Tag Archives: interest rates

Occupy Wall Street Redux, by MN Gordon

Posted on March 17, 2023 | Leave a comment

Maybe setting up a state-sanctioned banking cartel wasn’t such a good idea after all. From MN Gordon at economicprism.com:

“The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.”

– John Steinbeck, The Grapes of Wrath

Negative Carry

Borrowing short and lending long works mostly well most of the time.  This is how modern banking works.  You may be a customer at a bank.  But you also supply the product.

In short, a bank will pay you a small percent for the deposits in your checking and savings accounts, which you can withdraw at any time.  This is the borrowing short side of the operation.

The bank then takes your deposits and invests the money in some longer-term assets, such as loans and bonds that aren’t paid back for years.  Say the bank earns 2 percent on its money while paying depositors a fraction of a percent.  The bank pockets the spread, the net interest margin.  Easy money.

However, when the Federal Reserve intervenes in the market and presses the federal funds rate to zero and holds it there for 2 years (March 2020 to March 2022), driving yields across the range of maturities to 5,000-year lows, something bad is bound to happen.

The experience for consumers over the last 24 months has been raging consumer price inflation.  But that’s only a small part of the bad stuff that can happen.

Because as the Fed jacked up the federal funds rate starting in March 2022, to contain the consumer price inflation of its own making, the yield curve has inverted.  Short term yields are higher than long term yields.  And banks, having borrowed short to lend long, have negative carry.

Perhaps it would all works out for the banks if depositors stayed put.  But in a world where you can score nearly 5 percent from Treasury Direct – with no brokerage fees – why keep excess deposits in the bank when you only get a fraction of a percent?

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What Comes After the Great Liquidation, by MN Gordon

Posted on March 10, 2023 | 2 comments

Do rising interest rates break inflation or the economy and financial markets first? From MN Gordon at economicprism.com:

Expectations were great.  When 2023 started, there was a general sense that the stock and bond markets had turned over a new leaf.  A repeat of 2022 was out of the question.

The primary assumption was that inflation would relent.  After that, everything else would neatly fall in line.  Specifically, interest rates would decline, and the next great stock market boom would bubble up just in time to bailout the meager retirement savings of aging baby boomers.

That was the general outlook when 2023 commenced.  But instead, the opposite is now happening.  Inflation is persisting.  Interest rates are rising.  And stock and real estate prices are headed down, down, down.

This week, for example, Fed Chair Jerome Powell, in his semi-annual Congressional testimony, clarified that interest rates would go “higher than previously anticipated.”  He also noted that, if needed, he’s “prepared to increase the pace of rate hikes.”

In other words, the much-anticipated Powell pivot has gone on indefinite hiatus.  You can fight the Fed and buy stocks if you must.  But you won’t likely be very happy with the results.

Moreover, Fed rate hikes are only part of the story.  To be clear, the Fed’s rate hikes are to the federal funds rate.  However, they do, in fact, influence Treasury rates.

Since March 2022, the Fed has hiked the federal funds rate from a target range of 0 to 0.25 percent to a range of 4.50 to 4.75 percent.  As a result, and over this duration, the 2-year Treasury yield has jumped from 1.75 to over 5 percent.

What to make of it…

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Replace The Fed With The 2-Year US Treasury, by Ryan Ortega

Posted on February 9, 2023 | Leave a comment

Guess what, the Fed follows, not leads, the bond market, and there’s ample evidence to back that assertion up. From Ryan Ortega at zerohedge.com:

Last Wednesday, the Federal Open Market Committee (FOMC) wrapped up a two-day meeting to decide where to set the short-term Federal Funds Target rate. The meetings end with a highly anticipated press conference featuring Federal Reserve Chair Jay Powell just after 230pm ET.

Global market participants sit on the edge of their seats as they await the news of a potential rate hike with the possibility of more to come. Inevitably, both the equity and fixed-income markets will hang on Powell’s every word, searching for any clues as to what the Fed might do next.

What’s all the fuss about? Interest rates represent the price of money, arguably the most important price in the world.

This short-term rate influences all other rates in the economy including mortgages, auto loans, credit card rates, and more.

The Fed has manipulated the price of money for over a decade now, leading to the difficult situation we are in today.

Interest rates were kept too low for too long, even for years after the 2008 Global Financial Crisis.

Looking back on history, the Fed usually gets it wrong.

In this most recent case, waiting too long to remove historic accommodative policy and now risking over-tightening into a recession. But trying to micromanage the economy is like attempting to quickly steer the Titanic. It simply can’t be done.

Even with all the pomp and circumstance of the well-telegraphed meeting, it turns out the Fed historically follows the 2-Year Treasury Note anyway.

So, why not just let the free market decide the price of interest rates?

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The evolution of credit and debt in 2023, by Alasdair Macleod

Posted on January 14, 2023 | Leave a comment

The productive sector of the U.S. economy is already in a recession. From Alasdair Macleod at goldmoney.com:

The evidence strongly suggests that a combined interest rate, economic and currency crisis for the US and its western alliance will continue in 2023.

This article focuses on credit, its constraints, and why quantitative easing has already crowded out private sector activity. Adjusting M2 money supply for accumulating QE indicates the degree to which this has driven the US tax base into deep recession. And the wider effects on credit in the economy should not be ignored. 

After a brief partial recovery from the covid crisis in US government finances, they are likely to start deteriorating again due to a deepening recession of private sector activity. Funding these deficits depends on foreign inward investment flows, which are faltering. Rising interest rates and an ongoing bear market make funding from this source hard to envisage.

Meanwhile, from his public statements President Putin is fully aware of these difficulties, and a consequence of the western alliance increasing their support and involvement in Ukraine makes it almost certain that Putin will take the opportunity to push the dollar over the edge.

Credit is much more than bank deposits

Economics is about credit, and its balance sheet twin, debt. Debt is either productive, in which case it can extinguish credit in due course, or it is not, and credit must be extended or written off. Money almost never comes into it. Money is distinguished from credit by having no counterparty risk, which credit always has. The role of money is to stabilise the purchasing power of credit. And the only legal form of money is metallic; gold, silver, or copper usually rendered into coin for enhanced fungibility.

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Rate Hikes, Recessions and the Death of Spiritual Boomerism, by Tom Luongo

Posted on December 19, 2022 | 4 comments

As debt implodes and the economy collapses, many will make their acquaintance with reality for the first time. From Tom Luongo at tomloungo.me:

I hate to gloat but, screw it. I’m gloating. With every FOMC meeting this year, Jerome Powell has become more and more hawkish, but the denial of this still dominates the headlines. He raised the Fed Funds Rate to 4.5% last week, a level unthinkable to nearly everyone, including me, this time last year.

I told you all over a year ago Powell and the Fed were going to war with Davos and the ECB over Climate Change and their push for war with Russia. No one believed me then, and rightfully so. The idea was daft given the Fed’s history, the US’s books and the reality of a “Biden” presidency seemingly hellbent on spending the US into oblivion.

Hell, I barely believed me.

What I did believe was the Fed would be more aggressive than the majority in even the alternative finance space did, what I like to think of as the Zerohedge Set, because I didn’t think Powell was just another garden-variety globalist like his predecessors, Janet Yellen and Ben Bernanke.

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Rising rates lead to financial accidents, by Alasdair Macleod

Posted on December 18, 2022 | Leave a comment

The world has never been more primed for a financial accident. From Alasdair Macleod at goldmoney.com:

A recent Bank for International Settlements paper warning of unappreciated risks in foreign exchange markets echoes my earlier warning in an article for Goldmoney published over a month ago describing derivative risks in FX markets.[i]

In this article I also show evidence that banks in both the US and Eurozone are reducing the deposit side of their balance sheets by turning away big deposits which are ending up in central bank reverse repos, parking unwanted liquidity out of public circulation. The great unwind is well under way.

