Recap 11-22-11

Main Items:

• IMF announced that it will lend up to 1000% of a member’s quota to members for up to 24 months. The effective interest rate will be in the neighborhood of ~3%.

1. Member quotas are listed here.
2. Financing will be in the mid single digits as a % of GDP.
   

3. In 2012, Italy’s gross funding needs are 220bn. Spain’s is 82bn.
4. The question now is whether the countries will make use of it. Unfortunately, since use of the credit line is not anonymous, a country’s use of it could be seen as a sign of weakness and exacerbate pressure on its bond market.

Fed minutes were a bit dovish. Highlights:

1. A few members expressed interest in using language specifying a period of time during which the federal funds rate was expected to remain exceptionally low, rather than a calendar date, arguing that such language might be better to indicate a constant stance of monetary policy over time
2. A few members indicated that they believed the economic outlook might warrant additional policy accommodation. However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative. (this compared with 1 official dovish dissent in the voting)

US 3Q GDP growth was revised down to 2.0% from 2.5% prev. Most of the downward revision was due to inventories.

Richmond Fed Mfg index improved to 0 in Nov vs -2 exp and -6 prev

US banks about to be subject to another stress test; process starts Tues – FT.

BAC – regulators have warned the company that a present private MOU in place since ’09 could become a formal public action, “which would likely mean intensified scrutiny and greater restrictions”. Regulators want the company to take more meaningful actions on risk, governance, liquidity mgmt, and other shortcomings. The BoA board was very surprised by the regulators warning as it feels sig. progress has been made already at the company. WSJ

Overseas:

• China already tweaking bank RRRs at the margin – according to reports Tues morning, China’s central bank lowered the required deposit reserve ratio for five rural credit cooperatives in the eastern province of Zhejiang to 16 percent from 16.5 percent – Bloomberg

Commentary:

Gavekal had an interesting article showing the ratio of people aged 20-59 to those 60+ across different countries. In particular, note that the ~3.25 level seems particularly pivotal. Japan crossed that level in 1990, which coincided with the Nikkei peak. The US crossed that level in the late 80’s and 2006, both of which coincided with real estate peaks. China will cross that level in ~2022.

Separately, a Citi report suggests that deposits are flowing from Spain and Italy to Deutsche Bank and Nordic banks, although it’s not clear how much of this is QoQ noise:

Finally, note that the sequestration is actually an ingenious process by which both the Democrat and Republican leaderships were able to horse trade items to cut from the deficit while bypassing the broader legislature. The roughly even cuts between defense (generally a Republican concern) and domestic programs (generally a Democrat concern), as well as the fact that Obama, Reid, and Boehner have all restated commitment to the cuts support this view. With the Tea Party (the not a cent in tax increase ever ever party) holding significant sway in the House, these types of deals are likely to continue.