Fed watchers looking ahead
Pricing in rate cut
Showing posts with label Federal Reserve. Show all posts
Showing posts with label Federal Reserve. Show all posts
Tuesday, July 30, 2024
Monday, June 27, 2022
Tuesday, August 03, 2021
Sunday, February 14, 2016
Friday, February 12, 2016
Financial Sarcasm Roundup for 02/12/16
I had a busy day today. Important things demanded my attention. I read a whole bunch of very interesting material. I barely have time for sarcasm right now, but I make time.
The Federal Reserve's chair does not wish to be blamed for stock market turmoil. What a bunch of hooey. The Fed's ZIRP has done more to misprice securities valuation than anything else it has done in its history. Normalizing rates sooner would have depressurized the stock market without all of this pain from unsustainable gains. Other central banks took off with variations of the Fed's approach and now we see China's collapse hurting other markets. Way to go, banker gnomes.
Europe's sovereign debt market is seriously stressed. I wouldn't be surprised if some random announcement from one of the PIIGS' finance ministers makes the whole tamale implode. Suckers bought European government bonds and will soon eat their losses. The ECB's dollar swap line agreements with the Federal Reserve were an open secret among Transatlantic bankers in the last crisis. The rest of us won't find out for years just how much credit the Fed has given the ECB to support its bond purchases now.
I just did a Google search of "leveraged ETF" to see that these stupid products are more popular than ever. Investors chasing these things and advisers pushing them obviously can't do the math on daily leverage calculations. The best hope for sanity is a market crash that wipes out the 2x-3x bullish ETFs combined with a credit crisis that destroys the liquidity of bearish ETF sponsors. Brokerages programming their robo-advisers use passive ETFs without leverage for darn good reasons.
I should be busy tomorrow. I continue to ignore losers who demand my attention because I only have room on my calendar for winners.
The Federal Reserve's chair does not wish to be blamed for stock market turmoil. What a bunch of hooey. The Fed's ZIRP has done more to misprice securities valuation than anything else it has done in its history. Normalizing rates sooner would have depressurized the stock market without all of this pain from unsustainable gains. Other central banks took off with variations of the Fed's approach and now we see China's collapse hurting other markets. Way to go, banker gnomes.
Europe's sovereign debt market is seriously stressed. I wouldn't be surprised if some random announcement from one of the PIIGS' finance ministers makes the whole tamale implode. Suckers bought European government bonds and will soon eat their losses. The ECB's dollar swap line agreements with the Federal Reserve were an open secret among Transatlantic bankers in the last crisis. The rest of us won't find out for years just how much credit the Fed has given the ECB to support its bond purchases now.
I just did a Google search of "leveraged ETF" to see that these stupid products are more popular than ever. Investors chasing these things and advisers pushing them obviously can't do the math on daily leverage calculations. The best hope for sanity is a market crash that wipes out the 2x-3x bullish ETFs combined with a credit crisis that destroys the liquidity of bearish ETF sponsors. Brokerages programming their robo-advisers use passive ETFs without leverage for darn good reasons.
I should be busy tomorrow. I continue to ignore losers who demand my attention because I only have room on my calendar for winners.
Wednesday, February 10, 2016
Financial Sarcasm Roundup for 02/10/16
Today is Ash Wednesday in the Roman Catholic Church. I am no longer a member of any religion so I don't need to attend church services. My sarcasm never went over well during prayers anyway.
Europe wants the G20 to target growth. Got it. One continent's finance people want the world's leading finance people to decouple global growth from China as quickly as possible. Panic is not yet in the air. The real panic comes when the world's bifurcated economies - one for financial flows, one for real goods - trend down together. The rest of the world (ROW, in money manager parlance) can't get China off its balance sheet fast enough.
Coal power plant cleanliness gets a breather, so to speak. The charred, hard carbon miners have taken a beating for years thanks to the world's zeal for lower emissions. I don't see how the world can substitute for metallurgical coal and coke in making steel. China's crashing demand has put the lid on steel demand anyway, so even coal's industrial use faces dark days. It would take a lot more backyard barbecues for charcoal demand to make up for declining coal power.
Gold prices respond positively to the Federal Reserve's interest rate hints. Gold traders and retail investors view the Fed's experiment as a mistake, proving they are a reactive audience. The Fed's "layer cake" message tastes bitter to gold bugs stuck in old views of monetary tightening. The new era of a ginormous Fed balance sheet that constricts traditional stimulus means gold traders missed the news about what normal interest rates now mean. A normal situation is where the FOMC makes any change, in any direction other to zero.
Tesla Motors lost money again but its shares kept rising. The more cars they sell, the more money they lose. Investors are really stupid to think that a money-losing car company will be worth more. There is something very wrong with Tesla's inability to control both its fixed costs and variable costs. Software entrepreneurs need a whole new set of skills before jumping over to hardware.
