Is the Bank Crisis Already Over?

Taking the path of least resistance eventually leads to disastrous places.  Like the Alexandria Hotel in Los Angeles, circa 1990s, these are places that are best to be avoided.  Still, some people, after consistently choosing the easier and softer way, ended up there, going mad, in their SRO unit.

The same holds true for monetary policy.  Terminally intelligent policies, which favor short-term expediency, have the effect of layering society up with an abundance of long-term mistakes.  Intervening in credit markets to suppress interest rates via central bank asset purchase schemes is not without consequences.

What’s more, once set in motion these consequences cannot be readily undone.  The booms of plentiful credit must always be followed by the busts of unserviceable debt.  There’s no way around it.

Over time the easier and softer way becomes fraught with pain, upset, and turmoil.  Debt problems that could have been addressed with hard work and perseverance become all consuming.  The debt pile becomes too mega. Continue reading

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Will You Play It Fast And Loose?

“How should I play that one, Bert?  Play it safe?  That’s the way you always told me to play it: safe… play the percentage.  Well, here we go: fast and loose.  One ball, corner pocket.  Yeah, percentage players die broke, too, don’t they, Bert?”

– Fast Eddie Felson, The Hustler

QT2 Master Plan

Stopping the excess is always much harder than starting it.  But sometimes it must be done.  And done all the way.  Half measures avail nothing.

On June 1, 2022, Fed Chair Jay Powell commenced Quantitative Tightening (QT) Part 2.  “Brace yourself,” was the advice of JPMorgan Chase CEO, Jamie Dimon.  Were his banker cohorts listening?

The master plan for QT2 was for the Fed to reduce its holdings of Treasury notes and mortgage-backed securities by a combined $47.5 billion per month for the first three months (July thru August 2022).  Then, by September 2022, the Fed would start reducing its balance sheet by a total amount of $95 billion a month (i.e., $60 billion in Treasuries notes and $35 billion in mortgage-backed securities).

Wells Fargo Investment Institute took the Fed at its word and even projected that its balance sheet could shrink by almost $1.5 trillion by the end of 2023.  Taking it down to around $7.5 trillion. Continue reading

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Occupy Wall Street Redux

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

– John Steinbeck, The Grapes of Wrath

Negative Carry

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

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

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

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

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What Comes After the Great Liquidation

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

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

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

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

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

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