Hang On For A Rough Ride

                  As the old saying goes, hang on, things are likely to get a bit rough. I have pulled financial news articles from the past week or so. Financial thinking has been fairly consistent for the past weeks and the most recent 10 days have been fairly typical. By consistent I mean, lots of uncertainty, markets and thinking are moving up, down and sideways most all of the time. Nobody really knows much of anything but there is lots of noise.

First, a good article from Think Advisor (10/24/22) concerning the annual meeting of the Securities Industry and Financial Markets Association (SIFMA), an organization I subscribe to and is very much an industry standard. The meeting is attended by many big wigs from finance and government. Janet Yellen, secretary of the Treasury, spoke at the meeting (more on that later). One of the panel discussions included several business economists discussing inflation and recession among other things. Several are now predicting that there will be a recession in 2023. The participants listed several factors supporting their conclusion. The factors are the same as have been discussed before, inflation being the 800 lbs. gorilla in the room. The article gives some good comments and supports for their conclusions. Much of the current discussion involves estimating and second guessing the Fed and its inflation response. Since the 1970s and Alan Greenspan’s solution to inflation the Fed has been terrified of any type of uncontrolled inflation. The solution in the 1970s just about destroyed the US economy before it corrected itself. Corrected itself is also correct, Alan Greenspan and the Fed did not fix the 1970s economy but they made it possible for it (the economy) to rebalance itself – governments and individuals don’t control economies in spite of what they say, economies control governments and people. The Greenspan solution was one that worked or at least that was what governmental and financial think tank gurus came up with that worked, and it did work. Governmental officials and politicians ever since then will do just about anything to avoid that situation again. The problem is that much of the fiscal and governmental policies of the past 20 years have been such that it supports inflationary growth. Then the loose money supply accompanied with artificially low interest rates (yes, dear reader, rates have been artificially low for 20 years, held down by direct intervention from the Fed which allowed government to pursue its various expansionary agendas) got away from the governmental people as it had to do. The low interest rates and expanding money supply couldn’t go on forever but for 20 years governmental types have been kicking that can down the road until now. That is why the current administration is howling that the current inflation isn’t their fault but they are willing to add to the problem by increasing governmental spending by unprecedented amounts which is very inflationary. Hence, trying to kick the can down the road again but the financial system has reached its limit. Goods and services are not able to absorb the excess funds without adjusting and that means prices have to go up, in this case way up, way fast (the basic definition of inflation) as we have seen in the last 8 months. That is why the big concern. This looks a lot like the inflation rates of the 1970s. The cure is of course, recession, the rapid deceleration of spending and the removal of the excess money from the system. It would really help shorten the recession and cause it to be less severe if government curtailed spending, reduced governmental needs and did not fund new programs without also including revenue sources (net funding). All of which the current administration refuses to consider but instead is increasing spending and unfunded programs. We have to wait for price increases to begin to slow or stop (in spite of the governmental spending headwinds) as supply and demand are brought into closer alignment, i.e. demand does not outstrip supply and so prices are normalized and we don’t have too many dollars chasing too few goods. We have to weather inflation as price and supply try to find some sort of new equilibrium. I am afraid inflation hits very unevenly in these situations. It is inherently unfair, unjust and unkind. 

                Again, the mechanism to get inflation under control or rather, under more control is to dry out the excess money from the economy and that is done by making money more difficult or expensive to acquire and use. It has to cost more. The interest rates we pay is the control mechanism. Hence, the Fed Funds Rate helps increase or decrease what it costs to borrow and use money. In the second article by Reuters (10-24-22), Yellen is trying to make the point that the Treasury is aware of the problems of drying out the economy and at least in the area she has some control over is attempting to assure the financial system that the government is willing and able to keep one of the major secondary problems caused by inflation at bay. The problem is that as the cheap money (low borrowing costs, relatively speaking, caused by very low interest rates) dries up, investors become unwilling to speculate and began to draw their funds out of banks and financial institutions and put it in safer places such as Treasury instruments or cash (again safer is relative). Banks and financial institutions use leverage to earn additional profits by using borrowed money to invest. You take your money, they have to go find money somewhere on a short basis to cover your withdrawals. In the great recession of 2008 there wasn’t enough liquid funds available to meet the withdrawal needs and the government bailed out many financial institutions by printing more money among other things and almost wasn’t fast enough in responding (TARP if anyone remembers). Several big financial firms didn’t survive or were absorbed. Yellen is trying to tell the markets she is aware of the situation and it is under control which may or may not be accurate but we can hope.

                The Bloomberg article of 10-21-22 is a discussion of what Fed Funds Rates may be and why or why not. There is some speculation that Fed Funds rates may need to be as high as 4.75% - 5.0%. The Fed is trying to give the impression of controlling inflation and the financial institutions are trying to act like the Fed has some control. Both are incorrect. The Fed can’t “control” inflation and financial institutions are not really supporting the Fed but trying to find any place to hide away from the train wreck that is coming. As an aside, the financial economists are having a heyday because they can predict just about anything and there is a pretty good chance they will be correct at some point, for a change. Watch to see who claims they got the forecast right and what part of the forecast in the next 18 months or so. I need to flog a dead horse again. The Fed can not control inflation with any kind of fine tuning. Watch and see, at the very most they can nudge the inflation rate around. The Fed will get this whole process wrong (as measured by various financial institutions, markets and money gurus). But they may be able to influence inflation to some extent. According to the people in the know (don’t trust the people in the know), the Fed started raising the Fed Funds Rate to late or too early, they will not raise it fast enough or they will raise it too fast, and they will overshoot how high and for how long rates need to stay up and they will either not decrease rates fast enough or too fast on the back side of things. They will not be able to stop the inflation rate from gyrating all over the place, both up and down and they will likely completely miss their target inflation rate of 2.0% by a wide margin. The final solution to the last point will be that the Fed will change the target inflation rate to something other than 2.0%. In two years the Fed will declare that they beat inflation and it is now tame again at whatever rate they decide on. Again, not accurate (notice I didn’t say not true) as the Fed never has really been able to control inflation but rather sets a rate (for the last several years, 2.0%) that somewhat matches the ongoing economic activities. There will be more articles about the Fed and its “fine tuning” the Fed Funds Rate in the coming months. Don’t be fooled by the noise.

