US Money Market Funds Back in the Bank Funding Game

Given zero or near zero interest rates everywhere, US money market funds keep returning to the playing with fire by financing the short term dollar requirements of euro-land banks – especially French ones. However, not only that, they also hold vast exposure to banks elsewhere.

From a recent Fitch missive on the topic:


“U.S. prime money market fund (MMF) exposure to eurozone banks decreased slightly over the most recent reporting period. Despite the decline within the eurozone as a whole, allocations to French banks continued to increase and, as of end-December 2012, represented 6.5% of MMF assets under management within Fitch Ratings’ sample (see chart, Eurozone Banks — Slight Dip, Despite French Increase). For the first time since end-August 2011, France represents the largest single country exposure within Europe. As a percentage of MMF assets, allocations to French banks are at their highest level since end-September 2011.

 

To be sure, the overall levels don't seem excessive yet by comparison to the summer of 2011, but they represent a quite hefty percentage of MM fund assets even so:

 


 

MM funds euro bank funding

US MM fund assets in short term European bank paper, via Fitch

 


 

What's more, 13.2% of MM fund assets are invested in Japanese bank paper, 12.4% in Canadian bank paper, and 8.9% in Australian bank paper. The latter two are grave risks due to the potential for their real estate and household debt bubbles blowing up, the former is harboring 'Abe risk' (i.e., Shinzo Abe inflation and thus fiscal crisis risk). We're not sure what the MM fund managers are thinking. That they will be able to jump ship at just the right time as if by magic?

42% of all US MMF assets are concentrated in just 15 banks (as opposed to less than 29% exposure they have to US treasury debt). Nine of those are Japanese, Australian and Canadian banks, four are European, and two qare US banks (JPM and BAC).

We can see how the dollar funding problems have by now ended almost completely for European banks by considering euro basis swaps:

 

 

 


 

eurobasisswaps

3 month, 1 year, 3 year  and 5 year euro basis swaps: happy days are here again.

 


 

However, our proprietary European bank CDS index has been perking up a bit lately (possibly the recent troubles of Banca Monte dei Paschi di Siena may have something to do with that)

 



 

useurobankcds


Our proprietary unweighted index of 5 year CDS on the senior debt of eight major European banks – the white line (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito), compared to 5 year CDS on the senior debt of Goldman Sachs (orange), Morgan Stanley  (red), Citigroup (green) and Credit Suisse (yellow)


 



 


Interestingly, there is still a very wide gap between US and euro-land inflation expectations:


 



 

infladjbonds


The price of gold (yellow line) versus US (orange line) and euro-land (white line) inflation expectations


 



 


Lastly, here is a chart of the Euro-Stoxx bank index – it could well be that an A-B-C type correction is close to ending, although we can of course not be sure of that.


 



 

euro-banks


The past two years in the Euro Stoxx bank index, daily. Was the recent rally an a-b-c- corrective move?


 



 

Welcome Back, Your Eminence?


The point of all this is to show that current sentiment is the exact opposite of what it was in August to November 2011.


In this context, Bloomberg reports “Bank Bonds Poised to Recapture Pre-Crisis Yield Eminence”. Although the report concerns US banks, the mood in Europe is of anything even more bullish. European bank bonds have seen a veritable flood of buyers snapping them up lately.



“Banks are poised to overtake industrial companies as the safest borrowers in the $5.1 trillion U.S. corporate bond market for the first time since the start of the worst financial crisis since the Great Depression.

Investors demand an extra 154 basis points in yield over benchmarks to buy bonds of JPMorgan Chase & Co., Wells Fargo & Co. and other lenders, compared with 138 basis points for companies from Alcoa Inc. to Ford Motor Co., Bank of America Merrill Lynch index data show. At 16 basis points, the gap has shrunk from a peak of 365 in 2009 and may invert as soon as this year based on the current pace of tightening.”


Now, to our mind the balance sheets of big banks remain as opaque as ever. Let us not forget, mark-to-market remains suspended. We know that many of the banks' assets have seen vast improvement, but do they really deserve to be rated as 'safer' than industrial companies? That strikes us as rather odd.

As an aside, Moody's has just downgraded six Canadian banks (we're not sure why, but we suspect potential bubble trouble – “high home prices and consumer debt” were definitely mentioned). This information and the next chart come courtesy of “Investment Watch”. The next chart illustrates the state of Spain's mortgage market. Not that it is really surprising, but we thought it is quite instructive: mortgage approvals have now even fallen below the numbers that prevailed before the bubble.

 


 

Spanish mtges_0

Number of Spanish mortgages approved. A full round-trip from the bubble period and then some.


 



 


So will all this new-found state of financial sector bliss last? We kind of doubt it, but as readers are probably well aware, our skepticism has so far proved, if not ill-founded, then it least 'way too early'. However, we cannot help it: we simply don't believe that the world can possibly have been made a richer and better place by means of printing wagon-loads of money. It would really be a first.


 

Post Scriptum: Attacks on Private Banks A Bit Too Popular


Lately it has become very fashionable to attack the 'banksters', especially, or rather almost exclusively, the private ones. Central bankers are considered taboo, they are above all reproach. The Daily Bell has recently published a number of articles taking what one might call a 'contrarian stance' on the issue. We think they may be on to something. What all these attacks on bankers appear to have in common is their deeply anti free-market, statist bent. This campaign does smell a bit funny.


