Thursday, Aug 06, 2009
Send for Dyno-rod
FT: The liquidity pipes remain clogged
The longer that the banking pipes remain partly or fully clogged and the governments keep pouring water into the system, the more that investors and policy makers need to watch what this liquidity “backflow” might do; and not just in the gilts market, but other, less obvious corners of the global asset markets too.
Posted by devo @ 11:14 PM (1150 views) Add Comment
28 Comments
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1. devo said...
Although there have been many twists and turns so far in this unfolding Depression, there is an underlying malady that hasn't and is unlikely to be cured...
The banks don't trust each other.
2. Karen said...
Why does everyone keep blaming the banks for not lending. They are doing what they are supposed to do. They look at risk and lend accordingly. They are now back working responsibly keenly responding to risk and not lending. End of Story. I am not often likely to compliment the banking system, but on this they are correct.
3. paul said...
Devo, not quite - they actually seem to trust each others' debt more than others!:
Ironically, it seems that many investors now consider bank debt to be one of the safest instruments on the planet, since the governments can ill afford to let large banks collapse.
I doubt the Bank of England will heed this warning from Japan or the FT. They've heeded few other warnings about the shaky viability of their other long term strategies.
4. hpwatcher said...
Banks seem unwilling to use the money pouring into the system
Yes, which is why the QE amount has been raised to 50 billion, for banks to give away......the minute that money stops - and the amount will be limited - we will be back on course for the depression. Only then will house prices start to hit more realistic levels.
5. paul said...
I'm not particularly worried about the impact of QE on the housing market.
Japan's experience shows us that it can't and won't work.
While the plane is in a nosedive, there's no control until the bottom is reached and can pull up again. If the banks are sitting on a mountain of unvaluable assets because the market is in a nosedive, then any extra money being given to them is going to be set against those bad assets. And those bad assets are residential (and commercial but mostly residential) property.
Once the bottom is reached, the market for the assets returns, but not before then. This was Japan's experience and I see the UK as being no different.
I'm still not sure its getting through that the Bank of Japan tried all of the tactucs that the Bank of England is currently deploying and none of them worked. Either someone in the Bank of England thinks that it will somehow be magically different this time or they simply have a rather vain and arguably nationalist sense that Japan somehow just "didn't do it quite right".
I suspect the latter, which is why we are probably doomed to re-make Japan's mistakes.
6. growler said...
... but lets think about this. If you're a bank, have tons of cash at 0.5% and want to invest in somethign that improves your finances, what would you do? Imagine the government keeps piling the cash in... as soon as you see something, you and everyone will be in there.
Since "normal" business is persona non grata, major long term capital projects in the real economy must look interesting.... surely?
Flashman... your thoughts...?
7. flashman said...
growler: Spot on. There are many long-term capital projects in the pipeline. Many "normal" businesses are suffering right now but some of them are unsustainable old-fashioned businesses than arguably need culling.
8. flashman said...
"I'm not particularly worried about the impact of QE on the housing market."
I think paul is right about this. The Treasury/BOE would be mystified by claims that QE will/could support house prices. I can’t see how it could. Just because the banks have been re-capitalised, it doesn’t mean that they want to jump back in and de-capitalise themselves by lending to a fragile, overpriced property sector. The banks want to lend to more promising sectors, as per growlers comments
9. growler said...
@ flashman
Thought this might be the case... I am in heavy engineering and have connections to infrastructure.
I also think not only "unsustainable old-fashioned businesses", but also unsustainable new-fangled quasi-service businesses will suffer. Who needs wedding organisers, sandwich vans, bin-cleaners....... and.... estate agents :-)
10. flashman said...
growler: Can we save ironing ladies from the cull? Absolutely essential.
BTW: The banks are still interested in high quality mortgage lending. Mortgage lending will gradually ramp up but not remotely to the same levels as a few years ago... and quality will be everything
11. bellwether said...
Hi Flash and Growler.
I think lending to households and commerical property, which is not focused on so much, is a huge and unresolved connumdrum, either you accept that prices go lower (and they must go much lower in both sectors) or you trash the currency to keep them high (and because prices are really high you must really trash it) . It amazes me that people write so bearishly about the US when they are getting close to clearing their housing problem and we haven't even begun. Sorry if I'm stating the obvious but have a bit of OCD when it comes to this sort of stuff!
Anyway interesed in the capital projects stuff what sort of things you referring to?
12. stillthinking said...
Exactly, Japan was criticised for years over doing the wrong thing and creating zombie banks, refusing to split into good/bad banks, but now apparently they did the right thing but with bad timing. We will have the dubious honour of watching BoJ funding dry up as they lose the ability to borrow from a pensioner population, while at the same time struggling with huge debts.
Delaying loans is a winner because the economy is rotten with misallocated capital, the easy way to determine which firms are robust is just to wait while they thin out.
13. icarus said...
Limited amounts of cash are going into the real economy for long-term or any other kinds of projects. Lending is risky and low-margin compared with what Deutsche banks top investment banker calls 'sales and trading' - speculating in bonds, commodities and currencies.
Government guarantees and cheap money from central banks have made it easy for top investment banks to make money without lending. They prefer issuing, buying and selling bonds. They made big money by buying bank bonds when they realised that after the Lehman collapse governments wouldn't let the big banks go broke. They are making big margins on distressed securities trading at a big discounts because a few big banks have eliminated their competition and because they're buying the securities with cheap money from central banks. They're making big money on corporate bond issues (almost risk-free, good margins) as companies are forced into this method of raising money. You can make more money churning over existing loans than you can making new ones.
14. flashman said...