Credit contraction is not only driving a bear market in financial assets, but the exposure to malinvestments by rising interest rates is having negative consequences for the non-financial economy as well. Private equity, which has thrived on cheap finance used to leverage targeted businesses, is showing signs of unwinding with two major Blackrock funds suspending redemptions.

As we approach the season for year-end window dressing, we must hope that the volatility in thin markets that often accompanies it does not destabilise global financial markets. 

Inflation and stagnation

Make no mistake: interest rates have bottomed at the zero bound and can go no lower. The forty-year trend of declining interest rates has ended, with an initial rally, which six weeks ago had halved the value of the 30-year US Treasury bond. The suddenness of this change probably needed a pause, and that is what we have today. Since October, there has been a spectacular recovery in bond prices with this UST bond yield dropping ¾% to 3.5%.

Fears of price inflation have been replaced in large measure by fear of recession. Having dismissed monetarism, bizarrely for a Keynesian led establishment analysts and commentators are now frequently citing the slowing of monetary growth as evidence of a looming recession. Perhaps this means that the failure of their economic models has them grasping at straws, rather than being evidence of a conversion to monetarism. But what is definitely not in the Keynesians’ playbook is a combination of inflation and recession, commonly attributed to an unexplained phenomenon of stagflation.

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How Big Are the Fed’s Losses and Where Can We Go See Them?

Posted on December 10, 2022 | Leave a comment

You wouldn’t think an institution that can legally print money would lose money. From Wolf Richter at wolfstreet.com:

We find a good rubbernecking spot.

How Big Are the Fed’s Losses and Where Can We Go See Them?

by Wolf Richter •  • 110 Comments

We find a good rubbernecking spot.

By Wolf Richter for WOLF STREET.

A collapse-chart has been making the rounds in the social media, financial blogs, and the like. It’s being handed around without context, as if self-explanatory, sort of like, look, the world is collapsing. It’s from the St. Louis Fed’s data depository. The title of the chart says, among other things, ominously, “Liabilities: Remittances Due to the U.S. Treasury.” Whatever this is, it’s violating the WOLF STREET dictum, “Nothing Goes to Heck in a Straight Line.”

But beyond the funny aspects of the chart, there is something happening on the Fed’s balance sheet that is taking on momentum and heft: How much money the Fed is losing, where this lost money shows up, and how it derails a taxpayer gravy-train. The chart reflects that in a bizarre manner — it does a switcheroo — that we’ll get to in a moment.

A liability is money that the Fed owes some other entity – in this case, money that the Fed owes the US Treasury Department. But this particular liability account, “Earnings remittances due to the U.S. Treasury,” is kind of a funny creature.

It has a negative balance of -$13.2 billion as of the Fed’s weekly balance sheet released yesterday. On a balance sheet measured in trillions, this is pretty small. But it’s going to get a lot funkier.

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If Red States Want Protection From Collapse They Will Have To Build Alternative Economies, by Brandon Smith

Posted on October 27, 2022 | Leave a comment

If you’re relying on the federal government to make you anything but more miserable when the apocalypse comes you’re bound to be disappointed. Think local. From Brandon Smith at alt-market.com:

Economic centralization is the ultimate form of organized conspiratorial power, because it allows a small group of people to dictate the terms of trade for a society and therefore dictate the terms of each person’s individual survival.

For example, the Federal Reserve as a banking entity has free rein to assert policy controls that can disrupt the very fabric of the US economy and the buying power of our currency. They can (and do) arbitrarily create trillions of dollars from thin air causing inflation, or arbitrarily raise interest rates and crash stock markets. And according to former Fed chairman Alan Greenspan, they answer to no one, including the US government.