We are often criticizing the banking system here, but we sure have no problem with private banks as such. We have a problem with central bank-directed cartelized banking, and we have a problem with the practice of fractional reserve banking (in a truly free banking system we believe it may actually die out of its own accord). Here are the links to the Daily Bell articles, which are well worth the read:


Root for Wall Street to go to Jail” (PBS wants bankers to go to jail, but somehow misses a great many other worthy targets in it campaign)


The Heroism of Iceland's Grimsson, the Man Who Stood Up to the Banksters


Icelandic hero Olafur Ragnar Grimsson reconsidered, as he speaks from…Davos? What is the bane of banksters doing in Davos anyway?

"Nationalize Banking? Or Apologize for the Suggestion …


A leftist economist wants to nationalize the banks. Splendid idea, let the State take over banking completely.

 

"Senators Demand that Banks Be Punished – but Not the Fed"

The US Senate is at it as well….
 
 


Charts by: Bloomberg, Fitch, SocGen, BigCharts


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “News from the Banking Realm”

  • zerobs:

    People hate the banksters because they are a protected class. Understandable, but the hatred should really be directed toward those protecting them.

    I wouldn’t invest my money in a bank, but it’s hard to argue that stance when banks are so well protected by their sovereigns that half of their taxpayers will be sacrificed before another (large) bank or insurance company is allowed to fail. Naturally, people are going to wonder just why the banks rate higher than they do in the hearts and minds of their elected officials. Since the people elected those officials, they are somewhat “in love” with those officials so they refuse to see their faults and sins. So all the sins are projected onto the objects of their elected officials’ desires.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Capital Structure as a Mirror of the Bubble Era
      Effects of Monetary Pumping on the Real World As long time readers know, we are looking at the economy through the lens of Austrian capital and monetary theory (see here for a backgrounder on capital theory and the production structure). In a nutshell: Monetary pumping falsifies interest rate signals by pushing gross market rates below the rate that reflects society-wide time preferences; this distorts relative prices in the economy and sets a boom into motion – which is characterized by...
  • How to Get Ahead in Today’s Economy
      “Literally On Fire” This week brought forward more evidence that we are living in a fabricated world. The popular story-line presents a world of pure awesomeness. The common experience, however,  falls grossly short.   There are many degrees of awesomeness, up to total awesomeness – which is where we are these days, in the age of total awesomeness, just a short skip away from the Nirvana era. What is Nirvana, you may wonder? We only know for sure that Nirvana is what...
  • Full Faith and Credit in Counterfeit Money
      A Useful Public Service There are nooks and corners in every city where talk is cheap and scandal is honorable.  The Alley, in Downtown Los Angeles, is a magical place where shrewd entrepreneurs, shameless salesmen, and downright hucksters coexist in symbiotic disharmony.  Fakes, fugazis, and knock-offs galore, pack the roll-up storefronts with sparkle and shimmer.   The Alley in LA – in places such as this, consumers are as a rule well served by applying a little bit of...
  • Gold and Gold Stocks – Conundrum Alert
      Moribund Meandering Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the...
  • US Money Supply Growth Jumps in March , Bank Credit Growth Stalls
      A Movie We Have Seen Before – Repatriation Effect? There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.   The y/y growth rate of TMS-2...
  • Fear and Longing - Precious Metals Supply and Demand
      Waiting for Permanent Backwardation  The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.   Lettuce hope this treasure is not cursed... but it probably is....
  • Scorn and Reverence - Precious Metals Supply and Demand
      Shill Alarm One well-known commentator this week opined about the US health care industry:   “...the system is designed the churn and burn... to push people through the clinics as quickly as possible. The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.”   From the annals of modern health care... [PT]   Nope. That is not the standard...
  • Global Turn-of-the-Month Effect – An Update
      In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.   Good vs. bad seasonal timing...   [PT]   The effect has been studied...
  • Tales from “The Master of Disaster”
      Tightening Credit Markets Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.   A change in pace: yields are actually going somewhere. There is...
  • Is Political Decentralization the Only Hope for Western Civilization?
      Voting with their Feet A couple of recent articles have once more made the case, at least implicitly, for political decentralization as the only viable path which will begin to solve the seemingly insurmountable political, economic, and social crises which the Western world now faces.   Fracture lines – tax and regulatory competition allows people to “vote with their feet” - and they certainly do. [PT]   In the last few months, over 3,000 millionaires have...
  • Why the Fundamental Gold Price Rose - Precious Metals Supply and Demand
      Gold Lending and Arbitrage There was no rise in the purchasing power of gold this week. The price of gold fell $22, and that of silver $0.19. One question that comes up is why is the fundamental price so far above the market price? Starting in January, the fundamental price began to move up sharply, and the move sustained through the end of April.   1-month LIBOR (London Interbank Offered Rate – the rate at which banks lend euro-dollars to each other). LIBOR and GOFO...
  • “Sell In May And Go Away” - A Reminder: In 9 Out Of 11 Countries It Makes Sense To Do So
      A Truism that is Demonstrably True Most people are probably aware of the adage “sell in May and go away”. This popular seasonal Wall Street truism implies that the market's performance is far worse in the six summer months than in the six winter months. Numerous studies have been undertaken in this context particularly with respect to US stock markets, and they  confirm that the stock market on average exhibits relative weakness in the summer.   Look at the part we...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist