WHO'S NOT SELLING BONDS?
First, the US Treasury has hundreds of billions of dollars of bonds to sell to fund the trillion dollar deficits Congress is mandating.
Second, the Federal Reserve will be selling the trillions of dollars of securities they have purchased in the recent expansion of the monetary base.
Third, and finally, any investor who owns bonds will be selling to avoid the coming bear market.
Paterson is advising its clients to continue to extend the maturity of liabilities past the 5 year mark, and look at 10 year liabilities, or more.
TACTICS
Continue to shorten the maturity of assets and use money market arbitrage to improve earnings.
Consider borrowing long term deposits.
Use extreme caution on long term lending.
STRATEGY
Warn senior management and the board that a disaster is in the offing.
The flood of money recently added by the Fed will either cause inflation or increases in long term interest rates - or both.
Showing posts with label risk management. Show all posts
Showing posts with label risk management. Show all posts
Monday, May 04, 2009
Tuesday, January 06, 2009
Money Explosion Continues
Growth in the monetary base continues.
Since September, 2008 when the monetary base stood at $870 billion, the Fed has added more than $800 billion to the base.
With stimulus like this, the recession will be shortened by years, bringing the return to growth in the next year or two.
OTHER MONEY NUMBERS
MZM which had been stagnant, is now growing.
Here is the raw data.
Here is the rate of growth data.
M2 Growth Signals Economic Recovery
M2 is a leading indicator, signaling both financial and commercial expansion.
The rate of growth in M2 is soaring, approaching 10%
COMMERCIAL AND INDUSTRIAL LOANS
The problem now is to get banks to lend.
Though flush with cash, thanks to Fed actions, Banks are reluctant to lend to Commercial and Industrial companies for two reasons.
One, the uncertainty of every company's balance sheet in this world of Interest Rate and Credit Default swaps. Until this confusion is cleared away, very few financial institutions will take the risk of lending.
Two, economic uncertainty also brings a halt to lending. As economic activity collapses, even good companies might not be able to pay back their loans.
REAL ESTATE LOANS
The surprising fact is real estate loans are holding up well.
INTEREST RATES AND SPREADS
Credit spreads have stopped widening.
Of all the signs that the credit crisis is ending, this is the one most watched by forecasters.
The drop in BAA yields by 100 basis points is a sign that lower quality credits are finding buyers.
SUMMARY, TACTICS, AND STRATEGY
In summary, the Fed's aggressive expansion of the monetary base has shortened a 10 year depression into a 3 year recession.
Though it is not time to invest or lend yet, that time will soon be here.
Tactics
Continue money market arbitrage, extending deposit maturities to 2 years, and adding high-yield assets.
Spreads of 1,000 basis points on AAA quality credits are not uncommon.
Stragegy
Prepare senior management and the board for continued earnings enhancement thanks to the investment department. Focus attention on finding high-yield assets.
Since September, 2008 when the monetary base stood at $870 billion, the Fed has added more than $800 billion to the base.
With stimulus like this, the recession will be shortened by years, bringing the return to growth in the next year or two.
OTHER MONEY NUMBERS
MZM which had been stagnant, is now growing.
Here is the raw data.
Here is the rate of growth data.
M2 Growth Signals Economic Recovery
M2 is a leading indicator, signaling both financial and commercial expansion.
The rate of growth in M2 is soaring, approaching 10%
COMMERCIAL AND INDUSTRIAL LOANS
The problem now is to get banks to lend.
Though flush with cash, thanks to Fed actions, Banks are reluctant to lend to Commercial and Industrial companies for two reasons.
One, the uncertainty of every company's balance sheet in this world of Interest Rate and Credit Default swaps. Until this confusion is cleared away, very few financial institutions will take the risk of lending.
Two, economic uncertainty also brings a halt to lending. As economic activity collapses, even good companies might not be able to pay back their loans.
REAL ESTATE LOANS
The surprising fact is real estate loans are holding up well.
INTEREST RATES AND SPREADS
Credit spreads have stopped widening.
