Here’s your epic face ripper continuing right on cue.  The news driving markets this morning is threefold:

  • The GOP is now backing the payroll tax cut extension.  See full story here.
  • The ADP employment report came in well above expectations setting the tone for what could be an upside surprise in Friday’s NFP report.   See full analysis here.
  • And finally, the Fed announced coordinated intervention to reduce dollar swap rates.   They also said they are ready to act if the banking crisis in Europe were to impact the USA:
“The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.”

That’s a lot of news. The payroll tax extension is obviously great news.  We still aren’t quite sinking into the austerity trap and with 10% deficits the negative impact of the balance sheet recession is being greatly reduced.  The ADP figure is not entirely reliable, but it is consistent with my general idea that the US economy is hanging in against some incredible global headwinds.  And the swaps are negative in that they expose the USA to foreign denominated debts, but positive in that they show the central banks of the world are cognizant of the crisis and attempting to be proactive.  This doesn’t hit at the crux of the European crisis, but it does show that Lehman 2.0 is at least attempting to be avoided.  There’s much work left to be done in Europe before this crisis is resolved though…But still, this is a good start.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Dave

    TPC, would you care to expand in another post on the negativity of the foreign-denominated debt the US will certainly take on as part of this coordinated action? Would like a more in-depth view of how that could impact the Fed.

  • http://www.pragcap.com Cullen Roche

    The swaps expose the Fed to some relatively small amount of risk. Nothing to get too worked up over. Besides, the risk of total Euro collapse is practically nil and I think the Fed and ECB have hashed this out in advance. Still, providing dollar liquidity to Europe can be seen as a somewhat helpful maneuver. It’s certainly not going to fix Italy’s debt crisis and budget woes, but it does mitigate the risk of Lehman 2.0 spreading to the USA. Clearly, they’re watching this whole thing very closely so, unlike 2008, they appear proactive to some extent. That’s a good sign.

  • Jon


    You forgot to mention that China is cutting it’s reserve requirements by 50bps. Not sure if this is a good thing or bad though.

  • Chad Starliper


    Dollar funding liquidity may, as you point out, help stop the bank runs, but it will not make anyone solvent. So the problems persist, in addition to more UK austerity coming. Merkel still seems against every potential solution… ECB purchases and Euro Bonds. Of course, that is the only option on the table unless a break up occurs.

  • quark

    The gop is now backing an extension but this is not an improvement nut instead a contunuation of the status quo…at least it is now creating friction. Who pays the inteteat on this debt?

    The adp report has consistently overestimated employment. Perhaps it is an early indictor that reflects the true condition of the labor market. However I have 2 well educated frienda who were recently employed in the healthcare field, one sells
    software the other is a nurse, neither one can find employment and they are concerned as the nurse has been looking for over 4 months.

    Again the system operators are pushing on a string. The issue is demand and fear not putting additional money and security to bankers and wall street. Fools to the man.

    Debt forgiveness in a time when future payouts are the underpinnings of current valuations seems to be a voluntariy measure that is to burdensome gor the market to bare.

    I believe natural economic forces ie deflation will force the marketa to write off the debt and recalculate present valuations based on future cashflow streams.

  • BB

    “It’s certainly not going to fix Italy’s debt crisis and budget woes, but it does mitigate the risk of Lehman 2.0 spreading to the USA.”

    Please elaborate. How does it mitigate the risk of Lehman 2.0?

  • http://binaryoptiontutor.wordpress.com/ Options Trader

    China cut is really minor overall but not a great sign for them because it indicates slowing growth. I expect we’re going to see riots in China again b/c of inflation if they continue to see the need to ease credit.

  • pebird

    Lehman was a wholesale liquidity crunch that shut down commercial paper markets. In Europe, government spending is down due to austerity strategy. However, there are huge amounts of soverign debt that needs to be rolled over. With the ECB not acting as a lender of last resort, the markets could fear a liquidity crunch in Europe. You settle with Euros, not freshly purchased Greek or Italian bonds.

    The Fed action is to keep open the swap lines they established a few months ago. The lowered cost of funds increases liquidity. If they had let those lines expire, it would have decreased European liquidity, hence a greater risk of a wholesale banking crash in Europe.

  • Dunce Cap Aficionado

    Anyone have a good primer/explanation/educational pamphlet on these swaps? Just not familiar with them and how they actually are performed. Even if someone just wants to lay out the basics in a comment that would be great.