I would like to start a religion that celebrates Cash Wednesday. It would be an opportunity for me to stand up and wave cash around to the applause of my congregation.
Europe wants the G20 to target growth. Got it. One continent's finance people want the world's leading finance people to decouple global growth from China as quickly as possible. Panic is not yet in the air. The real panic comes when the world's bifurcated economies - one for financial flows, one for real goods - trend down together. The rest of the world (ROW, in money manager parlance) can't get China off its balance sheet fast enough.
Coal power plant cleanliness gets a breather, so to speak. The charred, hard carbon miners have taken a beating for years thanks to the world's zeal for lower emissions. I don't see how the world can substitute for metallurgical coal and coke in making steel. China's crashing demand has put the lid on steel demand anyway, so even coal's industrial use faces dark days. It would take a lot more backyard barbecues for charcoal demand to make up for declining coal power.
Gold prices respond positively to the Federal Reserve's interest rate hints. Gold traders and retail investors view the Fed's experiment as a mistake, proving they are a reactive audience. The Fed's "layer cake" message tastes bitter to gold bugs stuck in old views of monetary tightening. The new era of a ginormous Fed balance sheet that constricts traditional stimulus means gold traders missed the news about what normal interest rates now mean. A normal situation is where the FOMC makes any change, in any direction other to zero.
Tesla Motors lost money again but its shares kept rising. The more cars they sell, the more money they lose. Investors are really stupid to think that a money-losing car company will be worth more. There is something very wrong with Tesla's inability to control both its fixed costs and variable costs. Software entrepreneurs need a whole new set of skills before jumping over to hardware.
I would like to start a religion that celebrates Cash Wednesday. It would be an opportunity for me to stand up and wave cash around to the applause of my congregation.
Tuesday, February 02, 2016
Financial Sarcasm Roundup for 02/02/16
There are always voters in an election year who think a politician can make the stock market go up. There's always a politician ready to pander to those voters. They are all stupid.
Bond yields are tanking in Japan. The two-year yield dropping to -0.11, even less than the BOJ's -0.10 rate for excess reserves, is totally crazy. How can they be profitable on any product with a duration of less than two years? This totally scrambles overnight lending to businesses. I want every hedge fund manager who jumped on the Japan bandwagon to be blown out of the water. Forcing the dumbest fund managers out of business will be a shock to the really dumb investors who trusted in non-existent genius.
Now the Federal Reserve is thinking about negative rates. The rest of the world sometimes laughs at America for the dumb things we often do here. Now we have the chance to be as dumb as the rest of the world in monetary policy. The shock of initiating NIRP may lift the US stock market as investors leave cash and enter riskier equities. The rush should last for about six months, the typical duration of monetary policy's lagged effects. After that, the deflationary death spiral across multiple asset classes will be impossible to prevent. Lethargic Americans will wonder what happened.
Leading financiers want better public company shareholder relations. Anything with Warren Buffett's approval will probably work. JP Morgan's involvement indicates confidence that its balance sheet will survive long-term turmoil. Better corporate governance is an imaginary prophylactic against corporate raiders. Private equity firms will target well-run firms anyway if they're undervalued. The best corporate governance policy would be an electric shock device attached to a board member's chair, activated if they fall asleep during a quarterly meeting.
Vote for panderers and they will do absolutely nothing for you. I promise. You can't vote for me because I work for myself.
Bond yields are tanking in Japan. The two-year yield dropping to -0.11, even less than the BOJ's -0.10 rate for excess reserves, is totally crazy. How can they be profitable on any product with a duration of less than two years? This totally scrambles overnight lending to businesses. I want every hedge fund manager who jumped on the Japan bandwagon to be blown out of the water. Forcing the dumbest fund managers out of business will be a shock to the really dumb investors who trusted in non-existent genius.
Now the Federal Reserve is thinking about negative rates. The rest of the world sometimes laughs at America for the dumb things we often do here. Now we have the chance to be as dumb as the rest of the world in monetary policy. The shock of initiating NIRP may lift the US stock market as investors leave cash and enter riskier equities. The rush should last for about six months, the typical duration of monetary policy's lagged effects. After that, the deflationary death spiral across multiple asset classes will be impossible to prevent. Lethargic Americans will wonder what happened.
Leading financiers want better public company shareholder relations. Anything with Warren Buffett's approval will probably work. JP Morgan's involvement indicates confidence that its balance sheet will survive long-term turmoil. Better corporate governance is an imaginary prophylactic against corporate raiders. Private equity firms will target well-run firms anyway if they're undervalued. The best corporate governance policy would be an electric shock device attached to a board member's chair, activated if they fall asleep during a quarterly meeting.
Vote for panderers and they will do absolutely nothing for you. I promise. You can't vote for me because I work for myself.
