Oct 142014
 
 October 14, 2014  Posted by at 8:39 pm Finance Tagged with: , , , ,


Dorothea Lange Drought-stricken farmer and family near Muskogee, OK Aug 1939

With the US mid-term elections just 3 weeks away, of course there won’t be any sudden interest rate hikes or other major moves directly traceable to, or even remotely suspected to be from, the Federal Reserve and its Wall Street and/or global central bank chums. But I’ll explain once more why I think those hikes are coming – just not before November 4 – on the back of a Bloomberg piece today.

Mark October 26 as well, by the way: ECB stress test results and Ukraine elections without east Ukraine. And if you’re interested, you can read back what I said before about those rate hikes in This Is Why The Fed Will Raise Interest Rates (Aug 29) and Why The Fed WILL Raise Rates (Sep 30).

Actually, there’s two Bloomberg pieces today that are relevant to my point. Here’s the first:

Too-Big-to-Fail Banks Face Up to $870 Billion Capital Gap

Too big to fail is likely to prove a costly epithet for the world’s biggest banks as regulators demand they increase debt securities to cover losses should they collapse. The shortfall facing lenders from JPMorgan to HSBC could be as much as $870 billion, according to estimates from AllianceBernstein, or as little as $237 billion forecast by Barclays. The range is so wide because proposals from the Financial Stability Board outline various possibilities for the amount lenders need to have available as a portion of risk-weighted assets.

With those holdings in excess of $21 trillion at the lenders most directly affected, small changes to assumptions translate into big numbers. “The direction is clear and it is clear that we are talking about huge amounts,” said Emil Petrov at Nomura in London. “Regulatory timelines will stretch far into the future but how quickly will the market demand full compliance?”

A hard question to answer given that the Fed et al have been the market for a long time now. Them and the HFT robots. Webster’s should really redefine the term markets. But then, I understand there’s been some pick-up from ultra-low volumes recently as the VIX rises with human nerves.

The FSB wants to limit the damage the collapse of a major bank would inflict on the world economy by forcing them to hold debt that can be written down to help recapitalize an insolvent lender. For senior bonds to suffer losses under present rules the institution has to enter bankruptcy, a move that would inflict huge damage on the financial system worldwide if it happened to a global bank. That’s what happened when Lehman collapsed in 2008.

The FSB, which consists of regulators and central bankers from around the world, will present its draft rules to a G-20 summit in Brisbane, Australia, next month. Its proposals call for 27 of the world’s largest banks to hold loss-absorbing debt and equity equivalent to 16% to 20% of their risk-weighted assets to take losses in a failure …

Under the plans, these lenders will also have to meet buffer rules set by the Basel Committee on Banking Supervision, another group of global regulators. These can amount to a further 5% of risk-weighted assets, taking banks’ requirements to as much as 25% of holdings.

All the numbers and percentages don’t matter much, because they could all just as well have been invented on the spot. What makes this piece, and those ECB stress test results, relevant, is that they point out the how big banks are still far from healthy, no matter the profits and bonuses they report and dole out. No surprise there if you’ve been paying attention the past decade. No amount of free money will ever nurse them back to health. But it can keep them slugging along, replete with lots of green goo, empty sockets and tombstones.

It gets more interesting in the next bit, where you need to read between the lines a little. I took the liberty of bolding the juiciest bites:

No Stock Salvation Seen in Bank Results as VIX Surges

Options traders are skeptical this week’s bank earnings will deliver calming news to a stock market enduring its worst losses in two years. U.S. stocks have fallen for the past three days on concerns about global growth, the future of interest rates and the spread of Ebola. With companies from JPMorgan to Goldman Sachs and Bank of America scheduled to report this week, demand for bearish options on the largest U.S. financial firms has increased to the highest since May 2013.

Even though banks have escaped the worst losses in the recent selloff, the companies will struggle to boost profits if the Federal Reserve keeps interest rates near zero. Analyst projections tracked by Bloomberg show financial companies in the S&P 500 Index increased earnings 3.1% in the third quarter and 1.6% in the fourth. “There’s an anticipation that a significant percentage of earnings are going to lower forward guidance relatively significantly, including some of the big banks,” Jeff Sica at Sica Wealth Management said by phone.

