Fed Watch - Fall 2009

Federal Reserve holdings of mortgage-backed securities (MBS) this week exceeded those of Treasuries for the first time ($777bn vs. $774bn). The Fed is now well past half way through its program to purchase $1.25 TN of MBS – which is slated to be completed in March. Federal Reserve Credit jumped to $2.172 TN, up from less than $900bn to begin September 2008.

10/25
Treasury has sold $1.6 trillion in notes and bonds to finance a budget deficit that reached a record $1.4 trillion in fiscal year 2009 that ended Sept. 30. Debt amounted to 9.9 percent of the nation’s economy, triple the size of the 2008 shortfall.

At the same time, interest paid by the U.S. dropped $67.8 billion even as outstanding debt rose 34 percent to $7 trillion from $5.21 trillion, government data shows. Yields on 10-year Treasuries ended last week at 3.48 percent, less than half the average of 7.31 percent over the past 40 years.

China Resurgence Notes - Fall 2009

China Growth to Slow in Mid-2010 as Stimulus Fades, Roach Says
By Indira A.R. Lakshmanan

Oct. 19 (Bloomberg) -- China’s growth will slow in the middle of 2010 as its stimulus package fades and weaker U.S. consumer demand fails to support an export-led recovery, said Stephen Roach, chairman of Morgan Stanley Asia.

China cannot count on a surge in exports to sustain growth kick started by a $586 billion stimulus package “because external demand -- courtesy of what is likely to be a multiyear shakeout due to the overextension of American consumer -- is not going to come back,” Roach, who is based in Hong Kong, said today at the Council on Foreign Relations in Washington.

Roach estimates the Chinese economy will reach its 8 percent growth target by year-end, thanks to infrastructure spending “funded by an absolutely unprecedented binge of bank lending.” The world’s third-largest economy expanded at an average rate of 7 percent in the first half of this year.

China’s economy may grow 8.5 percent this year, with growth in the second half accelerating to more than 9 percent, Caijing Magazine reported on its Web site late yesterday, citing Yu Bin, head of the macro-economic research department at the State Council Development and Research Center.

The “investment share of the Chinese GDP is now a number north of 45 percent,” Roach said. “No country has ever experienced a number that large and gotten away with it for long.”

While a boom in exports reignited faltering Asian economies following the Asian financial crisis in 1997-98, “it’s not going to work this time,” Roach said.

Economic growth may accelerate to 8.9 percent in the third quarter from 7.9 percent in the second and 6.1 percent in the first three months of this year, according to a Bloomberg News survey of economists.

To contact the reporter on this story: Indira Lakshmanan in Washington at ilakshmanan@bloomberg.net

Last Updated: October 19, 2009 16:57 EDT

Another look at the origins of Credit Crunch in July 2007

Another look at the origins of Credit Crunch in July 2007

a. the Fed kept interest rates too low for too long despite the obviousness
of the housing bubble
b. Fed policy was enabled by a continued global demand for the dollar as reserve currency
c. there was a global demand for the securitized debt which was based on and furthered the us credit bubble (this preference was based on the lower perceived risk of these securities and higher return compared to other investment choices


Credit was easily available and penetrated more deeply than ever before within the us population

much of this securitized debt has not been written down from the balance sheets of financial institutions. the value has in many cased been artificially propped up by the feds balance sheet coming to the rescue of big finance.

treasuries are sold and debt increased in an effort to continue payment on debt based on much overvalued assets.

A Future investing trend

a. global capital flows will reroute from us securitized debt and treasuries to bonds and currencies backed by natural resources rather than housing.

b. the rise in the prices of resources will soon sqeeze profits globally

c. the break up of this standoff structurally will require tech substitutes for dwindling natural resources.

d. any global restart will be faced by rising resource costs and inflated foreign fixed assets (e.g. china's housing market) squeezing profits and global pollution costs.

I. A way Forward


a. underperforming debt must be revalued, cut 10-20%
b. large banks must take on smaller, failing ones with gov tighter regulation of now too much bigger to fail.
c. the securitization regime is broken, credit will remain tight for consumers
d. there has to be an income maintenance program. there is no other way to make a living.
e. fed money directed to work programs such as organic agriculture. would we want the cheaper option of under-employed work force eating industrial food?

f. resources are under priced, the social costs of their use is under priced. alternative energy can be competitive in the future.

g. world continues to buy treasuries. this allows us to refloat debt for little cost. additionally the dollar continues its fall, making repayment cheaper.

h. the world will require a strengthening dollar in order to protect export market.


II Stock Market

a. stock market rise can be seen as a dollar play. world assets revaluing higher rather than confidence in resurgent economy

b. will dollar continue down as assets, resources pushed higher threatening global profits