Thursday, January 28, 2016
Financial Sarcasm Roundup for 01/28/16
Hatred and love are powerful emotions. Sarcasm is not an emotion but it may be even more powerful.
The Federal Reserve made markets nervous yesterday. I say tough luck for wimpy stock market experts. Big players have had it too easy with ZIRP subsidizing their gambling. Moving toward a more historically normal interest rate environment means crybaby institutional investors will lose money. Just look at the confused commentary coming from Wall Street's idiots. They don't remember what normal feels like and their bond trading desks are full of Millennial whipper-snappers who think credit is always free.
The US Treasury alerts us to derivatives clearinghouse risks. That sure throws some cold water on the theory that transparency and mark-to-market pricing would make derivatives less threatening to the economy. The Fed and SEC have planned for trading halts and fund backstops. Now they need to think about liquidity backstops for clearinghouses. I suspect that will be a bridge too far in a crisis, so AIG-style instant firm resolutions will be the preferred risk mitigation tactic instead.
China's statistics chief is in trouble. Beijing couldn't keep their numbers frauds hidden forever and now they need a public scapegoat in true Manchurian style. The news may fool a few Western investment firms (the ones that don't understand China) into thinking things will get better when the head stats guy is replaced. A couple of high-profile career terminations won't stop the Chinese stock market's slide.
I try really hard not to hate people, even if they deserve it. Hateful people deserve sarcasm instead.
The Federal Reserve made markets nervous yesterday. I say tough luck for wimpy stock market experts. Big players have had it too easy with ZIRP subsidizing their gambling. Moving toward a more historically normal interest rate environment means crybaby institutional investors will lose money. Just look at the confused commentary coming from Wall Street's idiots. They don't remember what normal feels like and their bond trading desks are full of Millennial whipper-snappers who think credit is always free.
The US Treasury alerts us to derivatives clearinghouse risks. That sure throws some cold water on the theory that transparency and mark-to-market pricing would make derivatives less threatening to the economy. The Fed and SEC have planned for trading halts and fund backstops. Now they need to think about liquidity backstops for clearinghouses. I suspect that will be a bridge too far in a crisis, so AIG-style instant firm resolutions will be the preferred risk mitigation tactic instead.
China's statistics chief is in trouble. Beijing couldn't keep their numbers frauds hidden forever and now they need a public scapegoat in true Manchurian style. The news may fool a few Western investment firms (the ones that don't understand China) into thinking things will get better when the head stats guy is replaced. A couple of high-profile career terminations won't stop the Chinese stock market's slide.
I try really hard not to hate people, even if they deserve it. Hateful people deserve sarcasm instead.
Friday, December 18, 2015
The Fed Awakens
Today was opening day for Star Wars: The Force Awakens. I went to see it and it was pretty awesome. Lots of spaceships were shooting lasers at each other and blowing up stuff. Stormtroopers were running around and some other people were swinging lightsabers. It was all really cool. In the real world, the Federal Reserve raised its target interest rate range by 25 basis points. That turned out to be really cool too.
It would be nice if the Fed could raise interest rates all the way to a more normal level, like to 6.00%. That would be the required shock therapy to kill off uneconomic business projects by pricing them out of the range of reasonably available capital. The Fed continues to aid and abet the mispricing of capital by keeping interest rates much lower than their historical norms.
Future investors will thank the Fed once asset prices crash if only the Fed cared about true normalization. US equity markets don't care much for normalization and they yawned in response to the Fed's move. A truly normal interest rate move would act like the planet-sized superweapons we see in the Star Wars universe by blowing up bad investments. That's exactly what the galaxy could use right about now. I normally favor the light side of the Force. The Fed's refusal to truly normalize rates keeps fundamental analysts like me in the dark about intrinsic valuations.
It would be nice if the Fed could raise interest rates all the way to a more normal level, like to 6.00%. That would be the required shock therapy to kill off uneconomic business projects by pricing them out of the range of reasonably available capital. The Fed continues to aid and abet the mispricing of capital by keeping interest rates much lower than their historical norms.
Future investors will thank the Fed once asset prices crash if only the Fed cared about true normalization. US equity markets don't care much for normalization and they yawned in response to the Fed's move. A truly normal interest rate move would act like the planet-sized superweapons we see in the Star Wars universe by blowing up bad investments. That's exactly what the galaxy could use right about now. I normally favor the light side of the Force. The Fed's refusal to truly normalize rates keeps fundamental analysts like me in the dark about intrinsic valuations.
Wednesday, December 16, 2015
Tuesday, December 01, 2015
Federal Reserve Rate Rise Waiting Game
The anticipation over the Federal Reserve's likely target rate increase is approaching fever pitch, at least for a few thousand economists, bond traders, and analysts who are otherwise surgically attached to capital markets information systems. We can amuse ourselves with what-ifs while awaiting the Fed's formal announcement.