                The final article is a bit of fluff about the resignation of Prime Minster Liz Truss (Britain) after just 44 days in office. She has the distinction of being the shortest serving prime minster in history. Many of her problems were caused by very aggressive economic policies that were considered too radical for the times. Just a reminder why governments tend to be slow and ponderous in their decisions and a good example of why we have had 20+ years of expansion in this country. It is too politically difficult to change things and who wants to rock the boat, even if it needs it until there is some kind of popular uprising that is consistent with the political leaders thinking. A good example is the case of Ronald Regan and the then new thinking of supply side economics which was a good thing.

 

Articles referenced;

https://www.thinkadvisor.com/2022/10/24/bofa-economist-i-dont-see-how-we-avoid-a-recession/

https://www.reuters.com/markets/us/yellen-says-taking-steps-enhance-treasury-market-funds-resilience-2022-10-24/

https://www.bloomberg.com/news/articles/2022-10-21/fed-officials-expect-debate-on-rate-peak-and-when-to-slow-hikes

https://www.bnnbloomberg.ca/markets-are-calling-the-shots-uk-traders-react-to-truss-exit-1.1835289

Kitten on a Mission - How Things Change

 Notice how a kitten will jump on anything and everything and is easily distracted. This applies to governmental officials, financial professionals and financial news organizations.

The National Bureau of Economic Research is a private organization responsible for calling the official timing of a recession. It states a recession “is a marked declined across the economy in a range of indicators, including the labor market, investment and spending.” Usually people tend to look for 2 quarters of downturn in several indicators including GDP growth (negative), employment (negative), consumption and spending and other financial measures such as an inverted yield curve. Many of these measures can be analyzed by month, which is 5 months shorter than the classical 2 quarter+ measurement of the official bureau. That is why we get the range of dates or even no date on recession estimations. The only one officially recognized to call a recession tends to use at least 2 quarters of historical data before they make a pronouncement.

                With that in mind let’s turn to some news stories. From June 6^th, BNN Bloomberg (Canada), the headline reads “Powell says soft landing ‘very challenging,’ recession possible.” The article suggests that “Powell has given his most explicit acknowledgment to date that steep rates could tip the US economy into recession, saying one is possible and calling a soft landing ‘very challenging” ‘. Notice that the language is still couched and nuanced and leaves much room to wiggle. He still leaves a way for the Fed to claim that they are not forecasting a recession, yet. In spite of the hikes in the Fed Funds Rate and the reduction of the Fed balance sheet. The article discusses Powell’s reactions and actions to inflation reports. Republican have recently been blasting Powell for not jumping on inflation sooner by raising rates faster. Again we have the current bandwagon of thought. Watch as comments shifts back and forth. Powell didn’t do enough, Powell did too much. Remember, the Fed has a sledge hammer to deliver adjustments and the talking heads including Congress are reacting as if there is a precise tool. There isn’t and they (Fed) can’t use it that way (with precision). The Fed has fostered this thinking which is bringing the problem back to roost (as the saying goes) by their own past statements and actions. They act as if they can precisely control inflation and growth. They can’t. So when they get called out for not being able to steer the economy they have in large measure brought it on themselves by implying they can control. Again, they can’t. Expect to see more and harsher statements especially from Congress and talking heads.

                Moving to the 2^nd article, from Politico of 7/04/2022. Tag line is “President Joe Biden says ‘there’s nothing inevitable’ about a recession in the U.S. Right…., and where is the rest of the statement the country asks? Many are saying the president is a lone voice in the noise of recession and he probably is at this point. This is pure politics. Since the president can’t (or shouldn’t) try to influence the Fed which is supposed to be independent by definition, the president can make calming public statements and call Powell privately in desperation. Several Democrats are on record as suggesting this recession thing is not a big problem, we just need to spend more.

                The 3^rd article is from BNN Bloomberg of 7/07/2022. The tag line reads, “US recession is already here, according to Wells Fargo Investment Group”. Think back to our previous blog on economic / financial forecasts and notice that here we have the first news grabbers with a new story or new twist and trying to get out front of the news competition. We can see the progression of news stories as we went from no recession to possible recession to more likely recession to predicting recession in the future (from middle to end of 2023) to now we are in a recession. Pure news grabbing. Watch to see of others will jump on this bandwagon or if they suggest something else. Regardless they (the newsies) have a new and exciting twist to write about which generates copy (not necessarily good copy but copy).

