“…And when output has increased and prices have risen, the effect of this on liquidity-preference will be to increase the quantity of money necessary to maintain a given rate of interest…” (J. M. Keynes, “The General Theory of Employment, Interest and Money”, Chapter 13, Section III, 1936).
Please, click here to read this article in pdf format: december-17-2009
I thought that as the end of the year approached, things were going to get boring. Nothing could be farther from the truth. With most analysts agreeing on the future path of interest rates (first half of 2010 unchanged but stimulus programs are unwound, second half of 2010 rates begin to raise, except in the US. US yields however increase), there is still confusion around the impact on different markets. In addition, we see markets are paying more attention to fundamentals. Yesterday both the consumer price index (1.8% yoy, as expected) and crude oil inventories (-3.7MM vs. -2MM expected) suggested that we are getting closer to the end of cheap money…On this basis, the US yield curve continued to steepen with stocks selling and the USD appreciating. Oil reached +$72/bbl from its previous $69.87 close.
As I wrote before, in 2010 I expect a higher USD and higher stocks with higher yields in Treasuries. However, yesterday after the FOMC statement, the activity in the Treasuries and stocks markets seemed to refute this thesis. The statement was nothing new, with the repeated “exceptionally low rates for an extended period” phrase. This was of course interpreted as a validation of future inflation, and the 30-yr Treasury plunged. So did the S&P500. However, equities (+0.11%) and yields managed to end almost flat. At the end of the session, the USD was losing strength. I think it may be too early to reach conclusions here, but I took note of it. The same can be said about gold, which I found erratic. Was it related to the fall of the Euro and the Yen (after the Nikkei reported that the Basel Committee on Banking Supervision had decided to delay enforcement of stricter capital requirements for Japanese banks)?
Lastly, in our letter from yesterday, I incorrectly compared the situation in Greece with that of Argentina. Although it is true that in both countries the governments “stuffed” local banks with their own debt, the comparison is not correct. In Argentina, the financial system was totally compromised, because the peso was under a convertible (with the USD) system, where the Banco Central had given up the ability to act as a lender of last resort. In Greece, the situation is radically different. The EUR2BN private placement that was announced yesterday is nothing else but an undisclosed tax on Euro zone taxpayers, to subsidize Greece’s fiscal deficit. Greece cannot get a direct subsidy, but the banks that took on the government debt have access to liquidity facilities from the European Central Bank. Thus, the 250bps spread on Euribor charged for the issuance was an arbitrage on taxing jurisdictions, earned by the shareholders of the respective lenders and in a more diluted way, by Greece citizens too. The “white glove” move was subtle, beautiful and simple, with no direct impact on the foreign exchange markets.