What if the Fed raises rates by only a notional amount, like 25bps? Money market fund managers will probably breathe a sigh of relief that they won't face extraordinarily large redemptions. We cannot say the same for fixed-income fund managers, especially those with actively managed portfolios skewed towards the long end of the yield curve.
What if the Fed raises rates more than the notional amount, like anything from 25bps to 100bps? Money market funds would scramble to meet redemptions if they own anything other than overnight paper. Some of the funds would have to lean on the Fed's emergency tools, making all of the dry runs up until now worthwhile. The US equity markets would likely suffer a severe drop as companies with the weakest balance sheets immediately face higher overnight borrowing costs.
What if the Fed leaves rates unchanged? Bond fund managers breathe a sigh of relief for another quarter and the US stock market gets a little bump. The market bump continues into January if Christmas sales are better than expected. The large investors moving markets, particularly hedge funds, will tend to ignore whether the holiday sales are better or worse than last year's numbers. They only notice the headlines.
The first scenario for a 25bps increase is the most likely one, but doing nothing is always an option. A larger rate increase is probably not an option given its consequences. The Fed needs to test its new emergency levers under real world conditions before it puts the economy on a path to a more normal yield curve. The end of the Fed's emergency lending policy for SIFIs changes one such lever significantly. Testing with minimal stress is always best, but the test must come at some point.
What if the Fed raises rates by only a notional amount, like 25bps? Money market fund managers will probably breathe a sigh of relief that they won't face extraordinarily large redemptions. We cannot say the same for fixed-income fund managers, especially those with actively managed portfolios skewed towards the long end of the yield curve.
What if the Fed raises rates more than the notional amount, like anything from 25bps to 100bps? Money market funds would scramble to meet redemptions if they own anything other than overnight paper. Some of the funds would have to lean on the Fed's emergency tools, making all of the dry runs up until now worthwhile. The US equity markets would likely suffer a severe drop as companies with the weakest balance sheets immediately face higher overnight borrowing costs.
What if the Fed leaves rates unchanged? Bond fund managers breathe a sigh of relief for another quarter and the US stock market gets a little bump. The market bump continues into January if Christmas sales are better than expected. The large investors moving markets, particularly hedge funds, will tend to ignore whether the holiday sales are better or worse than last year's numbers. They only notice the headlines.
The first scenario for a 25bps increase is the most likely one, but doing nothing is always an option. A larger rate increase is probably not an option given its consequences. The Fed needs to test its new emergency levers under real world conditions before it puts the economy on a path to a more normal yield curve. The end of the Fed's emergency lending policy for SIFIs changes one such lever significantly. Testing with minimal stress is always best, but the test must come at some point.
Tuesday, November 24, 2015
Financial Sarcasm Roundup for 11/24/15
I should have blasted this out yesterday but cleantech thoughts kept me occupied all day long. It is better to be clean than dirty. Just ask any pig headed to the slaughterhouse.
Wall Street averages continue to rise in spite of global economic headwinds. Greater fools are always ready to rush into the top of a bull market. I have been waiting for these fools to get financially kneecapped for the past several years. The spectacle will be worth the wait. My cash will be ready when the top-buyers are all broke.
The Federal Reserve may raise rates in December, according to the consensus interpretation of its most recent notes. It's important to remember that the Fed can immediately reverse itself if a rate increase proves too explosive for the system's emergency brakes. Our mandarins are playing it by ear because they have enticed every investor to take on extraordinary risks. The first rate rise past 0.25% will test the yield curve's long end, and make long-duration bondholders wonder whether their portfolios are safe.
Some obsessive food selfie people have figured out that restaurants and other food service sector companies will monetize their food photos on Instagram and other social media sites. It's great that people who want us to know what they eat will make money from their idle habits. Eating is a natural function, so perhaps we can take other natural functions to their logical monetary conclusions. People who take shower selfies can sell Instagram advertising space to makers of soap and shampoo. Do I have to mention other bathroom functions? Don't make me go there.
I promised my cleantech contacts that I would clean up my act. I behaved myself this time around. My word is my bond.
Wall Street averages continue to rise in spite of global economic headwinds. Greater fools are always ready to rush into the top of a bull market. I have been waiting for these fools to get financially kneecapped for the past several years. The spectacle will be worth the wait. My cash will be ready when the top-buyers are all broke.
The Federal Reserve may raise rates in December, according to the consensus interpretation of its most recent notes. It's important to remember that the Fed can immediately reverse itself if a rate increase proves too explosive for the system's emergency brakes. Our mandarins are playing it by ear because they have enticed every investor to take on extraordinary risks. The first rate rise past 0.25% will test the yield curve's long end, and make long-duration bondholders wonder whether their portfolios are safe.
