Economy Archives - Page 73 of 132 - the patient investor

November 22, 2013

Why does QE taper spook the market if it will have no real impact?

Question received from CG about the impact of QE and Fed taper:

I’m not arguing against the data presented on the graph, but if true that most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed, why do the markets get spooked every time there are whispers that the Fed is going to reduce QE?

The comment CG is referring to:

Currently, there is evidence of expansive monetary policy from the Fed, but the overall impact on the financial markets is muted. Most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed. The chart below compares Fed balance sheet expansion (QE) to the increase in excess reserve deposits at the Fed.

A classic placebo effect, the Fed is well aware that the major benefit of their quantitative easing program is psychological: there is little monetary impact on the markets.

My answer:
The markets have no real reason to fear a QE taper. I think this is more psychological than physical. The current mind-set is:

If the Fed begins to taper, that marks the end of the bull market in bonds. Rising bond yields and higher long-term interest rates may slow industry investment and recovery of the housing market and this would be bad for the economy.

In other words, they still have a bearish outlook. At some point they will shift to the counter-argument:

QE taper and rising interest rates indicate Fed faith in the recovery and are a bullish sign for stocks. It also means the economy is reverting to a sustainable path.

The bottom-line is that markets are driven as much by emotion as by logic.

November 11, 2013

NAB Convertible Pref issue | FIIG

From FIIG Newswire:

National Australia Bank Limited (ASX:NAB) has announced to the ASX the issue of a listed, floating rate convertible preference share (\”CPS II\”) with an indicative dividend of 325 to 340 bps over the bank bill swap rate. NAB is seeking to raise $750,000,000 for general corporate purposes. APRA has confirmed that the CPS II will count as additional Tier 1 Capital, supporting the NAB\’s regulatory capital requirements.

A welcome move to see the big four banks raising more Tier 1 capital. My view is that TBTF banks should have a minimum leverage ratio of 10 percent — more than double the current 4 to 5 percent.

Ending Too Big to Fail | The Big Picture

From an address by William C. Dudley, President of the NY Fed, to the Global Economic Policy Forum, November 8, 2013:

There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed. Tough enforcement and high penalties will certainly help focus management’s attention on this issue. But I am also hopeful that ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.

Dudley calls for increased capital requirements to reduce the risk of failure as well as more robust procedures to reduce the impact of a single large failure:

The major initiative here is the single point of entry framework for resolution proposed by the Federal Deposit Insurance Corporation. Under this framework, if a financial firm is to be resolved under Title II of the Dodd-Frank Act, the FDIC will place the top tier bank holding company into receivership and its assets will be transferred to a bridge holding company. The equity holders will be wiped out and sufficient long-term unsecured debt will be converted into equity in the new bridge company to cover any remaining losses and to ensure that the new entity is well capitalized and deemed creditworthy. Subsidiaries would continue to operate, which should limit the incentives for customers to run. By assigning losses to shareholders and unsecured creditors of the holding company and transferring sound operating subsidiaries to a new solvent entity, such a “top-down” resolution strategy should ensure continuity with respect to any critical services performed by the firm’s subsidiaries and this should help limit the magnitude of any negative externalities.

November 4, 2013

Transport: Fedex improving outlook

Bellwether transport stock Fedex has risen dramatically in recent weeks, reflecting the improving outlook for economic activity.
Fedex

UPS has enjoyed a similar surge, as has Deutsche Post AG (which owns DHL).

Deutsche Post AG

October 19, 2013

Martin Wolf: Has the financial crisis changed the world?

John Weatherall Public Lecture | Martin Wolf
http://youtu.be/1w-pODAjVyE
[1hr28mins]

Hat tip to Macrobusiness.com.au

October 9, 2013

Household Debt to Income ratio

Barry Ritholz highlights the alarming debt to income ratio for Canada compared to the USA:
Household Debt to Income ratio

How does Australia compare?

Australian household debt to income is similar to Canada’s. There has been discussion recently about whether Australia is in a housing bubble. As Anna Schwartz (joint author of A Monetary History of the United States, 1867-1960 with Milton Friedman) pointed out: there is only one kind of bubble and that is a debt bubble. It may manifest through rising real estate, stock or other asset prices, but the underlying driver is the same: a rapid expansion of the money supply through easy credit.

October 7, 2013

Claiming the $1 trillion prize in US health care | McKinsey & Company

Even within a single local market, we have found that the cost to deliver the same “episodes of care” [medical situations characterized by a relatively clear outcome and relatively predictable start and end points (for example, most hospitalizations, pregnancies, upper respiratory infections, and hip replacements)] typically varies by 30 percent to well over 100 percent, even after we held constant the prices that hospitals, physicians, and other providers charge and risk-adjusted the costs to reflect patients’ health status. The cost differences were unrelated to any discernible variation in care quality or outcomes. These results make it clear that some providers are dramatically more successful than others in addressing patients’ needs. The strong providers achieve good results not by cutting corners but by developing (or adopting) best practices that enable them to deliver high-quality outcomes at lower cost.

October 7, 2013

Here’s A Disturbingly Astute Line From When S&P Downgraded The US Credit Rating | Business Insider Australia

From S&P’s historic downgrade of the US credit rating on August 5, 2011:

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

October 7, 2013

Pro-nuclear greenies? Thinking outside the box with Pandora’s Promise

Ben Heard and Prof. Corey Bradshaw highlight the environmental and economic damage caused by pursuit of nuclear-free power.

Had Australia deployed a modest nuclear program starting in 1965, to build slowly to around 20% of electricity provided (as done in the USA), over 876 million tonnes of carbon dioxide equivalent (CO2-e) would have been avoided to this day.

…..In the OECD, three yes, only three countries have achieved success in all but eliminating fossil fuels from electricity supply. They are France, Sweden and Switzerland Finland will soon join them. All did it by embracing nuclear power generation. These nations deliver reliable, large-scale electricity supply with less than 1/10th the emissions of Australia. France in particular delivers the cheapest electricity in Western Europe, and is the second-highest net exporter of electricity in the world…..