Posts Tagged ‘Interest Rates’

Upending the World

Monday, April 25th, 2016

Logic has taken a 180-degree turn, running at full sprint in the opposite direction from where it should be.

As one small example, consider the good fortune of Hans Peter Christensen, recently profiled in The Wall Street Journal, who is currently being paid by his bank to borrow money.  Christensen owns a home in Aalborg, Denmark, where negative interest rates resulted in his bank paying him the equivalent of $38 in interest for the quarter for borrowing money.

Meanwhile, in other countries with negative interest rates, some banks are charging customers for their deposits.  So the bank pays you to take its money and charges you to take your money. Zero Rates

Such is the logic of today’s central bankers in much of Europe and Japan, where rates have been negative for more than a year.

The United States has not adopted negative interest rates—but Fed Chair Janet Yellen said in February that the Fed is studying the feasibility of doing so, “to give the economy an extra boost,” according to The Wall Street Journal. (more…)

Something’s Rotten …

Monday, April 4th, 2016

“That it should come to this!”

                                  Hamlet, Act I, Scene II

Any student of Shakespeare will recall that Hamlet’s procrastination did not bode well for Denmark.

Centuries later, the Scandinavian country has Tivoli and perhaps the world’s best ice cream, but it’s not exactly a world power.  It may not be Hamlet’s fault–after all, Denmark is even more socialistic than the U.S. and Canada–but his hesitation was not a good thing for him or his country.YellenHamlet 2

So what does this have to do with Janet Yellen?  She chairs the Federal Reserve Board, which, like Denmark, has wielded its power clumsily, although it doesn’t even produce ice cream.  And, like the tragic prince, she will likely be remembered more for her inaction than for her action.

Even Hamlet didn’t procrastinate for years, although it may seem that way if you watch a poor production of the famous play. Also, like the melancholy Prince of Denmark, Ms. Yellen seems to be collapsing under the weight of the world and fretting over the potential consequences of her actions. And so, like Hamlet, she does nothing.

Her words before the New York Economic Club last week could have come straight out of Hamlet. Princess Yellen may be far less eloquent than the young prince of Denmark, but the parallels between what she said and what he said are significant. (more…)

Set. Down. No Hike.

Monday, March 21st, 2016

The economic outlook can be summed up in five words: Everything’s great, except what isn’t.

We’ll lead with the “everything’s great” part, as seen through the filter of the Federal Reserve Board.  As Fed Chair Janet Yellen reminds us after every meeting, the Fed has two goals—lowering the unemployment rate and stabilizing prices.

The Fed’s target unemployment rate is 4.7% to 5.8% and, if you believe the U.S. Bureau of Labor Statistics (see below re: why you shouldn’t), the Fed has accomplished that goal, as the current rate is at an eight-year low of 4.9%.  The Fed’s target inflation rate is 2% and, depending on how you measure inflation, it’s close to that number.Stock Prices

“The Fed’s preferred measure, the personal consumption expenditures price index, rose 1.3% in January from the previous year, and so-called core inflation—which excludes volatile food and energy prices—was 1.7%,” The Wall Street Journal reported. “The consumer-price index rose 1% in February from a year earlier, but core CPI was up 2.3% for the year, the largest 12-month increase since May 2012.”

So the Fed could have logically declared its mission accomplished and begun to gradually increase interest rates, as was expected after December’s initial miniscule rate increase.  So why was the vote at last wek’s meeting 10-1 against a rate hike? (more…)

Mutually Assured Destruction

Monday, March 14th, 2016

Iran, North Korea and the world’s other despots may be able to take over the world without going nuclear or even firing a single shot.

That’s because much of the free world seems bent on destruction from within, done in by a Keynesian death spiral.

Apparently, no one believes in capitalism anymore.  Instead, central bankers, who now control the economy in most of the world, are hell-bent on continuing to dig the negative-interest-rate hole ever deeper, until it is impossible to climb out.

While central bankers have only made matters worse with their easier-than-easy monetary policies, they’re so deeply invested, and so far down the rabbit hole of negative interest rates, they can’t turn back. Draghi

It may not be working, but admitting as much would bruise many strong egos, scare investors and sink stock prices.  So they keep digging.

A Bigger Bazooka

A year ago, Mario Draghi, head of the European Central Bank, announced the start of an asset-purchasing program similar to the Federal Reserve Board’s quantitative easing (QE) program through which the ECB would spend €60 billion a month on Eurozone government bonds.

(more…)

Hard Landing

Monday, February 1st, 2016

The Federal Reserve Board’s Open Market Committee met last week for the first time since raising interest rates in December and then published its usual policy statement full of mush.

It could have been written by Russia’s politburo.  It’s loaded with statements like this one: “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

In other words, if we’re not already in a recession, we’re pretty close to one, so the Fed is not going to raise rates to normal levels anytime soon. 20160128_policyerror_0

We’ll spare you the rest of the policy statement, which can be summed up as follows: “Blah, blah, blah.”  If the Fed were being honest, here’s what the latest policy statement would have said:

Well, that was a disaster.

We’ve been hearing for years that it was time to raise interest rates.  Virtually every economist on the planet, not to mention all of the journalists who think they understand the economy, had been predicting that the Fed would raise interest rates in December.  (more…)

Happy New Year: Meh.

Monday, January 4th, 2016

Well, it’s a brave new world for us cynics. Somehow, we all survived another year, but it wasn’t easy.

