The Weekly Report

By: Mick P | Sat, May 17, 2008
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Welcome to the weekly report. This week we look at inflation and deflation, the Dow, gold and FTSE but start with a look at a recent speech by William C. Dudley who is the executive vice president of the Markets Group at the Federal Reserve Bank of New York. He is also the manager of the System Open Market Account for the Federal Open Market Committee. The Markets Group oversees domestic open market and foreign exchange trading operations and the provisions of account services to foreign central banks.

If you want to know the effect of the Fed facilities on the markets, Mr Dudley is the man to ask. In a follow up to a speech he gave back in October '07, Mr D looked at the effects that the various Fed facilities had on the LIBOR/OIS spread and whether the facilities had done the job they were designed to do, i.e. introduce liquidity for assets. The speech covers a lot that my readers already know so I'll reproduce the salient paragraphs and charts and then add my comments afterwards. This is the problem as W C Dudley sees it:

Mr Dudley then goes on to explain the reinforcing (viscous circle) that has occurred because of these pressures, culminating in the Bear Stearns episode. After looking at the effects of intermediation and deleveraging, the LIBOR cheating and subsequent reset higher, FX swap prices and increased counter party risk W C Dudley still feels these areas may explain some but not all of the reasoning behind the funding pressures.

So Mr Dudley digs a little deeper (they may move slowly at the Fed but the analysis can be good) and pinpoints what he sees as the real problem:

Here comes the good bit, central to Mr Dudley's speech:

Now for my readers, myself and a few other writers and bloggers out there, most of the above is "old news". We recognised the effect that a re-pricing of assets would have on bank balance sheets, especially when Basel 2 kicked in quite some time ago. Whether Basel 2 caused the re-pricing or not is now mute (in the US B2 only applies to the top 10 international banks). It happened and we have to live with it.

By concentrating on bank balance sheets and the repairs required to capital ratios, investors have an important anchor point for fundamental analysis. For instance (and this is why you love me) in the FTSE 100 we have a large bank sector which has and is being battered, except for

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Mick P

Author: Mick P

Mick P (Collection Agency)
About Collection Agency

An Occasional Letter From The Collection Agency in association with Live Charts UK.

For some years now I have written an ongoing letter, using macro-economics, to try and peer into the economic future 6 to 18 months ahead. The letter was posted on a financial bulletin board to allow others discuss its topic.The letter contains no recommendations to buy or sell, indeed I leave that to all the other letters out there and to the readers own judgement. The letter is designed to make us all think about what may be coming, what macro trends are occurring and how that will affect future trends and how those trends will filter down to everyday life and help spot weak or strong areas to focus on for trading or investing.

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