Monday, April 12, 2010

A Tale of Two Debt Markets

Some Monday's seem longer than others. Today seemed very long indeed. Almost vacation time and I need it very badly.

Homework Assignment
I have to admit that I have no idea what any of the following means, so if anyone has some thoughts I would appreciate it if you left a comment.

Market Ticker had a couple of posts up today which showed a monster change in the "Total Loans and Leases of Commercial Banks" which is dubbed TOTLL. Here is the first one:
Did the FED Just Bail Out Europe?
and then a follow up:
What the Hell? (Outstanding Credit)
It seems yet another change has been made concerning bank balance sheets and how some items are accounted for. The relevant notes from the FED can be seen here:
April 9, 2010 Notes
I really cannot make heads or tails of this thing. What I can gather is that banks are moving some things back onto their balance sheets but it is not clear why this is happening or what it accomplishes. Have at it.

A Tale of Two Debt Markets
The latest greatest saga is the credit issues facing the nation of Greece. Stop me if you have heard it before; country with structural budget issues in a recession and having no real desire or ability to cut spending needs access to cash or they will default. Same old story all over the world.

I am often reminded that the "bond market" is the most powerful force in the financial universe. I would offer that the bond market's influence is losing ground in the face of never ending manipulations by the central banks of the world.

Which debt market is the real one? Here are two to choose from:
1-Greece is facing rising interest rates on their debt due to various issues and that rate has hit about 7% for even short term debt, far above what "normal" nations can borrow at.
2-Greece is being handed loans at 5% from the IMF/Eurozone to sidestep those pesky debt markets.

So which is it? From all the stories I have read it is #1 but through some creative use of bailout threats the plan is to make #2 replace #1 using the "free" markets.

Here are some clips:
Bailout details ease Greek borrowing costs
Note this section:
"Short-term, Greece needs lower interest rates. If the rates do not go down, I think they will use the mechanism," Agapitos said. "I think it's been a case of a domino. Greece promised, now Europe has promised, now Greece has to take the gun and use it if the spreads do not go down."

Germany, which has vehemently opposed a bailout for Greece, said Monday that the time had not yet come for the aid to be used.

"Just putting up a fire extinguisher on the wall does not say anything about the probability that it will ever be needed," German government spokesman Christoph Steegmans said.
Another Hank Paulson "bazooka" convert.

The Baseline Scenario offers this missive:
Greece Saved For Now – Is Portugal Next?
Summary sentences:
Surely the eurozone will bail Portugal out also – but where would it stop after that? The stronger Europeans, by coming to Greece’s rescue at this time with little conditionality, are effectively showing all the weaker nations that they too can get a package. This will undoubtedly reduce the resolve for needed fiscal reforms across the European periphery.

We are still lurching from crisis to crisis in Europe.
What a mess.

Try and remember that sovereign issues are not peculiar to the Euro zone. US States are having the same kinds of problems.

What does this all mean?

Just as with mortgages, the free market said "no more at these prices" and so the government issued and bought them all. Greece has funding issues and cannot pay a punitive rate, so they will not. Well, at least not until the unneeded bailout plan is rolled out. Tuesday is a debt offering day for Greece so we may get an answer at that point.

The overall economic system cannot function without ultra low rates and to this end we are seeing the greatest expansion of sovereign balance sheets to make it happen. How long can borrowing rates stay at all time lows? 5 years? 10 years?

What is most disturbing is there is still no grand plan anywhere; everyone just moves from one crisis to the next never trying to see the big picture. At some point all of these promises will have to be paid up. I have written plenty on the "Total Miss Pricing of Risk" and here is another example. I wonder how long this can all go on.

Have a good night.


watchtower said...

"How long can borrowing rates stay at all time lows? 5 years? 10 years?"

'Cage match' Bill Gross says the party is over:

"Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb."

getyourselfconnected said...

It would not be fair for me to meet Mr. gross now, I am in top form!

PIMPCO better hope bonds are going to get killed, they are moving into stocks now. Crazy is the new normal.

GawainsGhost said...

I don't know what to make of it either, GYC. It doesn't make any sense. Could have something to do with accounting rules and captial requirements, or it could be some game the banks play to skirt those rules and requirements. They do that, you know. And central banks and governments collude in shuffling funds around to maintain the illusion of solvency.

However, credit is just another word for debt. And eventually the appearance of wealth gives way to realization of poverty.

Interesting write up by Ed Harrison over at Naked Capitalism this morning, on the global debt crisis. How long can this all go on? Maybe for a short while, but the day of reckoning will come, and it won't be pretty.

Anyway, I got slammed with another five assignments from Fannie yesterday afternoon. That brings the grand total for this month to fifteen, so far. So I'll be out and about all day.

While I was researching one of the properties, I came across an interesting name on the list of owners in the subdivision. Blue Star Properties. You know who that is, right? None other than Jerry Jones.

This guy has his tentacles into everything. Now if he could only field a winning football team and bring home a championship. But I don't see that happening anytime soon, sad to say.

Reminds me of the Hunt brothers. After they tried to corner the silver market and got busted years ago, they came up with the idea of building a giant sports training facility down here. I actually saw the plans for it, and they were impressive. State of the art, with two football fields, dorms, cafeteria, exercise facilities, the works. It was supposed to become the permanent training camp for the Dallas Cowboys. But the deal fell apart, and now it doesn't exist.

Back in 2000, when the deal was still being negotiated, I was at the team hotel for a game and got to have breakfast with special teams coach Joe Avezano. So I asked him about training camp in the lower Rio Grande Valley. It's all below sea level! The heat and the humidity in the summer months are stifling. I told him, if the Cowboys come down here to work out, it will either kill them or wear them out. He said he had been down here before and knew what I was talking about.

The deal fell apart shortly after that. Coincidence? I think not.

Anonymous said...

"I wonder how long this can all go on."

5 - 10 years seems like a safe bet. I really do want to move before the next big one hits - hopefully retired. Ive lived abroad before and have no problem with that - I really like it.

The problem is, where would one go? What section of the globe is truly "safe" from all this mess? The more I think of it, the more I think the safest place is, sadly, right here in the U.S.

In the polished turds contest that is global finance, it looks like the U.S. is the shiniest!

getyourselfconnected said...

Out of time so no post tonight. Weird that the crazy jump in loans was about 400 Billion and the IMF today says they are expanding their bailout fund by.......450 Billion. This story needs more attention. Anyone have any ideas?