#Treasury Bond Repo Rates

[siliconpalms]

Navigating the Complexities of US Treasury Bond Repo Rates in the Era of a $34 Trillion National Debt

In an era where the U.S. national debt has soared to an unprecedented $34 trillion, understanding the intricacies of the Treasury bond repo rate becomes crucial for astute investors. This blog post aims to shed light on the potential risks and indicators to watch in this complex financial landscape, particularly as we move further into 2024. Understanding Repo Rates in the Context of…

[elytsbranding]

Arthur Hayes: Are We About to See a Stealth Money Printer Surge?

Arthur Hayes, co-founder of 100x and a notable crypto enthusiast, recently tackled the financial mess Japanese banks are in with his article "Shikata Ga Nai." Inspired by the phrase "it cannot be helped," Hayes links Japan's banking troubles to the inevitable surge in money printing, known as the "brrrr" of the money printer.

Japanese banks, trapped by low domestic yields, have long relied on the dollar-yen carry trade. They borrow yen at near-zero rates to invest in higher-yielding U.S. Treasury bonds (USTs). This once-profitable strategy has blown up in their faces with the Fed’s aggressive rate hikes to fight inflation.

Enter the Bank of Japan (BOJ) and the Fed's Foreign and International Monetary Authorities (FIMA) repo facility. To prevent a sell-off that would spike UST yields and disrupt global markets, the BOJ is likely to buy these bonds and use the FIMA repo facility. This allows central banks to pledge USTs in exchange for freshly printed dollars, increasing the global dollar supply.

This maneuver sidesteps the free market, preventing a bond market collapse from a sudden UST influx. However, it comes at a price: more dollars in circulation, fueling inflation—the hallmark of the "brrrr" scenario.

For the Fed, it's about stability. By providing liquidity to the BOJ, it ensures USTs aren't dumped, which would drive up yields and make U.S. borrowing more expensive. Yet, this also devalues the currency, leading to inflationary pressures.

In an election year, with high political stakes, Treasury Secretary Janet Yellen and the Fed will likely prioritize market stability over inflation concerns. This environment favors Bitcoin and other cryptocurrencies, which thrive on fiat currency weakness. As money printers go "brrrr," cryptocurrencies' scarcity and value proposition become more attractive, potentially driving prices higher.

[futurevalueofficial]

Money Market Mutual Funds: What Are They?

Money Market Mutual Funds are a type of investment plan that often makes short-term (sometimes a few hours or days) investments.

Corporations typically use the money market, a short-term instrument, to stash surplus money for a few days or weeks.

Private investors, governments, and other small entities can quickly redeem cash thanks to this market. It often offers higher interest rates than a savings account or FD.

The money market is very safe, so investors don’t have to worry about losing their money.

The money market is frequently regarded as low-risk. There is also no term or interest rate risk associated with these debt products. 

Mutual funds for the money market

1. These mutual funds make money market investments. These are less risky mutual funds for short terms. Professionals handle them.

2. Mutual funds focused on the money market invest in a diverse range of high-quality, short-term securities.

3. Excellent liquidity is one of the defining traits. Investors can easily buy or sell money market mutual fund shares at their current NAV on any business day. Therefore, They are the perfect option for people who need to access their assets immediately.

4. Money market mutual funds are tax-efficient for some investors because the income they generate is often exempt from local and state taxes. Investors should speak with a tax professional as different investors may have different tax ramifications.

One should review the funds’ historical performance and returns before investing.

You can invest in the top money market mutual funds with the help of Future Value. 

The Workings of a Money Market Fund

Money market funds function similarly to regular mutual funds. They are required to abide by the rules established by financial regulators and offer redeemable units or shares to investors.

A money market fund may make investments in the following categories of debt-based financial products:

Certificates of deposit (CDs)—bank-issued savings certificates with short-term maturity

Bankers’ Acceptances (BA)—short-term debt guaranteed by a commercial bank

U.S. Treasuries—short-term government debt issues

Repurchase agreements (Repo)—short-term government securities

Commercial paper—unsecured short-term corporate debt

Because the profits from these instruments are reliant on the prevailing market interest rates, interest rates also affect the money market funds’ overall results.

The benefits and drawbacks of money market funds

Money market funds compete with other comparable investment options, including enhanced cash funds, ultrashort bond funds, and bank money market accounts. These investment options strive for higher returns while potentially investing in a larger range of assets.

A money market fund’s main goal is to give investors a safe way to use smaller investment amounts to purchase safe, highly liquid, debt-based assets that are similar to cash. Money market funds are considered low-risk, low-return investments in the world of mutual fund-like products.

For the near term, a lot of investors choose to stash large sums of money in these funds. Money market funds, however, are inappropriate for long-term investing objectives, such as retirement planning. They don’t give much in the way of capital appreciation, which is why.

Investors find money market funds appealing since there are no loads associated with them—neither entry nor exit fees. Investing in municipal assets that are exempt from federal taxes (and occasionally state taxes as well) enables many funds to provide investors with tax advantages.

Pros

Very low-risk

Highly liquid

Better returns than bank accounts

Cons

Not FDIC-insured

No capital appreciation

Sensitive to interest rate fluctuations, monetary policy

It’s crucial to remember that federal deposit insurance offered by the FDIC does not cover money market funds; however, it does cover money market deposit accounts, online savings accounts, and certificates of deposit.10. Money market funds are governed by the Investment Company Act of 1940, just like other investment products.

An active investor may want to invest independently in the many available instruments if they have the time and expertise to search for the best short-term debt instruments that offer the best interest rates at the risk levels they are comfortable with. However, a less experienced investor can decide to use money market funds and leave the work of managing the money to the fund operators.