  • Mountaineer
  • Malmo
  • Malmo

    Lesson to perma-bears–never underestimate the actions of desperate central bankers, including, at some point in time, even the actions of the ECB.

  • Dunce Cap Aficionado

    Thanks guys.

  • mercator

    Gold and oil will soar as the printing press starts again. Middle and lower income Americans will receive, at the pump, the equivalent of a major price increase and reduction of disposable income. Global recession is a lock. Where am I going wrong here?

  • Wulfram

    Does this make it harder for Europe to work together for a real fix of fiscal and complete monetary union?

    If they didn’t work together when the Bond Vigilante Bernstein Bears were hunting them through the woods, why would they do it now the bears are sleeping in the bushes?

    Good news, but I hope it’s not businesses as usual.

  • mercator

    Or, you can count on the Fed to create a “trading event” that gives markets the impression of a solution. I think ECRI has it right, there’s nothing the Fed can do to impact the inevitable, just short term efforts that fail. The only solution… southern tier EU countries submit to German fiscal control. If that happens, I’m a bull.

  • B Ferro

    Love this link…9/19/08; an announcement that helped cap off a ~850 bps rally in the SPX in about 3 days…ironically, to ~1255 from 1156….


  • http://www.pragcap.com Cullen Roche

    The swaps are simple to understand. They’re unsecured loans to the ECB so their member banks can obtain dollar access if needed. It helps to cap LIBOR and provide liquidity to the banking system. It’s a high risk maneuver for the Fed because of the unsecured nature of it, but being in Euros is relatively low risk as is so I don’t want to overstate this. There’s an inflation risk if member banks use the funds to buy goods and services, but that’s remote. More likely this just shores up the EU banking system and boosts confidence a bit. Other than that, there’s not a lot of meat here even though market participants overreact every time something like this is announced. They think there is some mythical power being unleashed and various websites will imply that this is going to crash the USD and cause the world to end. You can’t even begin to comprehend the nonsense being discussed on trading desks until you know some of these guys. It’s amazing how little Wall Street actually knows about all of this. Ignore all that garbage about the end of the world inflation coming. Bottom line is, this is a sign that CB’s are being proactive, but it’s not a sign that the Euro crisis is being directly dealt with. Remember, this is a solvency crisis. The banking crisis is an extension of the solvency crisis. The risk of course, being short here, is that the EMU comes up with a deal on December 9th and the shorts get jammed for ANOTHER quick 4%….

  • Rem123

    The important swap line (Fed/ECB) was already in place. Only the price has changed (lowered by 50bps) and margins are reduced. So it makes $ funding cheaper and less collateral has to be pledged. A positive for banks, and a positive sign maybe, but for the rest it does very little IMO.

  • Dunce Cap Aficionado

    In terms of foreign debt we’re talking 50 bps excess the original swap, right? Because its excess of OIS? Hope I’m understanding this correctly.

    Anyway, is there a good measure anywhere of how many net liabilities in Candian dollars, pounds & Euros there are on domestic balance sheets?

  • http://www.pragcap.com Cullen Roche

    Right. Very little overall impact. Not much downside though unless the EMU implodes which is very unlikely in my opinion.

  • Dunce Cap Aficionado

    Thanks Cullen,

    My reply to your above comment was written before I saw this. The whole thing seemed mostly ceremonial to me, a public statment committing to working together to further prevent collapse by continuing agreements already inplace, but at a better rate.

    I assume since the repo agreement is made at the time of the swap its all on the books upfront and there can’t be much worry about, and that’s before even considering that there can’t be a massive need for a lender of last resort USD in Europe, although I’d be more than gald to see a number tacked on to USD liabilites held on Euro balance sheets.

  • ZeroBrains

    If you need a good laugh you should check out the headlines at Zero Hedge today. That dude is scrambling to downplay all the good news out. He even tried to claim that he predicted the government intervention. That website has to be run by the biggest bunch of a$$holes on the planet. But I am sure their traffic is booming. People eat up that scary $hit like you wouldn’t believe.

    Btw, Cullen, nice call on the face ripper. It’s refreshing to read an unbiased source.

  • Chad Starliper

    What markets apparently do not seem to be grasping is a) “liquidity” for banks does’t equate to dollars sloshing around the system creating inflation or anything else b) none of this has anything to do with the fundamental solvency/imbalances crisis and c) lost in all of this is the near certainty that the EZ is going into a recession, exacerbated by ongoing austerity which will slow the economies further and make the deficits worse.

