Category: Economy

Analysis of the global economy

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The Second Great Contraction – Kenneth Rogoff – Project Syndicate

…The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.

via The Second Great Contraction – Kenneth Rogoff – Project Syndicate.

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Treasury Prices Sink As Investors Pause Ahead Of Jackson Hole – WSJ.com

The fact that buying tapered off after Wednesday’s and Tuesday’s [Treasury auction] sales underscores the attention that traders are placing on the Jackson Hole, Wyo., summit at which Bernanke will speak, betting against the prospect of some form of new bond-buying initiative…..

Troves of tepid economic data in the past few weeks had worked up hopes that the Fed would step in with some sort of disclosure at this weekend’s conference. But those expectations have died down since the start of the week as new data show the global economic recovery might not have slowed down as much as some investors thought.

via Cynthia Lin: Dow Jones Newswires|Treasury Prices Sink As Investors Pause Ahead Of Jackson Hole – WSJ.com.

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10-Year Treasury yields at new 50-year low

10-Year Treasury yields are testing support at 2.00 percent — a 50-year low. One thing is clear: Fed monetary policy has failed. Suppressing short-term interest rates has, in most cases, lifted the economy out of recession, but also set us up for an even bigger crash the next time round — requiring even more severe interest rate cuts. Long-term yields have been falling for 30 years. We are now clipping the tree tops — with short-term rates near zero and no gas in the tank to lift us over the next obstacle. A bond market revolt cannot be far off.

10-Year Treasury Note Yields $TNX

A “bond market revolt” is a general sell-off of Treasurys when bond-holders decide that rewards (yield) are not commesurate with the risk. We have already witnessed several bond-holder revolts in European markets. A rise in yields would raise the cost of rolling-over existing Treasury debt, ratcheting up the budget deficit even further. This is a threat that should not be ignored.

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Nouriel Roubini says the risk of a global recession is greater than 50 percent – WSJ.com

Economist Nouriel Roubini says the risk of a global recession is greater than 50 percent, and he’s putting his money in cash.

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http://online.wsj.com/video/roubini-warns-of-global-recession-risk/C036B113-6D5F-4524-A5AF-DF2F3E2F8735.html

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Fire the Fed …… and replace them with a Rating Agency

On 1 November 2010 the Fed commenced QE2, purchasing US Treasurys with the stated intention of reducing long term interest rates. Over the next 4 months, 10-Year Treasury yields rose by 120 basis points (1.20%).

10-Year US Treasury Yields

Why do we need the Fed, who can’t punch their way out of a paper bag, when a rating agency (S&P) can send yields plunging 65 points in less than two weeks. 🙂

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Did Standard and Poor’s Break SEC Regulations in Disclosing Its Downgrade to Select Parties? « naked capitalism

There is a much more straightforward basis for questioning S&P’s conduct, and it has nothing to do with how S&P arrived at its rating. There is compelling evidence that the ratings agency made selective disclosure of its downgrade decision before it made it public last Friday evening. A reader told us certain hedge funds were informed Tuesday and traded successfully on the information. A separate source had told me certain banks were briefed on Thursday and were told of the US downgrade but assured their ratings would be unaffected. On Friday morning, Twitter was alight with the news.

via Did Standard and Poor’s Break SEC Regulations in Disclosing Its Downgrade to Select Parties? « naked capitalism.

10-Year US Treasury Yield

It appears that some market participants were aware of the coming downgrade even earlier — on Friday [?] the previous week.

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Tipping point

Posted August 3, 2011 8:00 p.m. ET (10:00 a.m. AET) on Trading Diary.

Markets are approaching the tipping point at which they will confirm a primary down-trend. The probability of a bear market is around 75 percent, with 80 about as high as you can get at a turning point. As highlighted in May, every significant spike in crude oil prices in the last 50 years has been followed by a recession — and the current spike is likely to prove no different. Ben Bernanke will modestly decline to take the credit, but the initial groundwork for higher oil prices was laid by QEII. Prices had started to rise well before the conflict in Libya.

Crude Oil and US Recessions

Investor flight to safety is clearly signaled by the sharp fall in 10-year treasury yields.

Other safe havens such as gold and the Swiss franc display a corresponding spike over the last few days.

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