                What to do. Slow and steady wins the race or in this situation slow and thoughtful keeps their sanity. You know the news articles and newsies are going to jump on everything just like our kitten does. Their attention is divided so many different direction (very much on purpose) because it generates pages to read. Again, there are few if any consequences in reporting so you have to be selective in what you read. Watch for things to settle out a bit and see. A good example is the recession. Since the first of the year the talking heads started as recession was not likely but a possibility to now a recession is likely and may be as early as next year. I don’t give much weight to the Wells Fargo comments about the recession has started because it is the first mention (a kitten pounced on something let’s all look). That makes it a new idea and someone was trying to get the jump on everyone else. If they are wrong it doesn’t matter to them. It’s news. Remember, slow and thoughtful helps you keep your financial sanity. You don’t have to react to every new thing. Paraphrasing what President Brigham Young was supposed to have said to the woman who came in for counseling, “Well sister, if your husband tells you to go to hell, well just don’t go.” If the newsies, financial pundits and governmental officials tell you we have to jump, well, just don’t jump (wait and see). Regardless of their screaming we will figure it out. Earplugs help. Enjoy family, friends and your favorite sport or book, take a walk, do something fun and relaxing. The screaming, finger pointing and loud noises will still be there when we get back and maybe, just maybe, there might be some calmer voices with some real, helpful information. We can always hope.

 

https://www.bnnbloomberg.ca/powell-says-soft-landing-very-challenging-recession-possible-1.1782346

https://www.politico.com/news/2022/07/04/recession-talk-surges-in-washington-00043818

https://www.bnnbloomberg.ca/us-recession-is-already-here-according-to-wells-fargo-investment-group-1.1789170

 

 

Cat on a Hot Tin Roof – Some Explanations and Information

A cat on a hot tin roof is the appropriate image for how the financial markets and economies feel and are reacting at the moment. An avalanche of commentaries and volumes of data are pouring into and being poured over by a myrid of individuals, specialists, talking heads, and governmental bodies. There is no shortage of information, opinion, comment, commentary, noise and confusion. I have found a couple of articles over the past 2 weeks I think may be interesting and helpful. I am including them in their entirety.

Some observations. Quoting from the first line of the Bloomberg article, “The world’s most powerful central bank is about to find out how far it can squeeze financial markets before something breaks.” That sums up exactly what is happening. That is the 900 lbs. gorilla in the room. If or when it breaks, that is recession. The 2^nd article from the Spokane Review (originally from Bankrate.com) is a pretty good discussion on how rising interest rates may impact various financial instruments. Remember, don’t focus on the hype language. Look for the solid information. Good luck. Hang in there and don’t panic.

https://www.bloomberg.com/graphics/2022-world-economy-wall-street-market-worries/

Bloomberg

Everything That Could Go Wrong in Markets as Free-Money Era Ends

By Jack Pitcher, Alexandra Harris, and Alex McIntyre

May 9, 2022, 6:00 AM MDT

The world’s most powerful central bank is about to find out how far it can squeeze financial markets before something breaks. Struggling to tamp down the most pervasive inflation in decades, the Federal Reserve delivered its biggest interest-rate increase since 2000 last week while outlining a plan to begin unwinding trillions of dollars in asset purchases that have kept world markets brimming with cash since the 2020 crash. Its peers will soon follow suit. Bloomberg Economics has estimated that policy makers in the Group of Seven countries from the European Central Bank to the Bank of Canada will shrink balance sheets by about $410 billion combined in the remainder of 2022.

Yet it all comes at one of the most precarious times in recent memory for the global economy. Russia’s war in Ukraine, and the bevy of sanctions that followed, have upended business. Supply chains that were disrupted by the pandemic have grown even tighter, causing chaos for companies lashed by soaring prices for everything from labor to commodities. The worry now is whether central banks can accomplish the high-wire act of weaning Wall Street off unprecedented stimulus, without disrupting the flow of capital and tipping economies into recession.

Bloomberg News canvassed traders, money managers and analysts on their top market indicators to track corporate distress, liquidity shocks and cracks in the financial plumbing. We then analyzed decades of price history to identify the systemic turning points — when central bankers on a hawkish mission risk crashing the real economy.

While there’s little sign of widespread stress yet, some barometers of cross-asset health are moving closer to the danger zone. All that suggests investors are in for a bumpy ride as the Fed drains its unprecedented liquidity measures.

Here are four indicators keeping Wall Street worrywarts on edge.

1. An Upside-Down Bond Market

Like it or not, the U.S. Treasury yield curve remains the top dog economic forecaster on Wall Street — even if the Fed’s bond-buying spree in the pandemic has distorted its message. In normal times, when the business cycle is in good health, the interest rate on debt maturing in, say, 10 years, will be higher than that on shorter-term securities as investors demand more compensation for the risk that inflation down the road will erode returns. If the opposite happens, meaning short-term rates are higher than the longer term, the foreboding dynamic is known as an inversion — signaling a bet that the central bank will eventually have to cut rates in order to salvage growth.

While not every inversion in the yield curve has led to a downturn, prolonged distortions have become eerily accurate, especially when two of the most widely followed curves become inverted at the same time, data compiled by Bloomberg show. Since the beginning of the 1990s, whenever yields on both 3-month Treasury bills and two-year notes have risen above the rate on 10-year bonds, a recession has followed almost without fail within the next six to 18 months. It's a simplified measure — the most recent double inversion preceded a pandemic that no one saw coming — but big moves in yield curves have kept Wall Street on edge recently.

In late March and the start of April, the gap between two- and 10-year yields briefly inverted before normalizing, reflecting market angst that the Fed’s mission to aggressively tighten policy risks sparking a recession by ramping up the cost of money and thereby constraining consumer spending as well as business activity. At the same time, the spread between the three-month Treasury bill and the 10-year yield has been heading in the opposite direction, suggesting a still-healthy outlook for U.S. investment and consumption that gives the central bank room to make good on its policy-tightening plan.

