Excess Reserves

9 Responses to Excess Reserves

1. Cassandra says:

   August 11, 2009 at 10:08 pm

   nice, thoughtful, exchange, gents! Concur with JCK re: the market’s re-pricing EOW scenario. But I also agree with GM that deleveraging has enormous gravitational pull. Just as the market ran ahead of real economy on the way down, so too is it running way ahead on the way up – even with the virtuous feedback loop of recent re-pricing. Intermediate term reality seemingly lies somewhere in between for pricing of risk assets.
2. jck says:

   August 7, 2009 at 6:22 pm

   don’t think it’s like korea. the U.S. current account is different, funded in its own currency and i don’t think it will go back to where it was a while back. there is a clear will to put a stop to reserve accumulation by china and the like and we could even see some liquidatrion of these reserves i.e. spend instead of save and that would be very bullish for the US.
3. gaius marius says:

   August 7, 2009 at 5:50 pm

   so loanmaking down, portfolio building up at the banks in the near-term — with an eventual inflection point (which the CBs likely miss) whence banks start shedding portfolio for loanmaking, sparking velocity rise and inflation.

   truth be told, credit to john hempton, i think a lot depends on the current account balance. if china continues to peg the currency and trade holds up, our CA deficit remains large and banking continues to draw foreign deposits as funding (whether or not intermediated by the fed and treasury). if not — even if the peg holds but trade declines further — i think we’re faced with downsizing the systemic balance sheet for a lack of funding capacity. hempton’s comp was korea 1997-8. not sure it’s quite that bad but the setup is at least similar in outline.
4. jck says:

   August 7, 2009 at 5:01 pm

   i think the excess reserves will be used but to fund short term, mostly govt paper because everybody “knows” that the excess reserves won’t be there forever so you don’t to use them to make 30 yr loans. of course liquidity is always the big driver but since velocity is down it matters to speculate on if and when it will pick up. basically we should expect banks’ balance sheet to expand but not on a risk-weighted basis because they will pick up safe paper like govt which is 0 risk rated. still think that the key facxtor is that the fed and the BofE will be behind the curve therefore bukllish for stocks and tangible assets and not bullish for bonds long term.
5. gaius marius says:

   August 7, 2009 at 2:59 pm

   right — good point. i don’t want to pollute your blog too terribly with my noodling, but with velocity/multiplier expansion as a function of credit expansion it would seem to me that the important tell would be in deposits. if they manage to spark a credit expansion in spite of i) bank wholesale funding pressures and ii) the impetus for private-sector balance sheet repair, it should show up more or less contemporaneously with systemic deposits, should it not? and that’s a metric we can track weekly (at the big banks, at least).

   i provisionally think deleveraging is bigger than the fed and going to prevent the employment of excess reserves, making liquidity something of a leader for market prices — but if i’m wrong, i’d expect to get a tell in systemic deposit growth. would you?
6. jck says:

   August 7, 2009 at 2:35 pm

   a lot of credit assets are priced or rather were as if the world was going to end, that won’t happen for now, we are out of that zone, so any small signal confirming that will result in a “dash for trash.”
   but just watching liquidity is dangerous, remember that if we have quantitative easing, it’s primarily because the velocity of money has slowed down sharply, there is no way to measure it precisely but regarding the fed, for me, the one and only question is: will they be able to know when velocity rises again and remove liquidity in due time to avoid further problems down the line? I doubt it, they may be too early to exit or more likely too late as they almost always are behind the curve. i think that’s what is being priced in the markets, they will “miss” the exit time: too late, and that’s a bubblish development.
7. gaius marius says:

   August 7, 2009 at 2:06 pm

   disabuse me of my fantasies here if you kindly would, jck — i’ve kinda been watching this and (more closely) the “slosh report” (fed repos, nowadays the TAF) to monitor liquidity under the provisional thesis that the market revival is, to paraphrase stephen roach, ‘liquidity seeking a home’. not sure how valid that thesis is, but it’s perhaps notable that TAF really began to contract in 3rd wk may. IWM by that point had rallied from 34 to 50; today near 56, which is to say 75% of the rally was in by that point. it was about that point too where the NDX started to outperform big as the rally narrowed. triple-a ABX, double-a CMBX and IG CDX all experiences a nice rally which peaked in that week as well — some further rally lately but for the most part you’d have done well to sell in 3rd wk may.

   you can see where i’m going. am i an idiot to make these associations?
8. jck says:

   August 7, 2009 at 1:31 pm

   right, plus CPFF is going down, plus MBS purchases are not all included in the balance because settlement can take time. so far excess reserves probably peaking, but don’t think they are willingly bringing the level significantly lower.
9. gaius marius says:

   August 7, 2009 at 1:24 pm

   isn’t this essentially a function of unwinding currency swaps on asset side outpacing treasury/MBS buying?