Some obsessive food selfie people have figured out that restaurants and other food service sector companies will monetize their food photos on Instagram and other social media sites. It's great that people who want us to know what they eat will make money from their idle habits. Eating is a natural function, so perhaps we can take other natural functions to their logical monetary conclusions. People who take shower selfies can sell Instagram advertising space to makers of soap and shampoo. Do I have to mention other bathroom functions? Don't make me go there.
I promised my cleantech contacts that I would clean up my act. I behaved myself this time around. My word is my bond.
Wednesday, November 04, 2015
The Haiku of Finance for 11/04/15
Yellen's layer cake
Disguise signal inside text
Hidden in plain sight
Disguise signal inside text
Hidden in plain sight
Slicing The Federal Reserve's December Layer Cake
Here we go again. Federal Reserve Chair Janet Yellen is making noise about an interest rate increase. If it's not happening in 2015, it's probably not happening in 2016 either. One of my finance friends is very kind and intelligent. She often shares her wisdom with me on what this serial messaging means. It all comes down to a "layer cake" metaphor. Here is what the cake tastes like to me.
A public official's message to the general public is built on several layers of meaning. Most of those layers are intended for a general audience but other insiders hear the message too. General statements about a desire to raise rates are for the general public to hear. The public must remain confident that central bankers care about a normal economy. That reassurance is one layer of the cake.
Expressing faith in higher rates someday pushes bond yields up now, while prices of existing bonds decline. The second-order effect is to gradually make bonds less attractive as an asset class. Investors are thus less inclined to put new money into bonds, and more inclined to give bonds a lower weight in blended portfolios by selling some now. Reducing bond overweights makes an eventual bond market crash or crisis less severe, with a less stressful imposition of exit gates on bond funds. That scenario is another layer of the cake.
I cannot name my contact or describe her background in detail. She often speaks in guarded metaphors because she has access to privileged and confidential information she cannot discuss in public, and certainly not with me in private. I totally respect confidentiality imperatives. Suffice it to say that her assessments reflect a widely held culture among public policy officials, and this culture also informs the decisions of private sector financial executives. One could even say this culture circumscribes the decision making ability of private actors, because it signals how far they can push innovation before they cross a red line into public sector decisions they cannot influence.
The Fed still owns an enormous amount of mortgage-backed paper and cannot destroy its balance sheet by playing with rates. The policy innovations standing ready to impose bond fund exit gates, trading halts, and money market backstops are mostly for public officials to adjudicate, and mostly for private sector actors to execute. Wall Street's key influencers need enough advance warning to ensure their capital market decisions do not constrict the Fed's ability to act in a crisis. The Fed also continues to push for stronger capital buffers and resolution authority for SIFIs, and Wall Street gets that message too at the same time it gets the interest rate messages. That's why layer cake messaging matters.
A public official's message to the general public is built on several layers of meaning. Most of those layers are intended for a general audience but other insiders hear the message too. General statements about a desire to raise rates are for the general public to hear. The public must remain confident that central bankers care about a normal economy. That reassurance is one layer of the cake.
Expressing faith in higher rates someday pushes bond yields up now, while prices of existing bonds decline. The second-order effect is to gradually make bonds less attractive as an asset class. Investors are thus less inclined to put new money into bonds, and more inclined to give bonds a lower weight in blended portfolios by selling some now. Reducing bond overweights makes an eventual bond market crash or crisis less severe, with a less stressful imposition of exit gates on bond funds. That scenario is another layer of the cake.
I cannot name my contact or describe her background in detail. She often speaks in guarded metaphors because she has access to privileged and confidential information she cannot discuss in public, and certainly not with me in private. I totally respect confidentiality imperatives. Suffice it to say that her assessments reflect a widely held culture among public policy officials, and this culture also informs the decisions of private sector financial executives. One could even say this culture circumscribes the decision making ability of private actors, because it signals how far they can push innovation before they cross a red line into public sector decisions they cannot influence.
The Fed still owns an enormous amount of mortgage-backed paper and cannot destroy its balance sheet by playing with rates. The policy innovations standing ready to impose bond fund exit gates, trading halts, and money market backstops are mostly for public officials to adjudicate, and mostly for private sector actors to execute. Wall Street's key influencers need enough advance warning to ensure their capital market decisions do not constrict the Fed's ability to act in a crisis. The Fed also continues to push for stronger capital buffers and resolution authority for SIFIs, and Wall Street gets that message too at the same time it gets the interest rate messages. That's why layer cake messaging matters.
Saturday, October 24, 2015
Financial Sarcasm Roundup for 10/24/15
I don't know whether it's possible to be sarcastic without offending somebody. Alfidi Capital isn't about sexism anymore but it's still difficult to find nice things to say about the human race. If anyone can find the happy medium between human progress and human deficiencies, it would be me, Yours Truly, the greatest Supreme Super-Genius the world has ever known.