For now, yield-curve worriers are easy to find as the end of the easy-money era rocks global markets. Already this year, the Nasdaq 100 index of technology shares has had the worst start in decades, speculative stock strategies have lost billions and cross-asset volatility has spiked all over the world.

PGIM Chief Executive Officer David Hunt warned last week that signals in the bond market suggest a significant risk of a recession in 2024, while Citadel’s Ken Griffin said the outlook is the most uncertain since the global financial crisis.

2. Disruption to the Flow of Credit

U.S. companies have lost their ability to borrow money at ultra-cheap rates, a direct function of the Fed’s mission to cool the red-hot business cycle that’s stoked inflation for everything, everywhere all at once.

But when borrowing costs surge too far, too fast, the flow of corporate credit can become disrupted or even blocked entirely. In extreme instances, healthy companies can lose access to funding, wreaking economic havoc. This happened most recently during the onset of the pandemic, which forced the Fed to take unprecedented action to keep corporate America afloat.

The most widely followed credit gauge is the additional yield over Treasury bonds that investors demand to hold debt from the largest and strongest U.S. corporations. Currently, the spread on a Bloomberg index of U.S. investment-grade bonds has risen to 1.35 percentage points, from as low as 0.8 percentage point in June 2021, signaling higher borrowing costs that still sit below a key threshold for stress.

When the spread rises above 1.5 percentage points, it’s a warning sign that credit markets could seize up, making borrowing a lot harder, according to analysts and investors informally polled by Bloomberg. The metric has proved a reliable red flag in the past after crossing 2 percentage points in the volatile years after the global financial crisis and during the pandemic fallout.

To illustrate how the flow of credit across the entire U.S. economy can constrict, Bloomberg examined commercial and industrial loan data from all commercial banks, published monthly by the Federal Reserve.

The analysis, dating back to 1989, shows that when investment-grade credit spreads approach and exceed 2 percentage points, a threshold that’s been crossed just six times over that period, a contraction in loan growth almost always follows.

In January 2008, for example, borrowing costs for investment-grade companies soared to more than 2 percentage points for the first time in more than five years. Risk premiums remained above that level for nearly two years, and a prolonged slowdown in commercial and industrial loan volumes came next. Loan volumes fell for two years beginning in November 2008, causing historic damage to the world economy.

More recently, credit spreads spiked to over 3.5 percentage points in the March 2020 selloff. Yet some of the easiest borrowing conditions on record took hold in the following year as the Fed pumped liquidity into the financial system and even offered to buy corporate bonds directly.

Now premiums are back on the rise and company debt is becoming volatile. Investors and companies alike will be watching whether borrowing costs spike into risky territory that would disrupt the flow of credit once more.

3. The Junk Penalty

Borrowers with weak balance sheets were given a reprieve after the Fed and other central banks rode to the rescue in the dark days of the pandemic. For the better part of two years, credit was dirt cheap and defaults became virtually non-existent. But the liquidity party is coming to a rapid end as interest rates rise — with new speculative-rated debt offerings this year falling to the lowest volume since 2009.

A recent bond sale from Carvana Co., for example, initially struggled to attract investors, and the used-car company ended up paying a whopping 10.25% yield while buyers demanded a clause intended to help shield them from losses if the company were to head to bankruptcy court. Similar cases abound.

A measure investors are watching closely is the extra risk premium that bond buyers demand to own debt from the lowest-rated companies compared to investment-grade peers. Call it the junk-bond penalty. When this premium goes up, it makes borrowing more costly and less accessible to issuers who need the funding the most, especially those who have poor credit ratings due to weak cash flows or high debt loads compared to their earnings.

If firms that have limited money on reserve and debt coming due in the near future lose access to primary markets, that makes defaults and bankruptcies more likely — bad news for growth-minded policy makers at the White House.

For most of the post-pandemic era, junk-rated companies across the globe paid little more to borrow than some of the biggest corporations — an average of just 2.4 percentage points more during 2021, a year that saw some of the easiest credit conditions ever, according to data compiled by Bloomberg. That made corporate failures exceptionally rare. But the tide is starting to turn. The junk penalty climbed above 3 percentage points last week. While that’s below the historical average of about 4 percentage points, the fast pace of liquidity tightening could soon cause trouble for the most vulnerable of companies. Since 2000, when the junk penalty has climbed above 5 percentage points and held above that level for an extended period, defaults have almost always risen above the historic norm, data compiled by Bloomberg show.

4. Short–term money markets crack

The Fed’s massive pandemic stimulus program caused excess liquidity in the financial system to balloon, with banks flush with record cash in the form of reserves. Now, as the monetary authority begins to pare a $9 trillion balance sheet, a process known as quantitative tightening, Wall Street is on high alert for any resulting logjams in the financial plumbing.

When the Fed starts to shrink asset holdings — by simply not replacing maturing securities — there will be an increase in the number of Treasuries and mortgage bonds in search of a home in the private sector. And the amount of reserves held in the banking system will fall by design.

No one knows how any of this will ultimately play out. But the last time the central bank embarked on quantitative tightening, bad things eventually happened in late 2019. Banks saw their reserves fall sharply — fueling a disruptive spike in interest rates on so-called repurchase agreements, a keystone of short-term funding markets. That caused liquidity headaches all around and forced the central bank to intervene in the funding markets.