I have started to see a new narrative being spread within mainstream media platforms as well as alternative media platforms suggesting that the Fed is necessary because it is working to “counter” the agenda of Joe Biden and the Democrats. Some people claim the central bank is “protecting” America from the schemes of the UN and European interests.

This is perhaps the most moronic theory I’ve ever heard, but it makes sense that the central bank and its puppets would be trying to plant the notion that the Fed is some kind of “hero” secretly fighting a war on our behalf. The money elites associated with the Fed have inflated perhaps the largest financial bubble in the history of the world over the past 14 years. They did this with bailouts, they did this with QE, they did this with covid pandemic checks and loans, and now the bubble is popping. They know it is popping, because they WANT it to pop.

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15.7 trillion new reasons to be concerned about the national debt, by Simon Black

Posted on October 19, 2022 | Leave a comment

Gargantuan deficits become much more problematic when interest rates are rising. From Simon Black at sovereignman.com:

Last Friday, September 30th 2022 was the close of the Fiscal Year for the US federal government.

If you’re not familiar with the term, the ‘Fiscal Year’ refers to the government’s official accounting period. It starts on October 1st and ends the following September 30th. And everything from the federal budget to the Supreme Court’s case schedule is based around the Fiscal Year.

So are calculations for the national debt.

And based on the figures just released, the US national debt has now reached nearly $31 trillion as of the close of the Fiscal Year last Friday.

(If you want to see the number down to the penny, it’s $30,928,911,613,306.73)

At the start of the Fiscal Year back on October 1, 2021, the national debt was $28.4 trillion. So over the course of the past twelve months, the debt increased by a whopping $2.5 trillion.

That’s the second highest annual increase in the US national debt EVER, after the $4.2 trillion increase in the 2019-2020 Fiscal Year during the pandemic.

Now, a $2.5 trillion increase in the national debt is terrible, and alarm bells should be sounding from coast to coast. But there’s actually something more worrisome going on with the debt.

Remember that whenever governments borrow money, they do so by issuing some form of government bond. A bond, just like a loan, is a type of IOU. One of the key differences, however, is that a bond is a financial security that, just like stocks, can be easily bought and sold by investors around the world.

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Banking crisis — the Great Unwind, by Alasdair Macleod

Posted on October 14, 2022 | Leave a comment

Europe will be the epicenter of the banking crisis, which has already begun and which will engulf the world. From Alasdair Macleod at goldmoney.com:

There is a growing feeling in markets that a financial crisis of some sort is now on the cards. Credit Suisse’s very public struggles to refinance itself is proving to be a wake-up call for markets, alerting investors to the parlous state of global banking.

This article identifies the principal elements leading us into a global financial crisis. Behind it all is the threat from a new trend of rising interest rates, and the natural desire of commercial banks everywhere to reduce their exposure to falling financial asset values both on their balance sheets and held as loan collateral. And there are specific problems areas, which we can identify:

  • It should be noted that the phenomenal growth of OTC derivatives and regulated futures has been against a background of generally declining interest rates since the mid-eighties. That trend is now reversing, so we must expect the $600 trillion of global OTC derivatives and a further $100 trillion of futures to contract as banks reduce their derivative exposure. In the last two weeks, we have seen the consequences for the gilt market in London, warning us of other problem areas to come.
  • Commercial banks are over-leveraged, with notable weak spots in the Eurozone, Japan, and the UK. It will be something of a miracle if banks in these jurisdictions manage to survive contracting bank credit and derivative blow-ups. If they are not prevented, even the better capitalised American banks might not be safe.
  • Central banks are mandated to rescue the financial system in troubled times. However, we find that the ECB and its entire euro system of national central banks, the Bank of Japan, and the US Fed are all deeply in negative equity and in no condition to underwrite the financial system in this rising interest rate environment. 

The Credit Suisse wake-up call

In the last fortnight, it has become obvious that Credit Suisse, one of Switzerland’s two major banking institutions, faces a radical restructuring. That’s probably a polite way of saying the bank needs rescuing.

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