Feb 17. Never saw it coming…
–Comments yesterday from two new regional Fed Presidents. Harker of Philadelphia: “…but there are downside risks to my baseline forecast. …we have been below our inflation target for all but two years since 2008.” “It is also fair to say that risks to my outlook are tilted to the downside.” And then “I believe as we move into the second half of the year with economic activity growing at or slightly above trend, the unemployment rate below its natural rate, and price pressures starting to assert themselves, policy can truly normalize.” Risks to the downside but things will turn around in 4-5 months? Note to self, this guy can safely be ignored.
–Kashkari of Minneapolis. His speech was about breaking up the big banks. “Options such as these….are transformational – which can be unsettling.” Also in his speech, “A second lesson for me from the 2008 crisis is that almost by definition, we won’t see the next crisis coming, and it won’t look like what we might be expecting.” Hmmm. I see it coming. And if you layer on the ‘unsettling’ prospect of another major shake-up of the US banking system, it will be quite a doozy. Right, it’s hard to see any warning signs currently: stocks plunging since beginning of the year. Energy making new lows. Energy companies under severe financial stress. China in flux. Manufacturing in recession. …Never saw it coming. Honestly.
–Having said that, the markets are taking a pause from the latest round of risk-off which culminated last Thursday, and stocks are floating higher. Implied vol in rates is coming in fairly aggressively. Precious metals have seen a big pullback from last week’s surge… an engraved invitation to buy.
–I continue to think spillover from China will turn into a torrent but I have no way to quantify it. I just saw the Big Short, and one line from Burry stands out, that when trouble arises, instances of fraudulent activity jump. From today’s Business Times (Singapore) comes this headline: China Banks seen hiding losses in “opaque” receivables accounts. When is an asset not an asset? Ask anyone who worked with me at Refco…
http://www.businesstimes.com.sg/government-economy/china-banks-seen-hiding-losses-in-opaque-receivables-accounts
The article cites Commerzbank research. “Chinese banks haven’t provisioned for receivables and those are essentially riskier loans,” said Xuanlai He, credit analyst at Commerzbank in Singapore. “The eventual losses will have significant impact on China’s economy because you could have contagion risk in banking sector.”
–News today includes Housing Starts expected 1.175m, PP expected -0.1 with Core +0.1, Industrial Production +0.4 and the Fed Minutes.