The Fed has since implemented additional tools to help reduce these liquidity risks. But all bets are off. Some two and half years ago, total reserves held by depository institutions at the Fed slid to around $1.4 trillion. That was enough to cause liquidity issues in overnight lending, even though banks at the time considered $700 billion as the lowest threshold for comfort.

This time round, Barclays Plc estimates the tipping point at some $2 trillion versus $3.3 trillion currently. All this is guesswork with few historic precedents, so the reserve level will be a key focus for risk watchers well before it hits this point.

All in, traders around the world are bracing for a disruptive tightening in financial conditions on multiple fronts, from bonds and credit to money markets, as the Fed spoonfeeds markets with liquidity no longer.

“We have never been able to reduce inflation by more than 2 percentage points in the U.S. historically without inducing recession,” said Guggenheim Partners Chief Investment Officer Scott Minerd at the Milken Institute Global Conference in Los Angeles. “I think that it's going to be really hard for the Fed to maneuver into a soft landing.”

https://www.spokesman.com/stories/2022/may/09/biggest-winners-and-losers-from-the-feds-interest-/

The Spokesman Review - Spokane, Washington

Biggest winners and losers from the Fed's interest rate hike

Updated: Mon, May 9, 2022

Spokane, Washington

James Royal    Bankrate.com (TNS)

Last week, the Federal Reserve announced that it’s raising interest rates by half a percentage point, bumping the federal funds rate to a target range of 0.75 to 1.00 percent. The move follows an increase of 0.25 percent in March, as the Fed continues reducing liquidity to the financial markets to help tamp down soaring inflation.

The central bank also announced that it was further reducing stimulus to financial markets by letting its holdings of bonds decline over time. The Fed will work its way up to letting about $95 billion in bonds roll off its balance sheet every month, reducing liquidity by about $1 trillion per year.

The Fed’s move comes as inflation rages in the U.S. economy at the highest annual rate in some 40 years, hitting 8.5 percent in March. With the Fed hitting the brakes on an overheated economy, the main question for many market watchers is how fast Federal Reserve Chairman Jerome Powell & Co. will continue to raise rates.

“The Federal Reserve is behind the curve on inflation and has a lot of catching up to do,” says Greg McBride, CFA, Bankrate chief financial analyst. “This means rate hikes at successive meetings for the first time in 16 years, and for the first time in 22 years, a larger half-point hike.”

At about 3 percent, the 10-year Treasury bond is now at its highest level since late 2018, as markets price in the expectation of sustained inflation and rising rates. After some ups and downs in 2021, the benchmark bond has soared since December 2021 and especially since the start of March, when it sat at just 1.65 percent.

As the Fed embarks on what appears to be a longer period of raising rates, here are the winners and losers from its latest decision.

1. Mortgages

While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield zooming higher in recent months, as the market prices in expectations of the Fed raising rates, mortgage rates have risen alongside them.

“Mortgage rates have bounded higher by 2 full percentage points since the end of 2021, one of the largest and fastest run-ups in history,” says McBride. “Mortgage rates move well in advance of Fed action and the outlook for inflation and the economy will be the key determinants of what we see with mortgage rates in the months ahead. Until we see signs inflation has peaked, the risk is definitely to the upside.”

The run-up in rates – following the rapid rise in housing prices over the past couple years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.

So would-be homebuyers are worse off by the rise in rates.

2. Home equity

The cost of a home equity line of credit (HELOC) will be ratcheting higher, since HELOCs adjust relatively quickly to changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers.

Those with outstanding balances on their HELOC will see rates tick up, though interest expenses may continue to be low historically. A low rate is also beneficial for those looking to take out a HELOC, and it can be a good time to comparison-shop for the best rate.

But with rates moving higher, even a little bit, and the expectation that they’ll move higher still as the year progresses, those with outstanding HELOC balances should expect to see their payments continue to rise in the near term.

3. Credit cards

Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards will move higher now.

“Credit card rates will march higher in step with the Federal Reserve, and often follow within one or two statement cycles,” says McBride. “Pay down credit card debt now because it will only get more expensive and you don’t want that debt hanging over your head, should the economy topple into recession.”

If you have an outstanding balance on your cards, then you’re going to get hit with higher costs. With rates projected to rise for a while, it could also be a welcome opportunity to shop for a new credit card with a more competitive rate.

Low rates on credit cards are largely a non-issue if you’re not running a balance.

4. Savings accounts and CDs

Rising interest rates mean that banks will offer rising returns on their savings and money market accounts, but will likely adjust their yields at a measured pace.

Account holders who recently locked in CD rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.

Those with savings accounts may look forward to rising rates, but it’s off a low base, as most banks quickly ratcheted rates to near zero following the Fed’s emergency cuts in March 2020.

“Yields on certificates of deposit have started to pick up and we’ll see the same in savings yields, although with a bit of a lag,” says McBride. “The outlook for the next year or so is much better than what savers have endured over the past three years, where rates fell and then inflation took off.”

“It will take a while, but as rate hikes continue, the returns savers get will rise and inflation will hopefully decline,” he says.

Savers looking to maximize their earnings from interest should turn to online banks, where rates are typically much better than those offered by traditional banks.

5. Stock and cryptocurrency investors

A huge boon for the stock market has been the Fed’s willingness to keep rates at near zero for an extended period of time. Low rates have been beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed income investments such as CDs. But that’s changing.

