A Few Recent Provocative Posts

While on an extended business trip in Asia, updates on the blog will be sporadic.  Rather than focus so much on the price action, I have been sketching out a broader interpretative framework.  Here are some recent posts in this vein.

1.  How much of a headwind is the dollar?  We show that on a broad, trade-weighted, basis, adjusted for inflation, the dollar is up marginally this year.    The impact on the economy is not even a rounding error.  

2.  The UK became the first Western country to issue a yuan-denominated bond.  Although the perma-dollar bears see this as a sign that the greenback is being abandoned, the UK's decision is much more about securing London as a financial center for yuan clearing that is only likely to increase in the coming years.  

3.  Beware of extremes in market sentiment.  First we had to push against the hawks who read the FOMC dot plot as signaling an earlier and more aggressive Fed tightening cycle.  Last week, we had to push against the doves, who were talking about "tapering the tapering" and QE4.  The true signal of Fed policy comes from a centrist core, led by Yellen Fischer and Dudley.  

4.  Supply, not the dollar, is driving oil prices.  At what may prove to be a minor cost to it,  Saudi Arabia appears to be rejecting its traditional role as the swing producer.  It is allowing the price of oil to fall.  It squeezes their political rivals like Russia (not as a favor to the US and Europe, but because of Putin's support for Assad) and Iran.  It also sends a message to non-OPEC producers.   

5.  US commercial banks are buying Treasuries.  Last year, US banks were net sellers of Treasury bonds.  This year they are net buyers.  Preliminary data suggests they bought a record amount in September.  Corporate and retail deposits are rising faster than new loans.  This is the source of the funds being used to buy Treasuries, not the excess reserves that the banks hold at the Federal Reserve.  In addition, regulatory pressure encourages the purchase of Treasuries. 

6.  ECB may broaden the assets it purchases.   The ECB is drawing plans to buy other assets to increase its balance sheet if the TLTROs and ABS/covered bonds appear insufficient.  Since it is buying covered bank bonds, and the Asset Quality Review and stress tests are nearly past, the next logical step is to buy uncovered bank bonds.  Supra-nationals like EFSF/ESM bonds and EU and EIB bonds can also be bought.  Corporate bond issuance in the euro are is highly concentrated, with France alone accounting for nearly 45% of the market.