  • Ryan

    Look at the horrendous price action in BAC. Wow

  • VII

    Brilliant B Ferro.
    Good move regardless of the why…

    you once recommended to me…”…All you need to know was that the market preceived that it was going to do very good things for the economy, regardless of wheterh the mechanics of it really did anything beside swapping an asset with the private sector”….”you and I don’t get to decide what it should or shouldn’t be discounting correctlly….” the words were yours I’m sure you remember the rest.

    Well..I took that and other experiences to heart. When you wrote that to me back in 2010 early 2011? don’t remember. Although I did print it…so I’d never forget the lesson I thought was there. I have no control over short term moves and trying to “hitch my cart to the answers of why” is folly. It is what it is…trade accordingly.

    For me this news is welcomed. Regardless of the answers wether this solves anything. Answeres be dammed!

  • Leverage

    Short lived relief rally, that will go down eventually.

  • B Ferro

    Thanks VII. Those words are always true – market post mortems don’t pay dividends, right? Who needs the explanation, just obey the market’s commands.

    As it stands, the 30 week MA on the SPX remains decidedly negative, with price below it. The 12 month MA on the SPX has flattened out and has begun to turn negative and price sits below this MA. Both of these facts were decidedly different during the summer 2010 mid-cycle pause whereby the SPX’s weekly MA flattened out at worst (again, currently very negatively sloped) and its monthly MA remained decidedly in an uptrend.

    Fundamentals are irrelevant because they are already dispalyed on the chart for you. Rather than waste time arguing bull or bear, the facts, those being actual prices and the MAs, continue to tell me the trend is down and that all rallies are counter-trend.

    Seems like we could get further upside into the close today (1255-1265 on the SPX) or tomorrow which could be fadeable thereafter.

    I’d point out that in history’s secular bear markets there have been 8 opportunities for the market to stage 3 straight up years. Only once has this happened. In other words, in 7 out of 8 times following two straight up years in a secular bear market (i.e., 2009, 2010) the third year has been down. The average loss has been 18% on the year (implying ~1030 on the SPX). The SPX closed 2010 at 1257 – this continues to be my line in the sand for 2011 and is a price I’m willing to fade should I see it again as I’ll place my bet on the 7/8 time thing all day.

  • http://www.pragcap.com Cullen Roche

    Tack Chicago PMI and home sales on to this triple whammy….

  • Bond Vigilante/Willy2

    Very confusing. Because the word “”swaps”” suggests that the ECB has lent Euros to the FED as a part of the deal. They should use the word “”loans”” instead.

  • http://www.consideratecapitalist.blogspot.com WellRed

    Add great German employment numbers to the list. Good points on overall minor nature of coordinated central bank action. I wonder if the ECB transfers the posted collateral to the Fed or if there is counterparty risk there. Presumably the ECB’s credit is good (barring EMU implosion), but as with all CBs, they are thinly capitalized and (unlike all CBs) are sitting on a lot of really crappy assets.

    This rally is not encouraging in that the (former) generals are considerably underperforming. Look at AAPL and AMZN. That being said, there is a ton of headline risk over the next few weeks if you are looking short this pop..

  • Darrell

    At one point, I read ZH on a daily basis but it became clear they cherry pick events for their bias and provide no real value. Pretty much all news is bad; market up, things are manipulated so things are bad. Market down, real indicator of how bad things are. Market flat, things must be bad or the market would move. Seems the EU was toast about three years ago, along with our equity markets if I recall. I guess that is why the mantra; On a long enough timeline…

    I do believe they are onto a great marketing gimmick as, with the exception of sex, nothing sells like fear.

  • Bond Vigilante/Willy2

    1. The Silver-Gold ratio, although rising, didn’t signal any relief in the financial markets.
    2. Too many folks were short and had to cover. No wonder the markets rallied.
    3. I am still short a number of things. And I am staying short. And ALL those positions are still “”above water””.

  • Dunce Cap Aficionado

    Yes but there really is no good word for it. Its a swap of currency a the (market) exchange rate and a swap back at the same exchange rate later.

    But there’s interest accruing in the meantime, so it has characteristics of a loan as well.

  • VII

    Thanks B!