In the last few months, investors have been pricing in the potential for rate increases, with the S&P 500 starting 2022 in a deep slump.

“The market went up with little hesitation while the Federal Reserve was pumping stimulus into the economy, but now that they’re removing that stimulus, market volatility has returned,” says McBride. “Particularly susceptible have been the high-octane growth stocks that were the primary beneficiaries of low interest rates, with investors now questioning what value to put on those stocks in a higher interest-rate environment.”

Cryptocurrencies have also been feeling the brunt since November, when the Fed more clearly telegraphed its intentions to reduce liquidity in the financial system. Bitcoin, Ethereum and other major cryptos are well off their 52-week highs and have shown a solid downtrend over the last few months, as they priced in reduced stimulus and the potential for higher interest rates.

The Fed’s reduction in its own bond portfolio should further decrease support for stocks and crypto.

6. The U.S. federal government

With the national debt above $30 trillion, rising rates will raise the costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.

For now, the interest rates on debt remain at historically attractive levels, with 10-year and 30-year Treasurys running well below inflation. As long as inflation remains higher than interest rates, the government is slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt.

Bottom line

Inflation has been running hot over much of the last year, and the Fed is raising interest rates to combat it. But rates still do remain low by historical standards, at least for now, so it makes sense to think about how to take advantage, for example, by being more discriminating when it comes to shopping for rates on your savings accounts or CDs.

(Visit Bankrate online at bankrate.com.)

©2022 Bankrate.com. Distributed by Tribune Content Agency, LLC.

 

Why So Much Uncertainty? Recession, Slowdown, Retrenchment

https://www.bloomberg.com/news/articles/2022-04-11/world-markets-are-falling-again-with-echoes-of-the-2018-rout

https://www.bnnbloomberg.ca/junkiest-junk-bonds-flash-a-warning-sign-for-the-economy-1.1754017

https://www.theguardian.com/business/2022/apr/19/imf-governments-covid-debt-world-economic-outlook

https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874

https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874

                Yesterday the dentist put a new crown on a tooth for me. It was the culmination of about 3 weeks of pain, discomfort and unpleasantness. I was enjoying the ability to chew on both sides of my mouth this morning when another tooth broke. What a mess. I have an appointment with the dentist at 4:00 pm today for another crown (that is another very personal economic hit). This is kind of like the economy at the moment. We are suffering through one problem and something else gets added. I have 5 articles (2 of them very short)  I think may be interesting relating to national and world thinking on interest rates, markets and recession thinking.

                The first article from Bloomberg dated 4/12/22 World Markets are Falling Again With Echoes of the 2018 Rout, discusses various watched indicators and what they are doing. Fed officials and comments on Fed Funds Rate increases, stocks and bond market changes, recession comments all add to a cacophony of noises and sounds some helpful most mainly noise. The article uses words like rout, economic retrenchment, hawkishness, stampede, fear, hunkering down, all designed to create tension, show action or just to jar the senses. You see such things in the daily news relating to most stories. I am afraid it is the current fad in news reporting in general and financial markets and reporting are no different. So, can we cut through some of the rhetoric, yes we can. For example, in the Bloomberg article referenced above there are two or three items you should look at. One, the Fed is staying the course with rate hikes. There is talk of 75 basis points (bp or .75%) increases from various sources. That is an indication that the Fed is more worried about inflation than recession which they have stated before and they are not as afraid of recession. They are hoping for no or a very mild recession which is possible. The economic and financial indicators are currently giving  very mixed messages and advisors and officials are having a hard time gaining helpful information from those messages. This is not unexpected or unusual. Officials and markets will be trying to discern a direction or an intensity or a trend from all the market and data signals. Don’t hang your hat on any one piece of information regardless of how loudly or strongly someone pushes it at this point.

                The second Bloomberg article dated 4/19/22, Junkiest Junk Bonds Flash a Warning Sign for the Economy, suggests the junk bond (very low credit worthiness) market, by its recent increase in costs of borrowing, is signaling that a recession is becoming more likely. Maybe yes and maybe…… yes. The article lists several indicators that are supporting what they think is more likely to be pointing to recession or at the very least, a significant economic slowdown (or retrenchment). A slowdown may or may not fall into a recession, there are some technical definitions that separate the two. Some consider a slowdown or retrenchment a very mild recession (negative growth in GDP and a few other indicators) but if you don’t have to use the recession word, especially as a Fed official, that is very good. The article lists several indicators that are pointing various directions including uncertainty caused by the war. Remember, markets don’t handle uncertainty well at all and tend to bounce and wiggle alarmingly when they are subjected to much of any uncertainty. They are currently being subjected to very large quantities of uncertainty. They will be very unsettled. Depending on when some news story is generated, the conclusions of the story may be way up or way down. It is more important to watch trends but the news will not generally do that. You will tend to get the Chicken Little report (the sky is falling, the sky is falling) rather than something measured. Try to look for the measured.

                The next article is from The Guardian. I don’t have a lot of experience with this particular rag. It bills itself as “the world’s leading liberal voice”. I am not certain exactly what that means but the article seems pretty good. They are discussing the International Monetary Fund (IMF) and some of its thinking and findings. The article is short but I think fairly informative. I would like to quote a couple of sections;

“The IMF also warns the war has exacerbated two tricky policy dilemmas, one facing central banks and one troubling finance ministers.

For central banks, such as the Bank of England and the Federal Reserve, the issue is how to tackle mounting cost of living crises without killing off still incomplete recoveries from the pandemic. That’s not going to be easy, as the IMF freely admits.

