Category: Economy

The Federal Reserve has been targeting raising its feds fund rate.

Investopedia has a description of the feds funds rate:

“The rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis.”

However, interbank lending has been on a trajectory to zero since 2009.

Why is this market on a death spiral? Simple. Banks are loaded with excess reserves. There is no need to be involved in interbank lending especially when the fed is paying interest on excess reserves. Risk free money.

Even though interbank lending is dead, LIBOR (London Interbank Offered Rate) is still alive and well. Bloomberg ran an article talking about how relevant this market still is when pricing financial instruments. LIBOR is calculated from a daily survey of more than 15 large banks that estimate how much it WOULD cost to borrow from each each other without putting up collateral. I decided to capitalize “would”. There is a difference in what people say they will do and what they actually will do. From the Bloomberg article:

The OTC derivative market is the most complex, opaque and leveraged financial market in the history of the world. I do not believe a financial panic or crisis is imminent. However, this is an early sign of excesses in the financial markets.

Russell 2000 sends the bears packing.

The other major indices will finish their correction and move on to all time highs also.

The US 10 year just hit a level not seen since 2011.

The US Dollar has also been pushing higher.

There is always a battle of sorts going on between stocks and bonds. People decide how to invest their money. They compare the returns they anticipate from certain investments.
Since central banks have pushed interest rates down to absurd levels, stocks offered a superior total return not only in dividends but price appreciation over the last decade. With interest rates moving higher, bonds will once again begin to compete with stocks for income seeking investors. This will cause days like today. Rapidly rising interest rates will cause some to rotate back into bonds and out of stocks. I consider this the prime reason stocks are moving sideways in this corrective pattern. Many investors will reconsider the P/E ratio they will accept, and the dividend yield from their stock positions.
The current fear in the market about rising interest rates will cause some days and weeks to hit stocks badly. I believe these fears are overdone. Further, there is nothing that says that stocks and interest rates can not rise together. They can.

Kevin Warsh was interviewed by the Trump team for the top spot at the fed. The full article is here. Warsh had an important statement about the Oval Office interview with regards to interest rates:

“If you think it was a subject upon which he delicately danced around, then you’d be mistaken. It was certainly top of mind to the president … The president has a view about asset prices and stock markets. He has a view based on his long history in his prior life as a developer and real estate mogul of the role of interest rates.”

The fed will be slow in raising interest rates. This is the philosophy which dominates the fed board members and the white house.

The Fed is not concerned with overshooting their 2% inflation target. As I have stated as nausea, the fed will let the economy run hot. They will be slow to react and always be behind the curve.

It is now common practice to talk about the disappearance of cash. Are we headed to a cashless society? Let us look at some data.
First the amount of currency in circulation.

In the past decade the currency in circulation has doubled to almost 1.6 trillion dollars. The US population has not doubled. There are many estimates about how much of this currency is held outside the US. Most estimates I have seen indicate 50%. I don’t know if any one knows the true answer to this, but let us say of the 800 billion dollar increase in the past decade only 400 billion dollars was due to US citizens wanting to hold more currency. That is about a million dollar increase per person over the past decade.
Next we look at currency growth.

Since 2001 it has rarely decreased except before a recession. Since the 1980’s money growth of the currency has gone negative only seven times.
From the 2016 diary of consumer payment choice (DCPC) we have the following conclusion:
“The public demand for cash continues to grow…”
The DCPC indicates that 31% of all transactions are cash. Debit and credit made up 27 and 18 percent respectively.

The larger the payment the less likely cash will be used.

The free market has come up with great innovations for paying large sums of money quickly using a credit card or debit card. The public is taking advantage of this system. Very few people like to carry around thousands of dollars in their wallet for obvious reasons.
It is true the government can track all of these electronic transactions. The government also tracks all of our messages and phone calls. How often do they stop terrorist attacks? We don’t know the true answer to that because of top secret classifications. Here is what we do know: The terrorist attacks and attempted terrorist attacks that did occur were fairly obvious. Text messages, phone calls, even formal complaints to government agencies by citizens, before an attack. This points to one thing: Information overload. The government collects so much information it has no idea how to sort through it. The government is a massive bureaucracy. Bureaucrats are not innovative or efficient. They show up to work, push around paper work for eight hours, and than they go home.
In as cashless society, the government could track all of our transactions. More paper work to sort through. The US government is also going to run into a financial wall one day. Less people to sort through the paper work.

There is a book written by George Orwell called “Nineteen Eighty-Four”. It is the story about how an omnipresent government is watching everyone and uses this information to manipulate the public and punish those who part from the party line. It is fiction for a reason.

So far, nothing to write home about. An insignificant decrees in total assets.

Study after study show the same thing. The millennial generation is preparing for retirement. They are overly conservative with money. See below.

Despite the facts, millennial’s actually don’t think highly of themselves. They do not believe they are saving enough. According to a new study by BOA 47% have over 15K saved and 16% have over 100K saved. I have many interactions with millennial’s. When the issue of how much money they have saved comes up, the number is always surprisingly high. Contrast this with the baby boomer generation. Most of them I talk with have nothing saved. They are not worried about it. They think the millennial generation is going to pay for their medical bills and social security. The present value of unfunded liabilities have been estimated to be 200 trillion dollars. Baby boomers do not realize that the US government is going to default on all of these unfunded liabilities. Baby boomers always fail to explain where this money will come from. They have complete faith in the political system. Millennial’s do not have faith in the political system. Certain municipalities have already went bust and defaulted on pensions. The baby boomer generation can be summed up in one word: delusional.
When it comes to unemployment millennial’s are 100 basis points behind baby boomers.

This is despite the fact that the baby boomers have 20+ years experience on millennial’s.
Millennial also constitute a large share of the work force. See below for break downs.

I am not worried about the millennial generation. They are saving for the future. In a recession, cash is king. Baby boomers talk about the unfunded liabilities as if it is not their problem. It is their problem. One day, interest rates will rise. The US government will not be able to service its debt. The federal reserve will try its best to contain the crisis. They will make the crisis worse. When I talk to baby boomers about these issues I go back to one word: Delusional.

Initial claims have fallen to a nearly five decade low.

The economy is booming. Buy the dips.

For the record, the 10 year US treasury yield went above 3%. The last time this happened was almost 4 years ago. The 10 year US treasury security is a benchmark for lots of financial instruments around the world. I do not believe the bond  bear is dead just yet. The first sign of trouble market participants will flood into the bond market, which will push yields back down.