  • N

    When the Fed makes a loan to another central bank, don’t they increase the monetary base? Isn’t this just another way to do QE?

  • Mercator

    I believe the German unemployment number can be attributed to gov. sponsored subsidies (redirected unemployment benefits) to corporations, in exchange for minimal layoffs. The flip side for workers is no wage increases. So, no wonder workers do not support money printing. They would take a double hit if the Euro is inflated. Merkel would be looking for job.

  • Lolo

    this guy says this is equivalent to QE3 – he is on CNBC almost daily


  • kman

    A nice face ripper it was. The China move stinks of desperation, or at least an acknowledgement of, hey things are bad here.Reminds me of the days when greenspan would cut and the markets would rally. :-)) until he could cut no more.

    wzup with AAPL, only a little bump today. smells fishy, what happens there if the mkt starts giving back these gains ???

  • EB

    Isn’t this a technical rally? We were rallying on so-called black friday sales, which made no sense because there were no real numbers and black friday doesn’t matter. Now there is positive news but concern is going forward what to expect … and really, have our employment problems been solved?

    None of this today really has anything to do with whether those European countries are ever going to pay back all the money they’ve borrowed. I’m still guessing they aren’t, they aren’t as dumb as we are to bail out the banks.

  • jt26

    EURUSD fwds, Italian spread … hardly a reaction, or at best a gentle rewind to last week.

    BTW … after WWI, the US tried to get full payment on their foreign war loans, without much luck. I suspect, that in a *crisis*, full repayment of these swap lines will be extended and pretended and ultimately written off … and the European argument will be the same … “you’ll have to share some of the pain for stabilizing a global problem etc. etc.”

  • John

    The Fed will only be holding the Euro’s not actually using them, The European banks will actually be using the $’s for the liquidity issue they have. Will this cause downward pressure on the $ more so than the euro?

  • roger erickson

    DT aphasia? maybe they have a variant of LBJ disease, and can’t pronounce certain words?

    ever seen a Republican try to say Ag, Ag-gre, Ag-gre-gate De-de-de-deeeeeee-man Duh!

    GOP: Pay for payroll tax cut with federal workforce, safety net cuts


  • JWG

    The Fed says:

    “Is the Federal Reserve exposed to foreign exchange or private bank risk in extending these [swap] lines?”

    “No. Dollars provided through the reciprocal currency swaps are provided by the Federal Reserve to foreign central banks, not to the institutions obtaining the funding in these operations. The foreign central bank receiving dollars determines the terms on which it will lend dollars onward to institutions in its jurisdiction, including how the foreign central bank will allocate dollar funds to financial institutions, which institutions are eligible to borrow, and what types of collateral they may borrow against. The terms governing these loans of dollars are in all cases released to the public by the foreign central banks. As the Federal Reserve’s contractual relationship is exclusively with the foreign central bank and not with the institutions obtaining dollar funding in these operations, the Federal Reserve does not assume the credit risk associated with lending to financial institutions based in these foreign jurisdictions.”

    Do I believe the Fed? No; because if all hell breaks loose in the Eurozone, making the Fed whole is the last thing the Eurocrats and the ECB will worry about, because the cost of keystroke money to the Fed is essentially zero anyway. “Just create another trillion or two dollars” will be the Eurozone answer to any loss claimed by the Fed if the wheels come off the Euro. The Fed is taking on trillions of dollars of redenomination risk in these swap lines, and eurodollars have been below the radar since the Fed stopped reporting on them in monetary aggregates.

    Bernanke has a savior complex and a compliant Board, and that makes for a very dangerous central banker, regardless of the current deflationary macro environment. Ben thinks that eurodollars are off balance sheet play money. He is playing with fire, because major inflation in energy prices will kill the world’s economy and he could easily create such a situation. The herd can move very quickly, and confidence can dissipate in a flash. When elites start treating the dollar with contempt, the behavioral component becomes crucial, and MMT does not deal with behavioral finance very well (although TPC refers to it in his investment approach).

  • goodfriend

    I doubt fed would have done this without full certainty that euro won’t break up.
    so is it an hint that things will move in the rigth direction for europe?

  • Dunce Cap Aficionado

    That’s how I read it. Seems like some promising words were exchange off record and behind closed doors.

  • El Viejo

    Somewhere I remember reading that ECRI had said that the last quarter before the Recession begins is usually a good one. Maybe that’s where we are right now.