For finance ministers, such as Rishi Sunak, it is getting the balance right between protecting the most vulnerable while repairing the damage caused to the public finances by Covid-19 spending. The IMF understands the difficulties but warns against being too penny-pinching.”

The article also points out the global supply chain disruptions and suggests world markets are becoming more fragmented which they consider, not good. Germany is considered the big power in Europe and no one wants to remember the problem of a large powerful Germany with economic power (think WWII). One of the ideas of the European Union was and is to bind France and Germany (and the others) so closely together they can’t swing fists at each other. Supply chain problems makes it so economies and businesses stockpile resources and such which makes them less dependent on each other to some extent. The IMF is suggesting something similar about Russia and the war. The war is driving a wedge into positive relationships which were being created over the last 20 to 30 years between Russia and the European Union countries and creating economic disconnections which help drive nations apart. In positive times, the interlocking economies help reduce friction and give a reason to work together. Another reason several European countries are less vocal than others concerning the Ukraine / Russian conflict (like Great Britain who has its own oil supplies and other sources and is very vocal) is that Russian natural resources especially natural gas and oil supply a large percentage of European needs. That is part of what the IMF is referring to in its “supply chain” comments as have other world financial leaders done in the last several weeks. Moscow has the ability to be an unreliable supplier and many European nations are staring that big problem square in the face. A little economic blackmail can certainly be and likely will be part of Putin’s overall game plan for Eastern Europe.

                The last article is really 2 sources for the same information. I thought you might like to see the different reporting of the same information. BNN Bloomberg and The Hill reported on Fannie Mae’s  (the governmental housing arm) comments on recession. Fannie Mae is suggesting we will have a recession in 2023. You can see from the short articles. Quoting from the BNN Bloomberg article;

“Rising interest rates at the U.S. Federal Reserve will further slow an economy already weighed down by high inflation and the fallout from the Russian invasion of Ukraine, causing a “modest contraction” [recession] in the second half of 2023, according to Fannie Mae.”

Short and sweet. Expect to see more statements like this from various bank economists, quasi-governmental agencies, like Fannie Mae, and world economists. Whether its called a recession, economic slowdown, economic retrenchment or something else. Look for higher interest rates, slowing grow rate to negative growth rate (recession) or maybe, just hopefully, a cooling of the overheated economies and a return to more normal growth in housing and prices. One can and should hope for the best but prepare for something else.

 Greetings. It has been quite awhile since the last post but I felt there are some that might find an analysis of the current economic situation as it relates to a very fast paced changing world situation interesting and helpful. It has been some time since we had a shooting war, the Gulf War was the last one involving the United States. The current conflict with Russia and Ukraine will likely stay warm for a bit longer. Putin has not yet reached his objectives. He won't stop until he does. Putin will call the West's bluff on an open attack and push to reach his objectives. Biden and the NATO powers will not risk an all out shooting war at this point (or ever perhaps). Putin has shown he has no such fears. Tom Clancy in his book Red Storm Rising shows what the US military's World War III scenario looked like in the later 1980s. A good book and a good read. Some of the same conditions still apply. I have collected a few financial articles from leading news groups and put together some brief comments. The bottom line at this point is the US and world economy is in for a fairly rough ride over the next several months and may stretch out to a couple of years. Like the COVID pandemic the economic problems will likely drag on. 

I wrote the articles on the days shown and the news articles are from those days. Enjoy the read. Leave any comments and thoughts. Have a good day.

Written 3/2/2022

Global Bonds Extend Rally as War Curbs Pace of Rate-Hike Bets - BNN Bloomberg

Greetings,

                A new day, an increase in conflicts and more whipsawing of financial markets. Such is the life of a market watcher. If you have been closely following financial news (and regular news for that matter) you should have a very sore neck at this point. I hope you are feeling somewhat jaded with all the news, views and opinions swirling around at the moment. We have now had the State of the Union message with attendant power statements, major and minor threats and much noise including the continuing threat of spending trillions of dollars. The  attached Bloomberg article highlights the whipsaw nature of world turmoil. According to this article the Fed will now not raise Fed funds rates in March and likely any thoughts and plans should be scraped according to the article. I am afraid this is the nature of market watching. The pundits / reporters / news agencies tend to lurch from pillar to post with great speed. Remember, everything is short term in financial reporting regardless of what is said about forecasting and future planning. Any future plan will survive as long as short term situations don’t change (of course they always and constantly change). That is why you tend to see solutions being proposed and discarded with great rapidity.

                The underlying problem still exists. There is too much money in the system. I am afraid that war is one way of wringing out some excess funds but not very efficient and of course very painful. One can hope that the threat subsides soon. If so, look to see inflation become the #1 topic again and then the handwringing over Fed Funds rate hikes will quickly become the next short term, long solution.

                Just remember, long term proposals will be subject to short term criteria which will cause new long term proposals based on the current short term situation. No forecast survives today’s financial news. In the financial news business one uses the simplest of forecasting tools which is the straight line regression analysis or even easier (and quicker), pick a current point, pick a past point and draw a line to the future. Remember any past point is acceptable as long as it supports the current “group thinking”.

                The best plan is to stay back from the front line of financial news reporting. Let the pundits slug it out at the front. You and I can remain somewhat calmer and more reserved and enjoy much less stress if we don’t try to react to every “new” piece of information. In these situations slow and steady wins the race both in the fairy tale and real life.

Good luck.