Although fund shareholders usually have unlimited access to their money, there can be a cap on how many times they can take it out in a given time frame. https://futurevalue.in/money-market-fund/

[stockmarketanalysis]

Exploring the Dynamics and Significance of the Money Market

Introduction:

The money market stands as a pivotal segment of the global financial system, facilitating the short-term borrowing and lending of funds among financial institutions, corporations, governments, and central banks. Characterized by its liquidity, safety, and short maturity periods, the money market plays a crucial role in shaping interest rates, managing liquidity, and supporting economic stability. This article provides an in-depth exploration of the money market, examining its functions, instruments, participants, and significance in the broader financial landscape.

Understanding the Money Market:

The money market encompasses a decentralized network of financial instruments and institutions dedicated to short-term borrowing and lending. Unlike the capital market, which deals with long-term financing through equities and bonds, the money market focuses on transactions with maturities typically ranging from overnight to one year. Key features of the money market include high liquidity, low credit risk, and minimal capital investment requirements.

Functions of the Money Market:

The money market serves several essential functions within the financial system:

Liquidity Management: Financial institutions utilize the money market to manage short-term liquidity needs efficiently. By borrowing or lending funds in the money market, banks can optimize their cash reserves, ensuring they meet regulatory requirements and customer demands.

Interest Rate Determination: The money market influences short-term interest rates, serving as a benchmark for broader financial markets. Central banks often employ open market operations in the money market to implement monetary policy objectives, influencing interest rates to achieve price stability and economic growth.

Financing Government Operations: Governments raise short-term funds through the money market to cover temporary budget deficits or manage cash flow fluctuations. Treasury bills (T-bills) are among the primary instruments used for government financing in the money market.

Investment Opportunities: Investors seeking low-risk, short-term investment options turn to the money market for opportunities to earn interest on surplus funds. Money market instruments provide a secure avenue for parking cash temporarily while generating returns.

Instruments of the Money Market:

The money market offers a diverse array of financial instruments tailored to meet the short-term financing and investment needs of market participants. Some of the key instruments include:

Treasury Bills (T-bills): Issued by governments, T-bills are short-term debt securities with maturities typically ranging from a few days to one year. T-bills are sold at a discount to face value and redeemed at par upon maturity, providing investors with a yield based on the price differential.

Commercial Paper: Issued by corporations with strong credit ratings, commercial paper represents unsecured promissory notes issued to finance short-term funding needs. Commercial paper typically matures within 270 days and offers higher yields compared to T-bills.

Certificates of Deposit (CDs): Offered by banks, CDs are time deposits with fixed maturities and predetermined interest rates. CDs provide investors with a secure means of earning interest on their savings, with varying maturity options to suit different investment horizons.

Repurchase Agreements (Repos): Repos involve the sale of securities with an agreement to repurchase them at a specified price and date in the future. Repos allow financial institutions to obtain short-term funding by using securities as collateral.

Participants in the Money Market:

The money market attracts a diverse range of participants, including:

Commercial Banks: Banks play a central role in the money market, engaging in borrowing and lending activities to manage liquidity and meet regulatory requirements.

Central Banks: Central banks intervene in the money market through open market operations, adjusting interest rates and liquidity levels to achieve monetary policy objectives.

Corporations: Corporations utilize the money market to raise short-term funds through the issuance of commercial paper or participation in repo transactions.

Government Entities: Governments participate in the money market to finance budget deficits, manage cash flows, and implement monetary policy objectives.

Money Market Funds: Money market funds pool investors' funds to invest in short-term money market instruments, providing liquidity and stability while generating modest returns.

Significance of the Money Market:

The money market plays a vital role in ensuring the efficient functioning of the broader financial system. By providing a platform for short-term borrowing and lending, the money market promotes liquidity, stability, and interest rate transparency. Moreover, the money market serves as a crucial conduit for monetary policy transmission, enabling central banks to influence economic conditions through interest rate adjustments and liquidity injections.

Conclusion:

In conclusion, the money market serves as a cornerstone of the global financial system, facilitating short-term borrowing and lending activities among financial institutions, corporations, governments, and investors. With its emphasis on liquidity, safety, and short-term maturity, the money market plays a vital role in managing liquidity, determining interest rates, and supporting economic stability. By providing a range of instruments and opportunities for participants to manage cash flows, invest surplus funds, and implement monetary policy objectives, the money market remains a critical component of the financial infrastructure, contributing to the smooth functioning of economies worldwide.

[anuradha334]

What Influences Your Bank FD Rates?

As an investor aiming to park hard-earned savings into bank fixed deposits for stable returns, the interest income earned on them forms a pivotal factor. However, have you noticed FD rates vary across banks and shift intermittently over periods, even for similar tenures? 

This begets the key question – what influences the interest level offered on retail fixed deposits by commercial banks? Are FD rates determined in silos or swayed by a set of macroeconomic policies and market variables instead? As we analyze further, the formulation of lucrative FD interest hinges on multiple interconnected economic factors.

RBI's Evolving Monetary Policy Stance 

The Reserve Bank of India (RBI) periodically reviews economic growth, inflation trajectory, manufacturing health, credit off-take, currency stability, etc. Based on its assessment of the economy's health vis-à-vis objectives, RBI governs interest rates and system liquidity via tools like Repo Rate, Cash Reserve Ratio (CRR), Open Market Operations (OMO), etc. 

Banks' funding costs decline when RBI reduces prevailing interest rates, enabling them to advance credits at lower interest cost. Banks also lower fixed deposit rates across products, including FDs, to safeguard profit margins. Conversely, a rising interest rate regime makes access to money costlier for banks. This necessitates aggressive deposit mobilization at optimal interest cost to fund credit growth ambitions profitably without margin pressures. Hence, the RBI's accommodative or hawkish monetary stance guides domestic interest rate movements.