The new consensus among the Federal Reserve's camp followers is that a rate hike probably won't happen this year. It sure looked like something was going to happen a few months ago when the Fed was leaking talking points. Either the gaggle of yahoos running the FOMC is so divided in their thinking that they can't get their leaks straight, or they care so little about how a rate hike will affect the economy that they don't mind confused messaging. I would clean up the Eccles building forthwith if I was over there. I would be like Hercules cleaning out the Augean stables.
Chinese experts predict continued growth for their economy. Someone over at that central bank missed the meeting where the lies about economic forecasts are supposed to be coordinated with lies about past results. Remember the Keqiang Index? Don't worry if you forgot it, because China's own economists are forgetting it too. It's hard to keep the lying up when natural resource exporters like Australia report dropoffs in ore shipments to China. Maybe the Chinese could start exporting baloney to drive their continued growth. Their economists are getting pretty good at spewing it.
Airbnb's business model is on the municipal ballot in San Francisco. The company's business model is at risk and it fought back with some snarky ads that caused a minor sandstorm. Elitist San Franciscans don't mind looking down their noses at less enlightened parts of the country. When a local company gores a few sacred cows by noting how its taxes could fund some of The City's most precious entitlements, people get upset. Well, fellow Frisco people, you've had it coming. If you act like spoiled children then don't be surprised when someone calls you out.
I think a lot of the sensitivity over the Airbnb ads comes from old money San Franciscans' dislike of Airbnb's nouveau riche status. Pedigreed people don't like upstarts tweaking their noses on their home turf. That would be like me attending the SF Opera and Symphony opening night galas and refusing to genuflect when some hoity-toity type tells me I don't belong there. Oh yeah, I've done that. I voted early in these elections and one of my votes was against the ballot measure that would have hurt Airbnb. Cheap tourists may be hurting established hotels, but their demand for unused apartments drives up demand for new housing.
I just threw dirt at the Federal Reserve, the People's Republic of China, and the city of San Francisco. Not once did I use any language that could possibly be construed as sexist. I call that progress.
The new consensus among the Federal Reserve's camp followers is that a rate hike probably won't happen this year. It sure looked like something was going to happen a few months ago when the Fed was leaking talking points. Either the gaggle of yahoos running the FOMC is so divided in their thinking that they can't get their leaks straight, or they care so little about how a rate hike will affect the economy that they don't mind confused messaging. I would clean up the Eccles building forthwith if I was over there. I would be like Hercules cleaning out the Augean stables.
Chinese experts predict continued growth for their economy. Someone over at that central bank missed the meeting where the lies about economic forecasts are supposed to be coordinated with lies about past results. Remember the Keqiang Index? Don't worry if you forgot it, because China's own economists are forgetting it too. It's hard to keep the lying up when natural resource exporters like Australia report dropoffs in ore shipments to China. Maybe the Chinese could start exporting baloney to drive their continued growth. Their economists are getting pretty good at spewing it.
Airbnb's business model is on the municipal ballot in San Francisco. The company's business model is at risk and it fought back with some snarky ads that caused a minor sandstorm. Elitist San Franciscans don't mind looking down their noses at less enlightened parts of the country. When a local company gores a few sacred cows by noting how its taxes could fund some of The City's most precious entitlements, people get upset. Well, fellow Frisco people, you've had it coming. If you act like spoiled children then don't be surprised when someone calls you out.
I think a lot of the sensitivity over the Airbnb ads comes from old money San Franciscans' dislike of Airbnb's nouveau riche status. Pedigreed people don't like upstarts tweaking their noses on their home turf. That would be like me attending the SF Opera and Symphony opening night galas and refusing to genuflect when some hoity-toity type tells me I don't belong there. Oh yeah, I've done that. I voted early in these elections and one of my votes was against the ballot measure that would have hurt Airbnb. Cheap tourists may be hurting established hotels, but their demand for unused apartments drives up demand for new housing.
I just threw dirt at the Federal Reserve, the People's Republic of China, and the city of San Francisco. Not once did I use any language that could possibly be construed as sexist. I call that progress.
Monday, September 21, 2015
Financial Sarcasm Roundup for 09/21/15
The Federal Reserve did not budge on its interest rate target last week. They sure dropped enough hints for several months that something was in the works. The financial media follows this subject without pause, weighing inflation against GDP growth. The real narrative should run on two totally different tracks.
Track one is consideration of systemic stability. Low interest rates have propped up insolvent commercial banks long enough for them to disgorge most of their bad mortgage paper. Institutional investors desperate for yield were dumb enough to buy this paper thinking they could get more yield at a discount. The Fed now has to open back channels to money market funds to keep the system from unraveling in the event it raises rates. Read my article on the Fed's imaginary toolbox for a refresher.
