 2010, China was rocked by 180,000 protests, riots and other mass incidents — more than four times the tally from a decade earlier.

Other experts paint a similar gloomy future.

Pacific Investment Management Co., which runs the world’s biggest bond fund, expects advanced economies to stall over the next year, with Europe sliding into recession, underscoring mounting investor concern about the global economic outlook.

There will be little to no economic growth in industrial nations during the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

Let's do the twist...

Will the yield curve invert or just flat line while the Fed does the “twist”?
And will this truly be 'accommodative' and 'foster' economic growth? Or will this just realign/restructure the Fed’s already gigantic balance sheet?
And what happens if economic growth is stimulated and the yield curve moves up – won’t that put ‘market’ strain on the Fed’s balance sheet due to their purchase in the 6 to 30 year maturity range? I guess since it is the Fed it doesn’t matter!
I see that the stock market is not too interested in (fond of) retro monetary policy moves or was the amount and timing not enough?

prb

Release Date: September 21, 2011
For immediate release
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.