Current Inflation Outlook

As rising retail inflation erodes the purchasing value of money parked in low-risk avenues like FDs over time, investors expect suitable compensation by higher returns to offset this steady loss of money value. Particularly in high inflation, banks need to proactively increase FD rates to negate price rise pressures that risk customers withdrawing money into better inflation-indexed financial products or even physical assets like gold. 

Thus, the prevailing inflation rate and outlook are essential for banks to re-evaluate and revise FD interest rates periodically.

Liquidity Scenario with Banks 

During periods of surplus liquidity conditions across the banking system, funding costs are relatively lower, owing to which banks can continue advancing loans profitably without overdependence on deposits. Hence, pressure to attract investors via an upward revision in deposit rates remains lower, allowing banks to persist with existing FD rates or even afford marginal cuts.

However, in periods of liquidity tightness, higher funding costs, and stiffer competition to garner deposits, banks must announce attractive upward revisions in FD rates to draw investors and lower dependence on costlier sources, thereby protecting profit margins.

Credit Growth Momentum  

Period of solid economic expansion also reflects in higher appetite and lending towards automobile purchases, housing loans, small business funding etc, across banking channels. To fund this rising credit demand profitably without liquidity pressures, banks necessitate buoyant growth in the quantum of deposits mobilized using appropriate incentives like hiked FD rates. However, slim credit off-take offers flexibility to banks to reset rates pragmatically. 

Movement in Bond Yields

Besides the above factors, the yields offered on government-issued debt instruments like dated securities and treasury bills also sway bank FD rates formulated to divert investor savings. Commercial banks re-evaluate and hike FD interest rates to remain attractive avenues for parking surplus money for similar tenure when central and state bonds provide relatively higher returns. 

Conclusion

Thus, along with RBI's monetary stance, metrics like liquidity scenario, credit behavior, and yields on competing avenues collectively guide the formulation of FD interest rates aimed at investor stickiness. Evaluating these interplays provides perspective on the economic rationale driving the inherent rhythm in rate movements rather than appearing random!

[dayofbanks]

Money Markets, Bond Markets, and Mortgage Markets.

Capital markets consist of money market, bond market, mortgage markets, stock market, spot or cash markets, derivatives markets, foreign exchange and interbank markets. Money market instruments consist of Treasury bills, federal agency notes, certificates of deposit (CD), commercial papers, bankers’ acceptances, repurchase agreements (repos), among others. The securities market consists of primary and secondary markets. The primary market works with new issues whereas the secondary market is meant for trading of existing issues. Capital market instruments include Treasury notes, Treasury bonds, municipal bonds, corporate bonds. Corporate bonds consist of zero coupon bonds, floating rate bonds, and convertible bonds. Bond ratings are assigned by credit rating agencies (e.g., S&P, Moody’s, etc.). The major debt issued in the international market includes euro banknotes, Eurobonds, euro medium-term notes, global and foreign bonds. The three major groups in bond market are issuers, underwriters, and purchasers. Mortgage-backed securities (MBS) are created through the process of securitization. The different types of MBS include pass-through securities and collateralized mortgage obligations.

Learn more about Money Markets, Bond Markets, and Mortgage Markets related to the publication - Strategies of Banks and Other Financial Institutions: Theories and Cases.

[thesecrettimes]

Your Money: Fingers crossed, rate hikes are over

By Joydeep Sen The last time the Reserve Bank of India (RBI) increased the repo rate was on February 8, 2023, when it raised it from 6.25% to 6.5%. In the latest policy review on April 6, 2023, there was a pause on rate hikes and the repo rate remains at 6.5%. The next review is scheduled for June 8, 2023. The expectation is that it will not tinker with the rate. However, apart from rate action per se, there is a ‘stance’ to policy rate decisions. There are three usual approaches: hawkish, neutral and dovish. Hawkish stance means bias towards increasing interest rates to control inflation and dovish means bias towards cutting rates to support the growth of the economy. The stance adopted by the MPC is ‘withdrawal of accommodation’. This is possibly somewhere between neutral and hawkish. Also read: Planning to deposit or exchange Rs 2000 banknotes? Here’s what you must know In the forthcoming policy review, there is a case for change of stance from ‘withdrawal of accommodation’ to neutral. The rationale is, the backdrop in which the stance was changed from neutral, has changed. The stance was changed in May 2022, when the RBI MPC started hiking the repo rate from 4%. The repo rate has moved up to 6.5%. On the other hand, inflation has eased. CPI inflation in April 2023 was 4.7%, which is much lower than earlier and within the RBI tolerance band of 4% to 6%. RBI’s projection of CPI inflation for 2023-24 is 5.2% and that for 2024-25 is 4.4%. Given that inflation expectation is very much in the tolerance band and nearer to the target of 4%, we can come back to a neutral stance. Investment portfolio What does it mean for you and me? For your investment portfolio, interest rates not going up is a positive. Money being available is a positive for the equity market. It is a positive for the bond market as well, because interest rates and bond prices move inversely. When interest rates are not moving up, bond prices or NAVs of bond funds are not coming down. There are other positives as well. When interest rates move up, your housing loan EMIs move up in tandem. For quite some time, banks have been disbursing floating rate home loans, not fixed rate ones. The rate on a fixed rate home loan would have been much on the higher side, which is why banks are not even displaying those numbers. Once a bank gives out a fixed rate loan, it is unprotected on its margin if interest rates move up over that long period of time. Floating rate loans are benchmarked to an external rate, called external benchmark linked rate. The reset of a floating rate loan, when interest rates are moving up, happens instantly, as it is either the RBI repo rate or a Treasury Bill traded level in the market. Also read: Best Mid Cap Mutual Funds in 1 year: Top-performing 8 schemes with 19% to 28% returns (June 2023) It is expected that the RBI rate hike cycle is over and home loan borrowers can be comfortable to that extent, after bearing the hit over the last one year or so. Having said that, if and when there is change of stance from the RBI MPC from ‘withdrawal of accommodation’ to neutral, borrowers can heave a sigh of relief. The writer is a corporate trainer and an author Read the full article

[defiledtomb]

The US market is fucking terrifying.