The second track is the prosaic domain of human psychology. The Fed releases its minutes after every board meeting. It is increasingly obvious that most of the board members do not know how to get out of the mess the Fed has made for itself with six years of low rates. The intellectually honest ones, like Stanley Fischer, know that what they don't know won't matter if they can innovate fast enough in another crisis. The President and Congress will play catch-up in a crisis with new rules preventing investors and savers from escaping the Fed's emergency measures.
This endless waiting game would never have happened if the Fed had gradually normalized interest rates starting in 2010. It would have been painful for a lot of banks and mutual funds that would have faced insolvency after rapidly selling whatever bundled securities the Fed was unwilling to buy. Smart policy could have forced banks to consolidate. Instead we got dumb policy that forced yields to zero, drove conservative investors into assets outside their risk profiles, and destroyed price discovery in equity markets.
The Fed's real mission is to keep the financial system in working order. The imperfect humans operating the Fed's inner levers are as prone to panic as the rest of us without leaders who will keep them calm. Systemic stability requires emotional stability. Raising rates after October will test the readiness of capital controls and other ideas under the "break glass in case of emergency" sign. Keep calm and carry on.
Track one is consideration of systemic stability. Low interest rates have propped up insolvent commercial banks long enough for them to disgorge most of their bad mortgage paper. Institutional investors desperate for yield were dumb enough to buy this paper thinking they could get more yield at a discount. The Fed now has to open back channels to money market funds to keep the system from unraveling in the event it raises rates. Read my article on the Fed's imaginary toolbox for a refresher.
The second track is the prosaic domain of human psychology. The Fed releases its minutes after every board meeting. It is increasingly obvious that most of the board members do not know how to get out of the mess the Fed has made for itself with six years of low rates. The intellectually honest ones, like Stanley Fischer, know that what they don't know won't matter if they can innovate fast enough in another crisis. The President and Congress will play catch-up in a crisis with new rules preventing investors and savers from escaping the Fed's emergency measures.
This endless waiting game would never have happened if the Fed had gradually normalized interest rates starting in 2010. It would have been painful for a lot of banks and mutual funds that would have faced insolvency after rapidly selling whatever bundled securities the Fed was unwilling to buy. Smart policy could have forced banks to consolidate. Instead we got dumb policy that forced yields to zero, drove conservative investors into assets outside their risk profiles, and destroyed price discovery in equity markets.
The Fed's real mission is to keep the financial system in working order. The imperfect humans operating the Fed's inner levers are as prone to panic as the rest of us without leaders who will keep them calm. Systemic stability requires emotional stability. Raising rates after October will test the readiness of capital controls and other ideas under the "break glass in case of emergency" sign. Keep calm and carry on.
Saturday, September 12, 2015
The Imaginary Federal Reserve Toolbox
The NYT weighs in on how the Federal Reserve may adjust interest rates this month. The Fed drops a lot of trial balloons and its information operations campaign has prepared the media. The FOMC's open market operations are not as potent as they were before the crisis. Other central banks' recent experiments with adjustments in the middle of macroeconomic stimulus offer abject lessons in how effective the Fed's new tools can be.
China and Europe have gone full-steam ahead with stimulative experiments, albeit in different ways. China has begun liquidating some of its foreign currency reserves. The liquidation has not yet ignited a run on the US dollar because other major reserve currencies still look weak by comparison. Australia and Canada, for example, have seen their currencies weaken against the dollar because collapsing commodity prices have crashed the value of their natural resource exports. Europe continues a form of monetary stimulus while Greece muddles through a transitional government. The next Greek crisis offers a final opportunity to test the euro's resilience.
The US dollar's strength amidst the macroeconomic chaos approaching both China and Europe offers the Fed a very short window of opportunity to experiment with a non-traditional interest rate increase. Paying banks not to lend is generous as long as the Fed's ginormous balance sheet of agency securities is sufficiently solvent to fund such payments. If a significant amount of mortgage loans move to non-performing status, many agency notes become toast and the Fed will be hard-pressed to continue paying banks not to lend.
The Fed is about to open a new chapter in money market fund history. Borrowing from money market funds would effectively be an accounting trick that places a new asset on those funds' balance sheets called "Loan to Fed," or some such name. The notional amount of the loan may be enough to prevent money funds from "breaking the buck" and causing the kind of chaos in overnight lending that almost destroyed the US financial system in 2008. It's a brilliant innovation, especially if the money funds who nervously anticipate paying negative interest rates can sustain the Fed's remittance to the US Treasury.