Written 2/14/22

Inflation to exceed Fed’s 2% goal well into 2023, survey shows - BNN Bloomberg

https://www.reuters.com/business/finance/what-global-banks-forecast-fed-rate-hikes-2022-2022-02-11/

Greetings;

                Another 2 articles on the inflation front, markets and reactions. Things are getting very interesting (you remember what that key word means from last letter). The “very” modifier is a further definition of the key word, interesting. It means that the governmental agencies are now reacting. That is both good and bad. The politicians will attempt to minimize the importance of the various datum that is being generated by the numbers guys. You can see what form the politicians are initially likely to use in the statement from Pres. Biden in the Reuters article, 3^rd paragraph, when Biden says “we will make it through this challenge”. Expect to see more politicians weigh in on the themes of “we can do this and let’s all pull together and it isn’t as bad as it looks”. Watch for it, the noises, platitudes and pithy sayings should increase fairly soon. The various federal agencies, especially the Fed, will be trying to assure the politicians and the markets they can handle things. As it progresses and gets more involved (this will not likely be a short duration situation) the politicians will start to blame the Fed and call for more relief, help, etc. As I said it should be interesting. We haven’t seen this sort of financial mix/mash since 2008-9 in the beginning of the great recession. I don’t expect it to be as bad as that but it could be fairly rough.

                I am hoping things are more like the recession of 1997 or 2002 which were much more mild, relatively speaking, and were of fairly short duration. There are 2 basic types of recessions characterized by the letters “V” and “U”, the letters refer to the shape of the recession. The “V” is a fast falling in markets and things then a quick rebound, more of a blip that leaves markets gasping for breath and wondering just why they did a faceplant into the payment but getting up quickly and dusting themselves off (the markets tend to look around in this type of recession to see if anyone saw them fall, they look a bit guilty but carry on.) There will be commentary on what caused the fall. The “U” shaped recession is a bit more serious/difficult. The fall comes but the market faceplant is a bit more jarring and the markets may stay down on the pavement for a time. (Represented by the bottom of the “U” which may draw out over months as opposed to the “V” which may be quite short.) When the market gets up it is a bit more groggy and it will look around and wonder just what tripped them. As you would expect it can be quite a bit more jarring and damaging. (The recession of the early 80s was more “U” shaped as was the great recession of 2009 which was very “U” shaped. You remember how long it took to get out of the 2009 recession, that’s the long bottom of the “U”, more like |____| .)

                So, keep the faith, if not in the system in life in general. The Fed will be increasing rates, the politicians will become more involved and their voices more strident and shrill. Look for the blame game to start fairly soon. We must have a scapegoat and the politicians will indeed look for and find one, whether it is deserved or not. The Republicans will have one and the Democrats a different one. Oh yes, and I forgot, the talking heads will have much to say, most of it irrelevant but possibly entertaining in a sad sort of way. I will be interested to see how it impacts the Democrats massive spending plans. The diehard Democrats will want to push on with the spending which will make things worse by pumping more money into the already loose money policy and not allow the easy money to dry up. If they get the spending package through in most of its aspects look for inflation to remain for years not quarters or look for several quick, sharp recessions in a row for the next several years.

                Life is good when we remember that God, family and friends are the real value in this life and inflation can’t diminish the value of them. 

 

 

What is your risk level (part 4)

Government is designed not to lose & Risk summary

             Now think about a typical government department or function. How is success measured for government functions? What constitutes doing a good job? How does one do a great job? What is likely to happen if an individual tries something new and fails? As you think about government functions are they graded on how much money is made or is it on how much money is not lost. I believe that for government functions the goal is not to make money but to not lose it. A typical government function is not graded on succeeding but on not failing. It tends to not matter how many things go right but how many things go wrong. One failure can wipe out a multitude of successes. Think of government as a defensive function not an offensive innovation. If one is trying to win a battle are all the soldiers given shields (government) or are they given swords (private sector)? The army with swords may lose some men but will likely win the battle. The army with shields will not have the ability to win, only possibly not to lose. In government there will not likely be innovation, improvement, or  profit motivations. There will be support for status quo, minimization of failures, and entrenchment (defensive positions). I believe governmental officials tend not to be rewarded for taking risks (swords) but for not failing (shields).

             This underlying philosophy has serious implications. In general, innovation, new products and wealth generation come from the private sector not from government. Why, because innovation generally involves risk taking and the very nature of government is to avoid risks.

             As a general review, we discussed risk averse and risk tolerance and some ideas that show that the magnitude of the impact of an outcome can affect or view of the results. Many small impacts may not bother us as much as a few large impacts, especially negative changes. We looked at some evidence which supports the observed phenomena of the diminished capacity of the adolescent male brain as it approaches the 12 to 13 age range (which seems to reverse itself in most cases by the early 20s). The risk  that one does not know they don’t know can have significant ramifications. We looked at some examples of risk as it applies to specific outcomes and risk as it applies to ranges of activities or outcomes. We observed the distinction between private sector and public sector (governmental) risk taking and its possible impact.

            It was suggested that risk tolerance or avoidance could be used in character and story line development. Probability, the risks of uncertainty and of the unknown unknown could also apply to character and story line plots but may also be applied to world building and back story development. Such risks can be used to shape societies, cultures and even species or races. Can societies change their risk perception? Does a society by its nature lock in risk levels or understandings so that the individual must struggle to break free of norms expected behavior? Are risk traits inherited or learned, by an individual,  group or race. Does environment effect risk perception and action?

             Let me know your thoughts and ideas.