“That’s going to have a very negative impact on the stock market.” JPMorgan, Citigroup and Wells Fargo are scheduled to provide quarterly results this morning. Bank of America, Goldman Sachs and Morgan Stanley report later in the week. Low interest rates have crimped lending profits for banks, which benefit from higher loan yields. Net interest margins, the difference between what a firm pays in deposits and charges for loans, were a record-low 3.1% in the second quarter…

Fed Vice Chairman Stanley Fischer said during the weekend that U.S. rate increases could be delayed by slowing growth elsewhere. The central bank should be “exceptionally patient” in adjusting monetary policy, Chicago Fed President Charles Evans said yesterday.

Wait, that’s not what Fisher implied, at least not as MarketWatch reported it:

Fed’s Fischer Says Rate Hike Won’t Damage Global Economy

The Federal Reserve’s eventual rate increase, the first since 2006, will not damage the global economy, Federal Reserve Vice Chairman Stanley Fischer said on Saturday. While there could be “further bouts of volatility” in international markets when the Fed first hikes, “the normalization of our policy should prove manageable for the emerging market economies,” Fischer said in a speech at the IMF’s annual meeting.

[..] Since last year, Fischer said, the Fed has “done everything we can, within limits of forecast uncertainty, to prepare market participants for what lies ahead.” The Fed has been as clear as it can be about the future course of its policy course, and markets understand, Fischer said. “We think, looking at market interest rates, that their understanding of what we intend to do is roughly correct … ”

There’s a veiled message in there that’s very different from Chuck Evans’ “The central bank should be “exceptionally patient” in adjusting monetary policy.” Fisher says it won’t make any difference, because everybody already knows what will come. Which is a load of male bovine, because many of the emerging nations that are neck deep in dollar denominated debt have nowhere to turn. And besides, the Fed doesn’t serve market participants, or the real economy, or Americans, and certainly not enmerging markets, The Fed serves banks. Still, for now the confusing messages work miracles (we return to that 2nd Bloomberg piece):

Federal fund futures show the likelihood of a September 2015 rate increase fell to 46%, from 56% on Oct. 10, and 67% two months ago, according to data compiled by Bloomberg.

Wow, that’s a lot of behinds risking a severe burn. You better hope your pension fund manager is just a tad less complacent.

“If you get rates rising, you can price that into loans,” Peter Sorrentino at Huntington Asset Advisors, said. “We haven’t seen much shift in the yield curve, even though people thought this would be the year for it because of the Fed easing on QE. There’s a disappointment that we haven’t seen better margin growth this year.”

That’s all you need to know. Wall Street banks are still ‘down on their luck’ (I know I’m funny), they’re no longer making real money with interest rates scraping zero, and the answers to their ‘sorrows’ are right there in the hands of the people they own: the Fed. There have been a few years of free cash and zero rates which were profitable, but that has put all market parties in the same boat, so the real money, nay, the only money, is now in being on the other side of that boat, that bet, that trade. The trade, and the emotion, has shifted singnificantly. 90º, 180º, take your pick.

Increased volatility will boost trading revenues for the financials, according to Arjun Mehra of JPMorgan. [..] “For the first time in over a year, the largest U.S. banks are expected to get a boost from their trading business, which stands in stark contrast to press reports heading into the second quarter that called for the death of trading,” Mehra wrote. The VIX, a gauge of S&P 500 derivatives prices, jumped 41% last quarter for its biggest increase in three years. Bank of America Merrill Lynch’s MOVE Index, which measures implied volatility on U.S. Treasuries, climbed 22%.

Everyone’s gotten complacent, everyone follows Yellen’s lips, everyone thinks the same. There’s no money in that, and Wall Street needs money, badly. The money is now in volatility, not the lack thereof. So we will have volatility, it’s already rising.

“There are two things banks need to work: higher rates and credit expansion,” Mark Freeman at Westwood Holdings said. “Just as the outlook for growth is getting called into question, the outlook for higher rates is being called into question, and that’s been a headwind for the group as of late.”