[apas-95]

Good news for fans of hockey-stick graphs, bad news for anyone who cares about the global economy not crashing:

Banks and money market funds are parking an exponentially growing amount of cash - nearing 1 trillion dollars - in a Federal Reserve program which basically acts to ‘absorb’ excess cash quickly. The program pays interest (a ‘whopping’ 0.05%) for reasons related to keeping some other important financial systems alive.

At the same time, very safe investments are few and far between right now, because inflation is so high that long-term bonds actually lose you money. The market is full of way too much cash right now, and there are no good investments - so why not just take the 0.05% from this Fed program? Because of this, there’s way less demand for US treasuries, which give a worse rate.

The ‘way too much cash’ comes, in part, from the 120 billion dollar monthly cash injections that the Fed has been doing for more than a year now - with the US Treasury needing to dump a few hundreds of billions of dollars into the market by the end of this month, to satisfy its debt limits.

Experts are saying the Fed might need to stop buying assets, and raise interest rates - but this could cause a collapse, due to insane levels of stock over-valuation and ‘zombie companies’, who can only survive from the basically free credit, causing a domino effect. But, if the Fed doesn’t, and keeps flooding the market, it’s just inflating a bubble that’ll eventually burst.

Basically, if you remember the effects of the housing bubble: this is an everything-bubble, and there’s not really any way out of it. 2020 has been the kick on the door that’s started to collapse the whole rotting house of global imperialism - welcome to the beginnings of the final crisis of capitalism!

https://www.reuters.com/business/finance/how-excess-cash-is-playing-out-us-reverse-repo-money-markets-2021-07-02/

https://www.reuters.com/article/us-usa-fed-reverse-repo-idUSKCN2D62QX 

https://www.marketwatch.com/story/fed-sees-record-756-billion-demand-for-reverse-repo-program-expect-it-to-hit-1-trillion-say-rates-strategists-11623961989

https://www.marketwatch.com/story/why-demand-for-feds-reverse-repo-facility-is-surging-again-11621904689 

https://www.wsj.com/articles/derbys-take-fed-is-fine-with-reverse-repos-nearing-half-a-trillion-11623144602

https://www.wsj.com/articles/fed-reverse-repos-surge-to-new-record-of-756-billion-after-rate-tweak-11623955198 

https://www.wsj.com/articles/credit-suisses-zoltan-warns-of-trouble-ahead-in-money-markets-11625391002

[tim-cahyanto-bct]

Wider Implications

Though this is a mere studio project, I think the scope and problems that we are addressing and attempting to solve are very relevant and important. As someone involved in the cryptocurrency and wider finance space, and as someone wanting to buy a house at some point in my life, the idea I came up with was designed for someone like me.

With the stability of the financial economy falling under increasingly critical scrutiny, changes need to be made.

Just one example being the exuberant amount of money the US Federal Reserve has been printing to keep the economy afloat throughout the Covid pandemic.

https://www.somagnews.com/9-trillion-story-22-of-us-dollars-printed-in-2020/

This has led to much speculation of an approaching liquidity crisis as the repo markets demonstrate an astounding imbalance of collateral to cash. This due to quantitative easing (AKA printing money) which essentially just means that they repurchase government bonds from banks to flood the markets with cash. This however creates the problem that we're seeing now, not enough collateral (primarily government bonds in this case) in the system to match the supply of cash. Just in the past week, we saw record highs of reverse repos

https://www.msn.com/en-us/money/markets/fed-reverse-repo-facility-sees-record-244853-billion-of-overnight-demand-from-wall-street-awash-in-cash/ar-AAKsunN

The already low overnight repo interest rates at times even dipping into the negatives

https://www.msn.com/en-us/money/markets/fed-reverse-repo-volume-sparks-worries-us-short-term-rates-could-go-below-zero/ar-AAKnlzF

Demonstrating a counterintuitive demand for the collateral over the cash. Lenders going so far as to pay a borrower money in return for the collateral, which is generally US treasury bonds. This could be in part, due to the over shorting of the bond markets. Alternatively, it could also indicate that these banks are very hesitant to invest their cash into every other investment when taking into account potential risk, and are parking their liability (cash) in a safe harbour.

What could this mean for the economy? I guess only time will tell. One thing that's certain for me however, is that an alternative hedge against the traditional centralised system will be required if we want to lower our risk to another potential economic meltdown.

As demonstrated in my previous writeup about Cardano, blockchain technologies and cryptocurrencies are becoming a very relevant and important innovation with an inevitable influence on everyday people. Utilising these powerful new tools to me, is like a brick-and-mortar store transitioning into an ecommerce business model at the advent of the internet. We may be early, but I believe the change is inevitable.

