Monthly Archives: December 2011

Tracking QE – Currency Wars

In our introduction to QE, “Quantitative Easing: Facts and Fallacies“, we did not support a call for QE3 because we could see no rationale for it. In a recent video broadcast, Jim Rickards said some form of QE3 will come as early as May. He sees this as a function of the currency wars – to cheapen the dollar. It presupposes that the Fed would choose to intervene directly in what he calls the currency wars. The Fed is certainly aware of the issues. We do not think they will intervene overtly. Rather, as Rickards suggests, it will be via some oblique excuse around the economy. Their mandate to maintain stable employment would allow such an intervention if the dollar rose too high against other currencies such as the euro or the yuan.

We think it important enough to track the signs of QE and its development, partly to keep the pundits honest and partly for its potential economic and market impacts. We think Rickards is right. So the things to watch are the USD and the EUOUSD cross charts. To follow developments over time, read on.

Tracking the Fed Balance Sheet

The aspects of the Fed’s balance sheet that we track weekly (see The Fed’s Balance Sheet) are shown here in a snapshot view and below in some detail. The snapshot is a visual indication of the week-over-week (wow) and year-over-year (yoy) changes in dollar value shown in Table 8 of the H.4.1 statistical release. We also can track activity through the weekly New York Fed System Open Market Account Holdings.

Aug 7, 2014 (Millions) WOW
Change
YOY
Change
Total assets (size of balance sheet WALCL)  + 3,474 + 824,752
Gold certificate account (WGCAL)  0  0
U.S. Treasury securities (WSHOSNB)  + 2,280  + 832,196
Federal agency debt securities (GSE) (WSHOFDSL)  0 – 24,394
Mortgage-backed securities (MBS) (WSHOMCB)  0  + 427,399
Central bank liquidity swaps (see WACBS)  0  – 1,404
Federal Reserve notes, net of F.R. Bank holdings (WCURCIR)  + 2,493 + 87,549
Other deposits held by depository institutions (WRESBAL)
 + 3,608  + 628,424
U.S. Treasury, General Account (WLTGAL) – 799  + 6,645
Other (deposits) (WLDOL)  – 3,265  – 17,227

This is the first update since May. We are not actively tracking it any more.

Although the balance sheet is still growing the rate of growth is decreasing due to the “Taper”. When QE purchases are finished in Sept. or Oct. it will be interesting to watch the balance sheet to see whether the Fed allows it to shrink by normal maturation of assets or whether the Fed rolls maturing assets over.

US House Prices in 2011 (Canada, you’re next)

The Wall Street Journal’s MarketWatch published this short piece: “U.S. home prices down 3.4% in past year: Case-Shiller“. In its entirety:

WASHINGTON (MarketWatch) — U.S. home prices fell 1.2% in October to take the 12-month drop to 3.4%, according to the S&P/Case-Shiller 20-city composite home price index released Tuesday. Nineteen of 20 cities saw price drops, and the index is now down 32.1% from its peak in 2006.

Commentary

In “QE3: A Proposal“, we observed that a recovery in the housing sector was key to a sustained recovery in the overall US economy. According S&P, the  S&P/Case-Shiller Home Price Indices are the leading measures for the US residential housing market. They are the most closely watched measure of US house prices both on a regional and national level. Looking at a chart of the 20-city composite chart from Bloomberg we see a low was put in in May, 2011.

For a look at Canadian house price information read Canadian House Prices.

The Entitlement Society

The Entitlement Society is a term we have been using for quite a while in private conversation. A confluence of events over this holiday season has prompted this rant.

A few years ago, storage lockers first appeared in our area. Over time, these have grown to acres of garage-like structures that serve no other purpose than to store people’s stuff that they have no room for in their homes. The growth of these facilities has occurred in parallel with the growth of super-sized houses. One wonders if the owners of McMansions still lack sufficient space to store all there stuff, or if it is the storage solution for people who cannot afford a McMansion, possibly because they have invested their money in the plastic baubles and cheap furniture that decay in their lockers.

