Federal Reserve, CPI and Prospective Rate Increases
A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. Furthermore, Federal Reserve commentary also induced volatility in the markets when Jerome Powell spoke in early June. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. Year-to-date, the S&P is up over 16%, while all valuation metrics are misaligned with any historical comparator with heavily stretched valuations and record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. The confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests will be tailwinds for the big banks.
2021 Financial Stress Tests
The recent stress tests were easily passed and indicated that the biggest U.S. banks could easily withstand a severe recession. In addition, all 23 institutions in the 2021 exam remained “well above” minimum required capital levels during a hypothetical economic downturn.
The central bank said that the scenario included a “severe global recession” that hits commercial real estate and corporate debt holders and peaks at 10.8% unemployment and a 55% drop in the stock market. While the industry would post $474 billion in losses, the Fed said that loss-cushioning capital would still be more than double the minimum required levels. Continue reading "Financials - Stress Tests Easily Pass"→
Let’s see if I have this straight. For the past dozen years or so, dating back to the 2008 financial crisis, the Federal Reserve and other major central banks have been trying to raise inflation and thereby generate economic growth. (I’ve never quite understood that thinking; I always thought economic growth generated inflation, not the other way around. But that’s just me.)
So now it finally appears that inflation is about to rear its head, or so the bond market thinks, on the prospects of a nascent economic boom fueled by pent-up demand, fiscal stimulus, a decline in Covid-19 cases, and a vast rollout of vaccines. And what is the market’s reaction? Total panic. Sell bonds and tech stocks that have soared during the pandemic. And beg Jerome Powell and the Fed to save them from losses once again.
Let’s see which Powell responds—the one who has told us over and over again that the Fed will be “patient” and be pleased to let inflation run hotter and longer if it means boosting the employment market; or the one who repeatedly rides to the rescue whenever investors start to lose money and beg for relief.
On the surface, it should be the first one. Over the past month or so, bond yields have risen sharply on fears of rising inflation. Rather than a cause for worry, this should please Powell and the rest of the Fed. After all, they’ve been preaching for months that this is what they want, so this should come as no surprise to anyone. Plus, it’s a good thing – rising rates signal economic growth. Yet, the market’s reaction is shock and dismay. Continue reading "Which Way Will The Fed Blow?"→
We must be getting closer to the global asset bubble bursting or the end of central bank intervention, or both since the latter is likely to cause the former. How do I know? Central banks and the international agencies that support their policies have already begun the blame game, in order to deflect criticism from themselves when the bubble does burst.
European Central Bank President Mario Draghi started the process two weeks ago. With the troubles at Deutsche Bank, Germany’s largest bank, perhaps as his reference point, Draghi struck back at European bankers’ criticism of the ECB’s negative interest rate policies, which the banks blame for their difficulty in turning a profit. While accepting some of the responsibility for that, he instead said a good part of the blame belongs to the commercial banks themselves.
“Low-interest rates tend to squeeze net interest margins owing to downward rigidity in banks’ deposit rates,” Draghi admitted. “But over-banking is also a factor in the current low level of bank profitability. Overcapacity in some national banking sectors and the ensuing intensity of competition exacerbates this squeeze on margins.”
Gold is a unique asset class, despite being uninteresting from a volatility investing perspective. I mean, it's currently sideways amid a soaring equity and dollar value, but it is still interesting for selected market participants for its safe haven status and diversification purposes.
We all have different time frames that we use, common investors use daily, weekly and monthly charts and the quarter to year perspective when they summarize the profits or losses. And so do the public companies when filing their earnings reports every quarter. And for these type of investors, Gold's dynamics in recent years have been frustrating as it is has been totally unmoved month by month, making investment unpromising.
On the above monthly chart, tailored especially for INO.com readers, I want you to see for yourselves the direct relationship between Gold prices and the demand for ETF holdings. For 2 years as depicted on the chart, Gold lost 17% of its total value. Meanwhile the SPDR Gold Trust holdings lost 22% of its total value, almost matching dynamics. The holdings fell even more than the Gold price did telling us about worsening investors' sentiment for Gold. Remember the old words that "the Fear has a large shadow". The holdings were falling, gradually neglecting upswings in the Gold price, and only this January did the holdings pick up from 709 to 763 tons amid Gold's price growth from $1172 up to $1273. But this outstanding move proved to be short-lived, and both indicators fell back to the lows.
Monetary policy, which is also known as interest rate policy, describes the actions or in-actions of a country’s central banks. Interest rate policy generally focuses on maximizing price stability and growth. The central bank of a country is considered the institution that controls a countries currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries.
Each central bank has guidelines that are mandated by their legislature. For example, in the US, the central bank has a dual mandate which is to maximize price stability and employment. Other central banks, such as the European Central bank, have only one mandate which is price stability.
Central banks often spur growth and employment by reducing interest rates, making it easing for banks to lend money at reduced rates. Lower interest rates also increase liquidity, and make purchasing riskier assets a more attractive alternative than holding low interest baring government notes. Continue reading "Trading Using Monetary Policy Analysis"→