[usmartjack]

How to view the Fed's interest rate hike Since the unlimited QE, last year caused excess liquidity in the market, The Fed has adopted two methods of open market operations: positive repo and reverse repo Direct placement or withdrawal of the base currency through an agreement with the counterparty, The Fed is repurchasing to release liquidity, reverse repurchase to recover liquidity The Fed buys securities (treasury bonds, MBS) from counterparties Repurchase, signing an agreement to return the securities (national debt, MBS) to the counterparty within a specified time Reverse repurchase means the sale of Treasury bonds or MBS purchased in the Fed’s unlimited QE Contrary to positive repurchase, reverse repurchase requires public notice to the public The minutes of the Fed's meeting on interest rates in April mentioned for the first time to reduce QE The Fed needs to reverse repurchase to recover funds in the case of continuous spending Now that the Fed actively uses reserves, it will still return to the market and increase market liquidity. In order to balance market liquidity, the Fed announces information on expected interest rate hikes. Let market funds return to the bank, and raise interest rates by 5 points. Under the panic of publishing information, investors are more willing to choose to put their money in the bank, with interest, and enjoy the special services of the bank. Banks have sufficient funds, loan investment will increase, and the market will remain active and balanced. In the later period when the Federal Reserve has sufficient funds, the US government needs to consider the employment rate and target lending groups, lending to people who really need them, and people who maliciously speculate on investment. Maintain a balanced environment in the market. Under the turbulent situation of the market, it is recommended to consider bank stocks to start with. Long-term risks can be avoided. You can also pay attention to loan companies。 Pay attention to uSMART Securities, don’t get lost in investment（在 美國洛杉磯 LA） https://www.instagram.com/p/CQYjsa5tOHq/?utm_medium=tumblr

[sataniccapitalist]

By Pam Martens and Russ Martens: September 25, 2020 ~

Senator Kyrsten Sinema

Fed Chair Jerome Powell looked genuinely troubled as Senator Kyrsten Sinema of Arizona shared her traumatic childhood during yesterday’s Senate Banking hearing. The witness panel included both Powell and Treasury Secretary Steve Mnuchin. Sinema first asked Mnuchin and Powell if they had ever been evicted from their home. Both said no. She then shared this:

“Well, as you may know, I was homeless for a number of years as a child. And I wouldn’t wish it on anyone. I know the challenges that Arizona families are facing right now and it’s an important perspective for people here in Washington to understand.

“When I was in elementary school, my Dad lost his job and my parents got divorced. We lost our car and our home and we were homeless for almost three years. We lived in an abandoned gas station without running water or electricity.”

The New York Times has suggested that Sinema has embellished this story, but concedes that she and her family did live in an abandoned gas station; that it was a trying time; and that she had the grit to go on to graduate high school at age 16, as valedictorian of her class.

Sinema was making the case that dramatically more stimulus from Congress is urgently needed. She said “According to the Census Bureau’s household Pulse Survey, over 300,000 Arizona families missed their July rent payments. Two-thirds of those households are families with children.” Sinema went on to remind Mnuchin and Powell that Arizona’s unemployment insurance, at $240 a week, is the second lowest in the nation and without Congress passing a continuation of the prior unemployment supplement of $600 a week, the eviction crisis is destined to get worse.

Another emotional moment in the hearing came when Senator Sherrod Brown of Ohio appeared outraged at Mnuchin and President Trump praising themselves over the great job they’ve done. The exchange went like this:

Brown: “Secretary Mnuchin, President Trump said with regard to the Coronavirus ‘I think we did a great job.’ Do you agree with that? Do you think the President’s done a great job with the Coronavirus?”

Mnuchin: “I do. I think we’ve made tremendous progress…

Brown: “Mr. Secretary, I’m sorry to cut you off. I hope that you and the President don’t dislocate your shoulders by patting yourselves on the back, saying ‘good job.’ We are 4 percent of the world’s population; we are 22 percent of the world’s deaths.”

Brown went on to remind Mnuchin where the U.S. economy stands compared to other countries:

Brown: “You bragged about the economy growing so ‘fast,’ your words. Our unemployment rate is significantly higher than Germany’s; significantly higher than France’s; twice what Taiwan’s is; almost three times what South Korea and Japan’s is; much higher than Australia; twice what Britain’s rate is; twice what New Zealand’s rate is. I mean, I know you think the economy is doing well if you’re talking to your wealthy friends on Wall Street, but things are pretty bad for most working Americans. Things are going to get worse unless you come up with a real [stimulus] package….”

Later in the exchange, Brown reminded Mnuchin that Republicans offered a “paltry” $500 billion stimulus plan when “economists all over the country wanted 3 and 4 and 5 times that amount.” Brown asked why Mnuchin was so successful in getting Republicans to fall in line and approve the massive $1 trillion-plus tax cut “where 70 percent of it went to the richest people in the country,” but he can’t get those same Republicans to fall in line to pass a larger stimulus bill during this economic crisis.

Mnuchin said that he continues to negotiate with House Speaker Nancy Pelosi.

The strangest moment in the hearing came when Senator Pat Toomey of Pennsylvania asked Mnuchin and Powell about the current availability of credit for credit-worthy borrowers in light of all of the Fed’s emergency lending operations.

Powell gave a bizarre answer, stating, “We haven’t made a single loan to a corporate directly and yet something like a trillion dollars in financing has happened.” You can watch the full exchange at 53 minutes and 59 seconds (53:59) here.

Maybe Powell was having a senior moment or maybe he was talking about the corporate bond program where the Fed is buying up corporate bonds in the secondary market.

The truth is that the Fed has made more than $9 trillion, cumulatively, in direct repo loans to the trading houses (primary dealers) on Wall Street. Those are certainly corporations and they certainly benefited from a steady supply of cheap money.

The Fed has previously stated that it will release the names of the borrowers and amounts borrowed under its emergency lending programs – but only those where the taxpayer has put up loss absorbing capital. That has left the following programs with no guarantee of timely transparency: the Fed’s $9 trillion in repo loans; the Fed’s Discount Window, which back in April had a balance of $33.7 billion that had been loaned to unnamed depository banks; the $31.5 billion that was outstanding in April at the Fed’s Primary Dealer Credit Facility, which made revolving loans at ¼ of one percent to the trading houses on Wall Street against collateral that included stocks and toxic waste known as CDOs and CLOs.

No matter how one attempts to spin the economic reality of this crisis, Wall Street, once again, got bailed out while the average American continues to get sold out.

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[argumate]

It appears the funds were buying Treasuries and then selling interest rate futures to generate arbitrage profits. To juice up the returns they were using the Treasury securities they had bought as collateral for cash in the repo market that they could then use to repeat the strategy in a continuous loop of transactions.