WARNING: This post may be offensive to some people. If you suspect that you may be personally offended by this rant, do not read any further. We will not be responsible for your interpretation of the content.

Quote of the Day: 20111222

I would add, however, though, that although I think it’s very important to look at the fundamental factors affecting the recovery, there’ve been some elements of bad luck.

—  Fed Chairman Ben Bernanke in a November 2nd Press Conference. [Yeah …… it wasn’t in the tea leaves.]

Tracking Debt Coming Due In 2012

This is another theme we’ve chosen to follow and update as information comes in. The importance of understanding the size of the problem and where the debt lies is it gives us a location and time-frame for the next crises. The size of the debt may surprise as it is compiled. And there are major problems associated with rolling over debt.

Tracking the Wiley Swap

In our post “The Fed Saves Europe … for Now. Late Note: They Made Money Doing It!“, we analyze the global central bank coordinated action of November 30. This entailed a revised liquidity or currency swap line, essentially between the ECB and other central banks. It has become clear to us that this will be an ongoing action of prominence so we are opening a post to do just this.

We will also determine the impact of swaps on the Fed’s balance sheet to answer the pundits who ascribe to any Fed action, a form of QE or monetization as well as the bailing out of Europe.

Gold: Always a Store of Value but Never a Currency

We have been reflecting and writing on money lately. Now we turn to the question of can we return to gold or gold-backed currencies?

For a large part of human history, warfare has been motivated by and certainly directed at the acquisition of a neighboring country’s gold which represented a country’s wealth. Gold was the basis of a sovereign’s wealth and power and no sovereign, of today included, has ever had enough wealth. Until recent times, gold has been the predominate metal of currency, supported by silver and copper.

Gold Coinage As Currency

Consider an Archimedean experiment. Suppose all world currencies were in gold coins. Suppose we created a large balance such that all the gold coins in the world were on the left side and all the tangible assets in the world, ex gold, were on the right side. Suppose the balance were constructed so it was initially in equilibrium (balanced) and what the balance is measuring is value.

If we multiplied the face values or denominations of the gold coins by their numbers and added them up, we would have the value of all the money in the world.

Since it takes years (typically 5 at a minimum) and huge amounts of money (typically half to multiple billions of dollars) to explore for, develop and put into production new gold deposits, the increase in the gold supply is at a slow, fairly fixed rate. The total value of money on the left side of the balance grows slowly and cannot be accelerated to any extent.

The quantity of tangible assets or durable goods (we will ignore services for our simple example) on the other hand has expanded much faster through industrialization and the utilization of modern technologies. The output per unit of labour in virtually all industries and agriculture has been increasing steadily for centuries. The total value of assets at a fixed price on the right side grows faster than the value of gold on the left.

The experiment we have created would move away from the initial equilibrium or balance quite quickly. A free market would restore balance naturally, but let’s see what we would have to do if we wanted to maintain the balance ourselves.  We would have to increase value on the left side or decrease value on the right side. Let’s look at the left side first.

QE3: A Proposal

A turnaround in the housing market is key to a sustained recovery in the US. It can’t happen without it. The problem is that household balance sheets are severely impaired – hence no borrowing and the attendant consumption that drives the economy.

The Fed has helped repair the “too big to fail” (TBTF) banks’ balance sheets by throwing a huge amount of money at the problem – 1.25 trillion in QE1 alone. Moreover, their zero interest rate policy (ZIRP) at the front of the yield curve – that is short term interest rates – has allowed the banks to make huge amounts of profit in a carry trade. This created the opportunity for the banks to recapitalize themselves and repair their balance sheets (whether they did or not is another matter). So the Fed can channel money into bank balance sheets but they have no mechanism for repairing household balance sheets.

Quote of the Day: 20111219

We don’t have a crisis of the euro. What we have is a crisis and problems in a series of member states.

— German Finance Minister Wolfgang Schaeuble, quoted in Prudent Bear, December 16, 2011.

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