Hi bellwether: Yes the only way for property is down but I think it'll have to be done with good old fashioned price drops. I don't think there's any plan to further trash the currency because there are so many trade, bond market and political problems involved. We did a bit of devaluation earlier but our trading partners threw a hissy fit and there will be serious retaliation if we go for it again. I agree on America. As you know I have always been a bit dubious about the America is finished brigade
Maybe growler would like to be more specific on infrastructure but generally speaking, the usual suspects are being lined up: Power generation, transport (airports and rail specifically), government backed housing projects, communications etc. The OECD recently strung the government by ranking us very poorly in terms of infrastructure and consequently there has been a flurry of activity in terms of white papers and public/private project proposals. All the hoarded liquidity is looking for a home and government sponsored/endorsed projects will be a good safe gravy train. Certainly safer than property. One of the reasons that I am so pleased about the property market slide is because capital can at last go into something more productive
15. flashman said...
icarus: I agree with what you say but the banks know that the 'sales and trading' margins are unique to the current situation and will not last. Central bank largesse will not continue indefinitely and the banks have to prepare for the day when they do normal business. Banks are always terrified of losing market share.
16. paul said...
think paul is right about this. The Treasury/BOE would be mystified by claims that QE will/could support house prices. I can’t see how it could. Just because the banks have been re-capitalised, it doesn’t mean that they want to jump back in and de-capitalise themselves by lending to a fragile, overpriced property sector.
Flashman, the area where we disagree is that I'm quite sure that the Bank of England would love QE to support house prices - we've heard Charlie Bean and David Blanchflower say exactly this - "our priority is getting house prices rising again".
My point is that it won't work, despite what they want.
17. growler said...
@13 flash
yes - this and the waste/alternative energy industry.
And since the UK planning is a nightmare, if other countries have quicker turnkey times.... bye bye QE cash from the UK. Thsi is why I see a Sterling problem (sorry about the pun).
18. growler said...
@15 Paul
I don't think you and flash disagree. Being ever the cynic.... in true Growler style...
If the Government said we need QE to help banks (which they know is the real reason) what would our reaction be? Rising house prices is the opiate of the masses.
"our priority is getting house prices rising again" otherwise people will get miffed when they reaslise it's about helping banks
;-)
19. icarus said...
flashman @14 - agreed, we'll just have to see where we go from here. If we agree on points @12 this puts a big question mark over govt bailouts and green shoots. Regarding market share, the shake-up in investment banking over the past year puts GS, JMP and 3 or 4 others in the driving seat.
20. flashman said...
growler: It's interesting that you mention waste infrastructure and planning constraints. There is currently a waste plant application in Surrey. The parish councils all objected (as usual) and the county council dragged their feet asking for yet more reports. The government has just grabbed it from the council and will probably railroad it through. Hopefully this is a sign that the government are sick of the council planning offices
21. growler said...
Flash: Indeed. Most if not all capital projects involve NIMBY groups. But now - in the interests of emerging from recession (you can hear this already) - these projects will get railroaded through as the cash for it will never be so cheap for the Government. Look at equities - as you know...
If the UK is seen as time-consuming, divided by interest groups, at risk of huge changes in Government policy in 12 months time, or otherwise seem a dead loss for even these forms of capital investment, funding will leave the UK like a dam breach.
22. bellwether said...
Cheers Flash, and really interesting posts from everyone. I agree with you that past a point money into property is wasteful, there really is nothing like high rents to strangle business and enterprise.
That said with such vast amounts of unliquidated money invested in property, and property related debt and stocks, our was the era of securitisation, how can there also be huge amounts of money looking for a home, and if there are why choose the UK. Are there any figures that anyone can put on the cash on sidelines argument.
23. bellwether said...
My point re why choose the UK is that we are debt laden ie payment by an overleveraged state, paying in an already overleveraged currency backed by overleveraged assets, Also don't we tend to be useless when it comes to infrastructure, the opposite of say the Germans or Japanese or even the French or Germans. Also didn't Japan try this trick. Sorry not digging into the points in an agressive way just continued to be puzzeled as to where we are heading as a nation
24. flashman said...
bellwether: I haven't got the exact figures to hand because I'm at home but I do remember that earlier this year there was $9 trillion dollars in cash held in money market funds and bank deposits. This equates to about 3/4 of the value of all US companies, which I believe is an all time record.
25. flashman said...
bellwether: yes we are useless at infrastructure, which in a perverse way leaves us with more scope. It all depends on whether the next govt gives the proper incentives and backing. I think they will because what choice do we have?
26. bellwether said...
Thanks Flashman. Would be really interested in that stat if you can get me the source. Will also look at companies that will benefit from infrastructure spend, but tend to look to the US as I can see a clearer route there than here, and I guess my fortunes are already significantly tied to the UK!
Catepillar has been a bit of a darling recently but still looks well priced with a dividend of about 3.6% at yesterdays price.
See non farm payrolls and other data out of US better than estimated. Went long on sterling v the dollar. Not asking for any thoughts on that incidentally!
27. flashman said...
bellwether: I did some googling and found a link to a Bloomberg article. I was very close with my $9 trillion but it seems that it is only a record since 1990. I also googled the words from the article and found a blog on the subject (see second link). Obviously these figures are from America but scale down for the UK and you wont go far wrong. This stuff is from 6 months ago but I’m pretty sure that the amount has increased since then. The blog pretty much reflects the equity market bullishness that was doing the rounds six months ago
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4JGucN3jZxM
http://runningofthebulls.typepad.com/toros_running_of_the_bull/2009/01/cash-levels-at-18year-highs-.html
28. bellwether said...
Thanks Flash, just posted something from GS, that might be worth a read. Have a good weekend.