With the big banks sitting on a lot of liquidity they couldn’t deploy because of the prudential regime; the corporate tax payments and Treasury bond issue sucking liquidity out of the market and the hedge funds needing liquidity to fund their trades, the market and the Fed weren’t prepared for a cash shortage. The Fed has since made large lines of liquidity available to the market.

wow nothing about any of that sounded good.

[yashikablog]

The next decade - 2020-2029

let’s look at the situation from past, present & future perspective

past: in late 1980s Japan had a real-estate crisis, similar to what US and rest of the world had in 2008-2010; post Japan’s crisis, BOJ dropped rates to almost zero but in last 30 years or so, despite monetary as well as fiscal stimuli, the govt. could not create growth in Japan’s economy & so the stock market stayed flat; 39K in Dec 1989 to 7.5K in Feb 2009 & current value at 22K - just about in the middle but hasn’t crossed the prior high ..!

fast forward to 2010: post world-wide financial crisis (2008 - 2009) coupled with real-estate crisis (2008-2010), US Feds dropped rates to zero, while ECB went creative to drop them to negative & BOJ followed ECB, thinking [mathematically] that if lowering the rates is the solution to problem, why not cross the line and go to the other side; i.e. negative rates, so the growth / inflation returns sooner … what the folks in Europe don’t realize that the growth they saw in first decade (2000s) was partly due to world-wide real-estate boom caused by low rates in US and partly by formation of Euro; but the effect of both have dissipated; i.e. Europe is currently facing the same growth challenges that they had in the 1990 decade.

present: one third of all world-wide debt is in negative rates, which is absurd, and will not end well, unless it is resolved before maturing, and there is no solution as of now, as the smart folks are hoping that the growth will return and all the bills will be paid. The only good story right now is US, where the ten year treasuries are about 1.75% - low but positive … there are some good stories in Asian countries, which have no/low deficit and reasonable rates, like India, but the asian countries are also dependent on US, as when US sneezes, rest of the world catches cold ..!

why everyone feels so good despite this situation? well, since the rates are low (or negative low), capital is freely available throughout the world .. in Netherland, banks are giving loans at negative rates to purchase a house, which can be returned for less .. since the capital is accessible at such a low rates and bonds are not providing much, the capital is directly going into stock market; hence the rise since 2012, but banks can’t make money with negative rates, and if the banks don’t make money - a major sector of current economy - it can take rest of the economy down in Europe.

& why the excess capital is NOT introducing inflation in the economy? 1. technological advancement & automation: even software can be produced as well as tested by machines

2. internet has provided price transparency; hence its hard to exploit customers; plus amazon is working hard to bring you low prices

3. cost of production is low as manufacturing is moved to Asian countries, which are still in growth mode

4. people spend lot of money on buying & replacing gadgets like iPhone, while there is [almost] no limit to the supply of the material

5. USD is still strengthening partly because world needs dollars to make a transaction, and the more world-wide economy grows, more dollars are needed; uplifting dollar artificially, despite our $20T debt. so US is good in that way, for now! BTW, the repo problem seen last week is a probable effect of this issue, as Feds started reducing the balance sheet, there is a reduced supply of dollars world-wide, which became a problem ..!

future: so how will this end ..? short answer: i don’t know and am afraid that anyone does, but here are a few possibilities of a trigger which may turn into a cascade: 1. US recession: which most folks are seeing based on yield curve inversion

2. US political party switch in 2020: from republicans to democrats, which could be a cause as well as effect; so beware

3. hard BREXIT causing recession in UK

4. recession in one of the EU countries including Germany (PMI under 50 today)  

5. failure at one of the European big banks or default by an EU country - candidates: Greece, Italy

ECB doesn’t have a fix (also change of guard from Draghi to Laggard) except keeping the rates low in comparison to US, but if US joins the club by lowering the rates in negative zone (FOMC started lowering in 2019), ECB & BOJ will find a dead-end soon ..!

as a famous economist said, in the end, we are all dead .. i am not a pessimist person, but the next decade won’t be anything compared to last three ..!

IF the above scenario is played, where would the stock market go in next decade …?

my take: just review the Japan stock market chart in last 30 years and make your judgement .. i have stated the numbers in the beginning ... Good luck ..!

now i have to tell you a joke:

of course, an economist’s joke; so you may not laugh in the end: if this scenario plays out, most of the folks and the media will blame the recession on trade war … yes, trade war is a cause, but its like a bucket in the ocean; given the US economy and interest rates, and everyone who is willing to work, has a job .. do you think people have stopped buying $1K iPhones; or you wouldn’t buy a shirt because it costs couple of dollars more .. blaming the next recession on trade war is a joke ..!

can you imagine that Trump filed for bankruptcy after 1989 real-estate crisis and now he is the President & a billionaire ..!

& if you stayed till this point of this story, let me share a fact: market will touch somewhere between 1600 & 1800 in next decade ..! 

[johnmauldin]

A Crisis Has Already Begun… We Just Don’t Know It Yet

Let’s address an elephant in the room: the rapidly expanding federal debt. Each annual deficit raises the total debt and forces the Treasury to issue more debt, in hopes someone will buy it.

The US government ran a $343 billion deficit in the first two months of fiscal 2020 (October and November), and the 12-month budget deficit again surpassed $1 trillion. Federal spending rose 7% from a year earlier while tax receipts grew only 3%.

No problem, some say, we owe it to ourselves, and anyway people will always buy Uncle Sam’s debt. That is unfortunately not true.