The higher rates will be there, and not as late as September 2015. No profit in that. Credit expansion comes to an end, in a sense, with the tapering of QE. But guess what? A significantly higher dollar works the exact same way. It expands ‘credit’ in all – or most – other currencies, and in commodities.

Understand the make-up of the system, the role of the Fed and other central banks, and their relationship with the major commercial/investment banks, and it becomes obvious what their next moves will – must – be. The beast must be Fed.

Home Forums The Fed Must Feed The Beast

This topic contains 6 replies, has 6 voices, and was last updated by  Professorlocknload 5 years ago.

Viewing 7 posts - 1 through 7 (of 7 total)
  • Author
    Posts
  • #15893

    Dorothea Lange Drought-stricken farmer and family near Muskogee, OK Aug 1939 With the US mid-term elections just 3 weeks away, of course there won’t b
    [See the full post at: The Fed Must Feed The Beast]

    #15894

    bluebird
    Participant

    repost from previous topic…

    @ Diogenes Shrugged
    This is a great link to see which posts have an updated comment section. There is no need to check each thread because this link shows the date and the poster.

    Forum

    #15895

    Useful indeed, bluebird, it’s right up there in the banner menu. With platforms, and the specific themes developed for them, you get all kinds of things you wouldn’t choose, but are stuck with anyway.

    #15896

    rapier
    Participant

    The Feds tools are money and credit so they think they can solve all problems buy using those tools. It’s the old, well not so old, Law of Instrument. “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”

    https://en.wikipedia.org/wiki/Law_of_the_instrument

    It hardly needs saying but Fed Heads are economists and two generations of them have been taught that ‘monetary policy’ can fix most ills. Even if they didn’t quite believe it in 1978 the congress told them they could and ordered them make a perfect economy with the Humphrey Hawkins Full Employment Act.

    https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act

    The source of the so called dual mandate. Why everyone forgets a stable dollar and balanced trade and budgets escapes me. Well mandates, dual or quintuple, do not mean the results will be delivered for as we know monetary policy cannot deliver all that economic goodness. However economists when told they were gods of the economy soon grew to love the idea and why not. Greenspan and Bernake grabed the reins and became demigods. What’s not to like, if your an economist?

    #15897

    Diogenes Shrugged
    Participant

    bluebird: Thank you for that. I’ve perused this website at length and found some of it to be cumbersome and of limited utility. That includes the roster referenced by your link. What I’m accustomed to is much more user friendly: something more resembling the daily comments here, or the conversations at ZeroHedge. I will point out that you felt it necessary to post your message twice. That shouldn’t be necessary. I’m probably not the only one coming here who feels this way, but then again, maybe I am. Anyway, I’m over it now, and will continue to belly-ache about other things.

    The Trivium4TW: Thank you for your long rejoinders a day or two ago. I’m still trying to find time to wade through them. In the mean time, I thought the following video did an excellent job of explaining the etiology of present day bankster-ism and fascist politicial-ism. (If everybody else these days can make up words, why not me too.)

    #15898

    jmackenzie
    Participant

    The FED feeding the Beast only serves to limit the damage on the very shortest of horizons.

    The boat may have tipped to an immense and highly leveraged short positions via Futures, Options, Derivatives – any and all attempts to further tips these boats merely serves to discredit these efforts.

    Not that they will not doing something, anything absurd… they most certainly will make every effort, but it will be of an even shorter duration.

    They are very quickly losing credibility with Marker participants and given Fischer appears to owning the bullhorn while Yellen pretends to be carefully analyzing the “Data”… the entire charade will be unmasked further by Q3 EPS which will be beyond dreadful, the stronger DX will be but a fraction of the real structural issues.

    At this point all that is left is massive infrastructure programs for us and dollars to dimes or dollars to quin/quad multiples….

    We shall see.

    #15899

    Professorlocknload
    Participant

    “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” James Carville

    “Even the Fed” P. l’n’l

    Is the Fed bigger than all the world’s market players? Or is it swimming necked? Stay tuned.

Viewing 7 posts - 1 through 7 (of 7 total)

You must be logged in to reply to this topic.