Recap 2014-08-04

Commentary:

The NYFRB posted about financial stability, which provides a good glimpse of where the FOMC sees dangers in the system, and more interestingly, where they look. Highlights follow, but the most pertinent chart is perhaps the last one:

• The term premium … estimates have risen, but remain compressed relative to historic norms.
  

• Current levels of the far-term spread are also low by historical standards, suggesting that risk premiums in the corporate bond market are compressed.
  

• For the 2014 exercise (shown below), the projected capital ratios, including the capital distribution plans provided by the firms under the Comprehensive Capital Assessment Review (CCAR), indicate that each of the largest banks exceeded the 5 percent threshold for a tier 1 common ratio over the two-year projection horizon under the severely adverse scenario.
  

• The next chart shows that securitization volumes peaked prior to the financial crisis, plummeted during the crisis, and have remained well below pre-crisis levels since then
  

• outstanding tri-party and overnight repos have been about flat, while the level of ABCP has continued to trend down.
  

• Researchers have identified excessive credit in the private nonfinancial sector as an important indicator of systemic risk. The chart below shows an aggregate measure of leverage for the private nonfinancial sector—the sector’s credit-to-GDP ratio—together with a trend line. This ratio has been flat over the past few years and well below trend, suggesting that the nonfinancial sector might not be an important vulnerability in the current environment.
  

Very interesting paper from the Brookings Institute on the Increasing Dominance of Older Firms. A result of slowing growth rate? And another reason for higher P/E ratios?

Our research shows a secular increase in the share of economic activity occurring in older firms—a trend that has occurred in every state and metropolitan area, in every firm size category, and in each broad industrial sector. The share of firms aged 16 years or more was 23 percent in 1992, but leaped to 34 percent by 2011—an increase of 50 percent in two decades. The share of private-sector workers employed in these mature firms increased from 60 percent to 72 percent during the same period. Perhaps most startling, we find that employment and firm shares declined for every other firm age group during this period. We explore three potential contributing factors driving the increasing share of economic activity occurring in older firms, and find that a secular decline in entrepreneurship is playing a major role. We also believe that increasing early-stage firm failure rates might be a growing factor. We are unable to find strong evidence of a direct link between business consolidation and an aging firm structure. Though we document a clear rise in consolidation during the last few decades, it doesn’t appear to be a major contributor to business aging directly—which has been occurring across all firm size classes, and the most in the smallest of businesses. This leaves some questions unanswered, but it clearly establishes that whatever the reason, it has become increasingly advantageous to be an incumbent, particularly an entrenched one, and less advantageous to be a new entrant.

Funny Money: http://epicureandealmaker.blogspot.com/2014/08/where-did-he-learn-to-negotiate-like.html

Notable:

• EU PPI improved to -0.8% vs -1.0% exp and prev
• China Non-Mfg PMI declined to 54.2 vs 55 exp
• Australia Retail Sales rose 0.6% MoM vs 0.3% exp and -0.5% prev
• Turkey Inflation rose to 9.3% YoY vs 8.9% exp and 9.2% prev
• France has received the backing of Germany, the UK, and Italy in its push to have the G20 discuss the issue of US bank fines at their next gathering in Nov. Non-US banks are concerned by the size of the BNP fine and also the practice of Washington to penalize banks for violating American laws even though the institution may have been compliant w/its home country rules. FT
• Fed Loan Officer Survey:
  

  

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  This chart is unexpected – sharpest tightening of standards for residential mortgages since the S&L crisis:
  

  Even as aggregate Residential Mortgage demand remains weak:
  

Upcoming:

• Mon: AU Services PMI, Trade Balance
• Tue: RBA, EU PMI, US ISM Non-Mfg, NZ Employment,
• Wed: US Trade Balance, Australia Employment
• Thu: BoE, ECB, Canada Building Permits, US Jobless Claims, Australia Home loans, Japan Eco Watchers
• Fri: German Current Account, Canada Employment, US Unit Labor Costs, China CPI