BAC?

Today's best headline from Zero Hedge: "Buffett Bailout Of BAC Sends Stock to Early August Levels, Changes Nothing." Indeed, Moynihan's claim that BAC did not actually need the $5 billion capital injection is particularly laughable. It seems like now is the perfect time to sell the spike. Even before today's news, Moynihan was uncompelling during a CNBC interview on the first trading day post S&P's US credit downgrade, where he said that the bank would, somewhat ambiguously, "continue to do what it was doing."

Coordination

Regarding Chairman Bernanke's speech at Jackson Hole tomorrow,  Pimco CIO Mohamed El-Erian (in an opinion piece for the FT) has the right idea: the Fed must not "run the risk of building another bridge to nowhere." That is, a third round of quantitative easing (this time: buying further out on the yield curve / MBS and agency purchases / something along the lines of "operation twist"?) will fail to effectively solve our country's economic woes. Bernanke's goal should not involve another leg of artificial stimulus; rather, he should devote all efforts to orchestrating tangible reform. Specifically, in the words of El-Erian, "a sustainable solution must...incorporate co-ordinated structural reforms on the part of agencies responsible for housing, the labour market, public finances, infrastructure and directed credit." Undoubtedly the most important part of the above proposition involves the notion of coordination. All too often we blame a single individual, body, or organization in the face of poor economic data, and a general unwillingness to concede greatly hinders meaningful progress. Our current situation, however, leaves no room for prolonged dissent.

LIBOR-OIS spread components (with one-year historical performance)

Value of Swap Lines

This morning's Bloomberg Brief offers commentary regarding the recent stress within dollar funding markets, and specifically assesses its impact on the global financial system. Joseph Brusulelas [astutely] mentions the fact that approximately $200mm in cash has been drawn from the Federal Reserve's dollar liquidity swaps facility (during the week ending 8/18), a source last tapped in October of 2010. Although this figure is minuscule relative to the ~$9bn drawn at the onset of the European debt crisis, it may be a harbinger of difficult conditions ahead. Perhaps more significantly, the one-year basis swap (3M Euribor less 3M USD Libor) declined to open at approximately -50bps, indicative of the fact that the USD is in greater demand (and therefore yields a premium to hold). Overnight lending rates have also increased; notably, according to Bloomberg, Credit Suisse has increased the premium it charges for overnight lending  by "an unusually large 8.5bps," suggesting rising counterparty risk. It will be interesting to follow the interbank and swap rates in the days and weeks to come.

Some historical context: in 2010, the FOMC provided dollar liquidity swap lines with the ECB and SNB to, as one would expect, "provide liquidity in US dollars to overseas markets." Foreign currency swap lines have been in place from April 2009 through February 2011 (in partnership with BOE, ECB, BOJ and SNB, "in sterling in amounts of up to £30 billion, in euro in amounts of up to €80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion"), but the Fed did not draw on these lines.

Today's FT Alphaville presents the argument that the institution of a new FX swap facility would be "a much more useful move than any form of QE," but notes that such lines "are not a permanent solution."

Fed Funds Rate

It is becoming increasingly hard to fathom that the federal funds rate once peaked at 20.06% in January of 1981, the year of my parents' graduation from the University of Pennsylvania. Approximately 30 years later, on the date of my own graduation from Penn, the discount rate sat at a near-zero 0.09%.



see: historical interest rate data in spreadsheet form from FRB

NAIRU Musings

The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is defined to be "a measure of how low unemployment can go before risking inflationary pressures," or, put another way, "the level of unemployment below which inflation rises." Laurence Ball and Gregory Mankiw of Harvard elegantly explain that this concept "follows naturally from any theory that says that changes in monetary policy, and aggregate demand more generally, push inflation and unemployment in opposite directions in the short run." Intuitively, this inverse relationship makes sense, as demand and spending tend to increase inflation, while simultaneously decreasing unemployment. Conversely, a high-level lack of aggregate demand (and, therefore, lower inflation) triggers higher levels of unemployment. Mankiw continues to say that "once this short-run tradeoff is admitted, there must be some level of unemployment consistent with stable inflation." That is, NAIRU should be deemed synonymous with the "natural" or organic rate of unemployment.

see: (1) NAIRU estimates from the Federal Reserve Bank of Philadelphia (2) great explanation of the relationship between NAIRU, the Phillips Curve, and rational expectations [section 3 of article; graph depicted below] (3) NAIRU and QE3

BAML's "Morning Market Tidbits"

"We are a strong believer in the view that market sell-offs stop when investors stop glaring at their Bloomberg screens." Here the BAML economists hint at the (somewhat obvious) fact that consistent negative news flow leads to selling in the market. Unfortunately, bleak economic reports from multiple continents will cause investors to remain glued to their terminals. Psychological expectations play a crucial role in periods of heightened market volatility.