The likely rise in interest rates in September 2015 is a sleight-of-hand move. It will be one of those times in financial services that the back office will drive the front office, all while most of Wall Street and the financial media will only be watching the front office. The stock and bond markets will know that the experiment works if money funds do not break the buck for the rest of 2015. Hedge funds and other private investors should watch money market funds and other ultra-short duration instruments rather than long-term metrics such as mortgage rates. If money funds panic and the CBOE VIX suddenly goes vertical, the Fed may be forced to raise its official target rate by more than 25 basis points.
China and Europe have gone full-steam ahead with stimulative experiments, albeit in different ways. China has begun liquidating some of its foreign currency reserves. The liquidation has not yet ignited a run on the US dollar because other major reserve currencies still look weak by comparison. Australia and Canada, for example, have seen their currencies weaken against the dollar because collapsing commodity prices have crashed the value of their natural resource exports. Europe continues a form of monetary stimulus while Greece muddles through a transitional government. The next Greek crisis offers a final opportunity to test the euro's resilience.
The US dollar's strength amidst the macroeconomic chaos approaching both China and Europe offers the Fed a very short window of opportunity to experiment with a non-traditional interest rate increase. Paying banks not to lend is generous as long as the Fed's ginormous balance sheet of agency securities is sufficiently solvent to fund such payments. If a significant amount of mortgage loans move to non-performing status, many agency notes become toast and the Fed will be hard-pressed to continue paying banks not to lend.
The Fed is about to open a new chapter in money market fund history. Borrowing from money market funds would effectively be an accounting trick that places a new asset on those funds' balance sheets called "Loan to Fed," or some such name. The notional amount of the loan may be enough to prevent money funds from "breaking the buck" and causing the kind of chaos in overnight lending that almost destroyed the US financial system in 2008. It's a brilliant innovation, especially if the money funds who nervously anticipate paying negative interest rates can sustain the Fed's remittance to the US Treasury.
The likely rise in interest rates in September 2015 is a sleight-of-hand move. It will be one of those times in financial services that the back office will drive the front office, all while most of Wall Street and the financial media will only be watching the front office. The stock and bond markets will know that the experiment works if money funds do not break the buck for the rest of 2015. Hedge funds and other private investors should watch money market funds and other ultra-short duration instruments rather than long-term metrics such as mortgage rates. If money funds panic and the CBOE VIX suddenly goes vertical, the Fed may be forced to raise its official target rate by more than 25 basis points.
Monday, September 07, 2015
Financial Sarcasm Roundup for 09/07/15
One great thing about this blog is that visitors from the future can see how sarcastic I was at this point in history. I will be just as sarcastic in the future.
Japan's Q2 GDP is still down, no matter how you slice the inventory numbers. Maybe they could slice up some sushi rolls to go with those numbers. I'll have the dragon roll and California roll, please, because one plate is never enough. Abenomics is still in vogue over on that side of the Pacific Ocean. It will probably survive until a round of hyperinflation ruins the ability of ordinary Japanese to purchase very expensive imported foodstuffs for their sushi.
China is rapidly selling off its foreign exchange reserves to support its stock markets and currency. The US is not at all prepared for a sudden run on the dollar, but that is now very likely as more central banks follow China's path. Janet Yellen and Stanley Fischer are going to have some sleepless nights at the Eccles Building running scenarios on how to mitigate a dollar run. I expect pizza delivery services in Washington, DC will work overtime when the Federal Reserve starts pulling all-nighters.
Global supply and demand keep pushing oil prices down. Gas-guzzling Americans can enjoy a few more months of easy motoring. It's premature to call a bottom as long as financially weak oil service firms have access to cheap lines of credit in the US. I await the high yield debt market's collapse and the de-listing of multiple oil companies before I consider the sector a bargain.
If this blog were food, it would probably taste like vinegar.
Japan's Q2 GDP is still down, no matter how you slice the inventory numbers. Maybe they could slice up some sushi rolls to go with those numbers. I'll have the dragon roll and California roll, please, because one plate is never enough. Abenomics is still in vogue over on that side of the Pacific Ocean. It will probably survive until a round of hyperinflation ruins the ability of ordinary Japanese to purchase very expensive imported foodstuffs for their sushi.
China is rapidly selling off its foreign exchange reserves to support its stock markets and currency. The US is not at all prepared for a sudden run on the dollar, but that is now very likely as more central banks follow China's path. Janet Yellen and Stanley Fischer are going to have some sleepless nights at the Eccles Building running scenarios on how to mitigate a dollar run. I expect pizza delivery services in Washington, DC will work overtime when the Federal Reserve starts pulling all-nighters.
Global supply and demand keep pushing oil prices down. Gas-guzzling Americans can enjoy a few more months of easy motoring. It's premature to call a bottom as long as financially weak oil service firms have access to cheap lines of credit in the US. I await the high yield debt market's collapse and the de-listing of multiple oil companies before I consider the sector a bargain.
If this blog were food, it would probably taste like vinegar.
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