Of all the signs that the credit crisis is ending, this is the one most watched by forecasters.
The drop in BAA yields by 100 basis points is a sign that lower quality credits are finding buyers.
SUMMARY, TACTICS, AND STRATEGY
In summary, the Fed's aggressive expansion of the monetary base has shortened a 10 year depression into a 3 year recession.
Though it is not time to invest or lend yet, that time will soon be here.
Tactics
Continue money market arbitrage, extending deposit maturities to 2 years, and adding high-yield assets.
Spreads of 1,000 basis points on AAA quality credits are not uncommon.
Stragegy
Prepare senior management and the board for continued earnings enhancement thanks to the investment department. Focus attention on finding high-yield assets.
Sunday, November 16, 2008
Apology
For the past three months Paterson has been busy working with existing and new clients to avoid the disaster in the credit markets.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
Saturday, August 09, 2008
Markets at Major Turning Points
Gold at Major Support
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Wednesday, July 16, 2008
Fed and Treasury Up Again
Recent moves by the US Treasury to purchase equity in Fannie and Freddie tell us two things.
1. They are in danger of going bankrupt.
2. The treasury will not allow them to go out of business.
Even though shareholders might lose all their money, the companies will still be reconstituted by injections of US government cash.
Along with this announcement came the news that the Fed will lend to the mortgage buying behemoths if necessary.
These two actions will support home lending by ensuring the ability to sell mortgages in the secondary market.
1. They are in danger of going bankrupt.
2. The treasury will not allow them to go out of business.
Even though shareholders might lose all their money, the companies will still be reconstituted by injections of US government cash.
Along with this announcement came the news that the Fed will lend to the mortgage buying behemoths if necessary.
These two actions will support home lending by ensuring the ability to sell mortgages in the secondary market.
Friday, June 27, 2008
Inflation and the Bond Market
Bonds sank through support this month and are now back at May's support levels, now resistance for this instrument.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
Wednesday, May 07, 2008
End of a 25 Year Bull Market in Bonds
The bull market in bonds is over. Never again will investors see a run like this.
Since Paul Volcker crushed inflation back in 1980 bond yields have made new lows with every cycle.
10 year US Treasury notes peaked at 15% in 1981, and have fallen consistently till the lows of 3.5% in 2003.
During this period real estate values boomed as capitalization rates fell and the cost of borrowing tumbled.
Refinances further fueled the mortgage banking business, bringing profits to finance companies.
Companies like GE, which based their growth on this trend will now see that portion of their earnings disappear, never to return again.
STRATEGY
For diversified companies, reduce expectations of future growth from financial activities. Explain to senior management and the board that lower interest rates will not happen again - ever.
For finance companies, explain to senior management and the board that the competition in the finance arena is about to get as tough as it gets, with more competitors chasing every deal, and lowering profits in order to compete.
TACTICS
Asset and Liability Management will dominate the discussion on adding assets and liabilities.
As the Fed moves to more market-based allocation of Fed Funds, expect to see more volatility at the short end of the curve.
Lengthen liability maturities and focus on solid spreads.
Since Paul Volcker crushed inflation back in 1980 bond yields have made new lows with every cycle.
10 year US Treasury notes peaked at 15% in 1981, and have fallen consistently till the lows of 3.5% in 2003.
During this period real estate values boomed as capitalization rates fell and the cost of borrowing tumbled.
Refinances further fueled the mortgage banking business, bringing profits to finance companies.
Companies like GE, which based their growth on this trend will now see that portion of their earnings disappear, never to return again.
STRATEGY
For diversified companies, reduce expectations of future growth from financial activities. Explain to senior management and the board that lower interest rates will not happen again - ever.
For finance companies, explain to senior management and the board that the competition in the finance arena is about to get as tough as it gets, with more competitors chasing every deal, and lowering profits in order to compete.
TACTICS
Asset and Liability Management will dominate the discussion on adding assets and liabilities.
As the Fed moves to more market-based allocation of Fed Funds, expect to see more volatility at the short end of the curve.
Lengthen liability maturities and focus on solid spreads.
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