Foreign Treasury Buyers Are Turning Away

The foreign buyers on whom we have long depended are turning away, as Peter Boockvar noted:

Foreign selling of US notes and bonds continued in October by a net $16.7b. This brings the year-to-date selling to $99b with much driven by liquidations from the Chinese and Japanese. It was back in 2011 and 2012 when in each year foreigners bought over $400b worth. Thus, it is domestically where we are now financing our ever-increasing budget deficits.

The Fed now has also become a big part of the monetization process via its purchases of T-bills which also drives banks into buying notes. The Fed's balance sheet is now $335b higher than it was in September at $4.095 trillion. Again, however the Fed wants to define what it's doing, market participants view this as QE4 with all the asset price inflation that comes along with QE programs.

It will be real interesting to see what happens in 2020 to the repo market when the Fed tries to end its injections and how markets respond when its balance sheet stops increasing in size. It's so easy to get involved and so difficult to leave.

Declining foreign purchases are, in part, a consequence of the trade war.

The dollars China and Japan use to buy our T-bills are the same dollars we pay them for our imported goods. But interest and exchange rates also matter. With rates negative or lower than ours in most of the developed world, the US had been the best parking place.

But in the last year, other central banks started looking for a NIRP exit. Higher rate expectations elsewhere combined with stable or falling US rates give foreign buyers—who must also pay for currency hedges—less incentive to buy US debt.

If you live in a foreign country and have a particular need for its local currency, an extra 1% in yield isn’t worth the risk of losing even more in the exchange rate.

I know some think China or other countries are opting out of the US Treasury market for political reasons, but it’s simply business. The math just doesn’t work.

Especially when President Trump is explicitly saying he wants the dollar to weaken and interest rates go even lower.

If you are in country X, why would you do that trade? You might if you’re in a country like Argentina or Venezuela where the currency is toast anyway. But Europe? Japan? China? The rest of the developed world? It’s a coin toss.

The Fed began cutting rates in July. Funding pressures emerged weeks later. Coincidence? I suspect not.

The Fed Started Monetizing Debt

It sure looks like, through QE4 and other activities, the Fed is taking the first steps toward monetizing our debt. If so, many more steps are ahead because the debt is only going to get worse.

As you can see from the chart below, the Fed is well on its way to reversing that 2018 “quantitative tightening.”

Luke Gromen of Forest for the Trees is one of my favorite macro thinkers. He thinks the monetization plan will get more obvious in early 2020.

Those that believe that the Fed will begin undoing what it has done since September after the year-end “turn” are either going to be proven right or they are going to be proven wrong in Q1 2020. We strongly believe they will be proven wrong. If/when they are, the FFTT view that the Fed is “committed” to financing US deficits with its balance sheet may go from a fringe view to the mainstream.

Both parties in Congress are committed to more spending. No matter who is in the White House, they will encourage the Federal Reserve to engage in more quantitative easing so the deficit spending can continue and even grow.

The next recession, whenever it happens, will bring a $2 trillion+ deficit, meaning a $40+ trillion-dollar national debt by the end of the decade, at least $20 trillion of which will be on the Fed’s balance sheet. (My side bet is that in 2030 we will look back and see that I was an optimist.)

Sometime in the middle to late 2020s, we will see a Great Reset that profoundly changes everything you know about money and investing. Crisis isn’t simply coming. We are already in the early stages of it.

I think we will look back at late 2019 as the beginning. This period will be rough but survivable if we prepare now. In fact, it will bring lots of exciting opportunities.

The Great Reset: The Collapse of the Biggest Bubble in History

New York Times best seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could be triggered in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.

[billehrman]

This Too Shall Pass

As investors, we take a multi-year view. While we do not want to minimize the devastation to life caused by the coronavirus nor its near term impact to the global economy, our role is to look over this valley, as this too shall pass, and take advantage of the inefficiencies created in all of the financial markets.

Global stock markets and commodity prices are falling while bond prices are soaring.  The dollar has regained its strength and safe haven status along with the Japanese yen. Opportunities are being created for the patient, long-term investor, but go slowly as uncertainty is the word of the day and markets hate uncertainty.

So far there are approximately 12,000 reported cases of coronavirus worldwide and nearly 260 deaths globally, all in China. If history is any guide, the rate of change in the number of people getting the virus and dying from it should begin to slow in a matter of weeks. The Chinese government is moving rapidly to contain the virus, corporations are shutting down their operations asking employees to stay at home, governments are restricting travel from and to China, and the best of the best in healthcare are working together to control, mitigate, and ultimately find a cure for the virus.

Let’s put the coronavirus in perspective.  The flu has infected over 19 million people while killing over 10,000 so far in the 2019-2020 flu season in the U.S alone. No one talks about it as a national disaster and a detriment to growth as we feel that we have it under control. Do we? The health authorities, when approving a vaccine each year for the flu season, rarely get it right. Does the flu epidemic alter the long growth potential of the U.S? No. Will the coronavirus alter the long-term growth potential of China? Not really! So why not look over the valley and take advantage of these near-term inefficiencies in the financial marketplaces? It is not easy for sure, but the best opportunities are created when others are uncertain and panic. We maintain a long-term view: buy when value exists and sell when fully valued.  We always challenge our core beliefs and remain open to change, if/when warranted. We fully recognize that we live in a VUCA (volatile, uncertain, complex, and ambiguous) environment but invest for long term gains rather than trade which is a losing strategy over time.

Our base case remains that the coronavirus and the flu will both be contained before the end of the first quarter, 2020. There is no doubt that near term global economic growth will be penalized big time as growth in China in the first quarter could easily be halved from previous expectations and multinational earnings will clearly be impacted too. But will that alter long-term prospects for both China and these corporations. Not at all!