It was a good year for terrorists (Paris, San Bernardino), despots (hello Cuba, Syria, Iran, et al.) and hackers (any repercussions from China’s hacking of government records, federal employees sharing classified documents on unsecure servers, etc.?).

It was a bad year for investors.  Or, if not bad, not so good.  Heck, even Warren Buffett lost money, although he can afford a nick more than the rest of us. 2015

It would be generous to say that stocks ended the year “sideways,” as the year was volatile and the beginning was much more forgiving than the end.  Overall, though, the year was as flat as Twiggy in Nebraska.  As The New York Times put it:

“Name a financial asset — any financial asset.  How did it do in 2015?

“The answer, in all likelihood: Meh.

(more…)

Don’t Bet On It

Monday, December 28th, 2015

 “ … human beings have a natural tendency to manage risk after the fact.”

                              Michael A. Gayed, Pension Partners

 If I were betting on the ponies, Janet Yellen (or any Federal Reserve Board member, for that matter), would not be my first choice to bring along for consultation.

As we’ve previously pointed out, the Fed’s forecasting record is pretty lame.  The Fed has consistently projected a higher level of growth for the economy than we’ve actually seen (although even Fed projections are consistently well below the 3.3% average growth the economy enjoyed in the years between the end of World War II and the financial crisis). Fed Forecasts

The Fed projected growth rate for 2015 was 2.6% to 3%. While it’s too early to tell what the final numbers will be, the just-released latest estimate from the Bureau of Economic Analysis (BEA) for the third quarter of 2015 was 2.0% (down from its previous estimate of 2.1%), which isn’t too far off from the 1.5% growth rate for the first half of 2015.

As David Stockman noted, “Notwithstanding the most aggressive monetary stimulus in recorded history – 84 months of ZIRP and $3.5 trillion of bond purchases – average real GDP growth has barely amounted to 50% of the Fed preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.” (more…)

Just In Time for Christmas

Monday, December 21st, 2015

Even if it were wrapped in shiny paper with a big red bow on it, virtually everyone would have guessed at this year’s Christmas present from the Federal Reserve Board.

For most of us, the rate hike will be the equivalent of coal in our stockings, but for the economists, analysts, stock pickers, pundits, talking heads and other assorted Fed groupies, the rate hike was essential, because it validates their existence.  After inaccurately predicting a rate hike throughout 2015, they finally got it right! 20151217_BAML1

The hike of 25 to 50 basis points in the federal funds rate is an insignificant increase (the Fed’s Board of Governors will raise the interest rate paid on reserves to 0.5% and the Federal Open Market Committee will offer a rate of 0.25% on reverse repurchase agreements), except that it represents the end of an era.  ZIRP, or zero-interest-rate policy, has now been replaced with ZIRP+ or maybe Near ZIRP, Almost ZIRP or A-Tad-Above ZIRP.  It’s still as close to ZIRP as you can get without being ZIRP.

Questions Raised

Regardless, after 84 months of ZIRP, it’s worth noting that interest rates have changed direction and are now heading up.  ZIRP was already old when this blog was started in January 2010.  Now what are we going to write about?  (more…)

Nothing Lasts Forever

Monday, December 14th, 2015

If the Federal Reserve Board has used all of its policy tools during the current expansion, what happens when there’s a recession?

That’s a question worth asking, even as the Fed appears ready to raise interest rates, albeit by just a smidgen, based on the pretext that ZIRP (zero interest rate policy) is no longer needed, given today’s allegedly booming economy.

On course, the economy’s not booming and we may even be heading into a recession, assuming we aren’t already in one (it’s hard to tell in today’s slow growth-no growth economy). Average Recovery

Just one sign that the boom is an illusion is the length of the current expansion.  The average recovery since the end of World War II has been 58 to 61 months, depending on whose numbers you use.  The current “recovery” hit the 58-month milestone in April 2014 – 20 months ago. As David Stockman pointed out this week in his “Contra Corner” blog, “the only expansion that was appreciably longer than the present tepid affair was the 119 month stretch of the 1990s.”

Nothing lasts forever and even Larry Summers, the former Treasury secretary and current Harvard professor, recognizes that the current expansion may be nearing an end. As he wrote last week in a Washington Post op-ed, “U.S. and international experience suggests that once a recovery is mature, the odds that it will end within two years are about half and that it will end in less than three years are over two-thirds.  Because normal growth is now below 2 percent rather than near 3 percent, as has been the case historically, the risk may even be greater now.”

(more…)

The Big Disconnect

Monday, December 7th, 2015

Imagine being stuck in a blizzard.  You look out your window and can see the snow piling up outside, yet the meteorologist on your TV is forecasting continuing sunshine and near tropical weather.

That level of disconnect is similar to that shown by some members of the Federal Reserve Board, who are preparing for liftoff, even as the economy implodes like a SpaceX rocket. The difference, though, is that the SpaceX failure was an unmanned flight; when the Fed acts, we’re all on board, like it or not.Fed Meteorologist

We recently reported that a couple of members of the Federal Open Market Committee had spoken publicly in favor of a rate hike. But this past week, they were no longer the outliers, as even Fed Chair Janet Yellen joined in during a speech before the Economic Club of Washington.

USA Today reported, “Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.”

If you read on, though, that’s not quite what she said.  Given that inflation is nowhere near the Fed’s 2% goal, she couldn’t say that the central bank’s goals have been met. (more…)