Chinese monetary authorities mentioned yesterday that they will provide all the capital needed to deal with the economic blow from the coronavirus to support their financial markets. We fully expect the government to announce a massive additional fiscal stimulus plan to jump start the Chinese economy once the virus is contained.  In fact, all of the global monetary authorities will keep the money spigot wide open in 2020. Our Fed, which met this past week, confirmed its easy monetary policy not expecting the funds rate to increase until inflation reaches 2% for a sustained period which won’t happen anytime soon. On the other hand, Fed Chairman Powell did mention that the Fed may begin to wind down its $60 billion per month expansion in its balance sheet sometime this spring but that remains to be seen during these questionable times. The Fed will continue, no matter, to expand its balance sheet in the future but at reduced levels to maintain ample reserves in the system so the repo problem does not happen again.

Investment Conclusion

The engines for accelerating global growth are primed and ready to go once the world gets its arms around the coronavirus, trade deals kick in, and monetary stimulus is in effect, reducing the cost of capital for businesses and consumers alike.  Add to all of this, the benefits of major fiscal stimulus in China, Japan, and the U.S.  If anything, the virus may cause both monetary authorities and governments to do even more than is currently on their plates to re-ignite their economies.

We expect the global economy, as well as that of the U.S, to improve as we move through the year. For example, the U.S economy alone will be hit by around 0.5% annualized during the first two quarters of 2020 due to Boeing’s problems bringing the Max back online. We are hopeful that the FAA will approve it by mid-summer with production beginning even sooner but at much lower levels than existed in 2019. On the other hand, all of the trade deals finally concluded by the U.S. with China, Mexico, Canada, Japan and others will ramp up, too, as we move through the year, potentially adding well over 0.7% to annualized growth in the latter half of 2020. Net net, we would not be surprised to see first half GNP growth slightly less than 2% with the final two quarters running at 3% or above. In addition, as we wrote above, China’s growth will accelerate rapidly with added monetary and fiscal stimulus once the coronavirus is controlled such that their economy will recover and sustain growth at around 6% annualized once again as the year progresses.

Just the acceleration of these two economies alone would be sufficient to boost global growth as we move through the year, but we also expect the emerging markets, Japan, Australia, India and others to move into gear as the year progresses. By the way, India’s government just slashed taxes and increased fiscal spending to boost growth back above 5% in 2020 from beneath 4% last year. You can see why we remain optimistic that global growth will end the year on a high note, after a sluggish start, which is not the consensus at this time, which we like.

After having reduced our economically sensitive stocks over the last few weeks as discussed in previous blogs, we are looking to add them back over the next few weeks as they are beginning to be priced, once again, at recession valuations. Each of the companies that we would buy have strong managements with winning strategic long term plans, have exceptionally strong free cash flow after investing in their businesses, have dividend yields well over 3% and growing and are buying back tons of stock out of free cash flow reducing the count by over 3% per year. Energy is not part of this group.

Before we conclude this blog, we must discuss two areas of uncertainty that has existed in the marketplace over the last few months. First, it now is evident that the Senate will vote next week to exonerate Trump. The impeachment proceeding will finally come to an end. Second, Brexit is a done deal as of Friday night at 11:00 PM. The transition phase will last for a year with Britain as a nonvoting member of the Eurozone but be able to trade freely within the EU. If the two sides cannot reach a deal on their future relationship by December 31st, business will be conducted on World Trade Organization terms and border checks will be imposed where now none exist. We would not be surprised to see Trump and Johnson make a major trade deal between them before either one makes one with the Eurozone.

In conclusion, we believe that the major issues facing investors today are transitory and that growth will resume as we move through the year. We are also factoring in that all of the monetary authorities are unusually accommodative providing far more capital to the system than is needed by the real economy thus finding its way into risk assets just like last year. And you know how the financial markets reacted last year!  Remember that most all interest rates have retreated to near all-time lows, spreads remain tight and major bank capital/liquidity ratios are at all time highs. Clearly the stock market multiple should exceed 20 times projected earnings.

But the major difference today than last year is that we are on the cusp of accelerating global growth with all the stars aligned once the coronavirus is controlled. This too shall pass. This has happened time and again when epidemics spread in parts of the world. Now is the time to average into stocks when uncertainty is high, valuations are low, dividend yields exceed the 10-year treasury yield, and few are optimistic about the future. We expect to look back in a few months after the virus is controlled and ask why we did not do even more buying as others panicked. We recognize that the Chinese markets could have a blood bath when they reopen next week but we expect the government to do all in its power to mitigate the decline. We will continue to average into those stocks that we want to own long term as prices weaken.

Our major area of emphasis remain technology, including the semis. Look at Microsoft’s numbers. It is our second largest position. We also own some financials who are earning more each year, generating tremendous free cash flow, pay large and growing dividends and are shrinking their capitalizations big time. This has all been done with a relatively flat yield curve. Can you imagine their earnings once the yield curve normalizes?

Global capital goods and industrials remain a major focus, too, as their volumes and earnings grow despite sluggish global growth. They are generating over 100% free cash flow per year that is in the billions being used to enhance shareholder returns. Also, we own the low-cost industrial commodity companies that are also generating billions of free cash flow with large well supported dividend yields over 5% and large buybacks in place. We expect shortages in copper in 2021.  Housing related retailers is another area that we favor as there is a shortage of low cost housing in this country. Finally, we own many special situations where their intrinsic value is at least 50% greater than current valuations. Each one has exceptionally strong balance sheets with huge free cash flow, too and yield over 3%. We own no bonds and are flat the dollar.

Our weekly investment webinar will be held Monday at 8:30 am EST. You can join by entering https://zoom.us/j/9179217852 into your browser. Feel free to send questions in advance to bill.ehrman@prosperitefund.com.

Remember to review all the facts; pause, reflect and consider mindset shifts; turn off the pundits/experts; look at your asset mix with risk controls; listen to as many earnings call as possible; do independent research and …

Invest Accordingly!

Bill Ehrman

Paix et Prospérité LLC