As 1980’s big-hair, New Jersey band Bon Jovi sang, US households are “Living on a Prayer.” Or The Federal Reserve-created massive asset bubble.
As of 2016, the mean net worth of US households was a whopping $692,000! And the median is $97,300.
Quite a disparity.
Of course, The Federal Reserves zero-interest rate policy (ZIRP) and quantitative easing (QE) helped created massive asset bubbles that have helped households to historic high net worths.
Housing is one of the recipients of The Fed’s quantitative distortion (QD).
One indicator? Home prices are still growing almost twice as fast as average hourly earnings.
These are no “Tiny Bubbles”.
But YUGE bubbles. Hence, American households are living on a prayer that the massive bubbles don’t burst.
On a side note, I used to live in Rumson NJ and Jon Bon Jovi used to run by my house on the weekends (sans the big hair).
There is considerable divergence between China and the US in terms of financial condition. The trade disagreement between China and the US comes to mind.
First, there is considerable divergence between Hong Kong’s 1-month interbank lending rate, HIBOR, and the US 1-month interbank lending rate LIBOR. In fact, the divergence is the greatest since the financiak crisis. For the moment, the US Fed is engaged in quantitative tightening (QT) while China is frantically going the opposite direction.
Second, Central bank balance-sheet divergence is reducing the impact of China’s government-induced liquidity injections, contributing to an increase in corporate defaults. Since Fed run-off began in October 2017, the impact of People’s Bank of China (PBOC) balance-sheet expansion has diminished considerably, as the FX-adjusted effect of last year’s 1 trillion yuan in central bank stimulus resulted in a $160 billion contraction when converted into U.S. dollars. Total assets at China’s central bank rose 2.6% to a record 37.2 trillion yuan in 2018. Yet, when expressed in dollars, the PBoC’s balance sheet fell by 2.9% to $5.4 trillion.
Chinese onshore defaults rose to a record $16.5 billion in 2018, and are up $1.4 billion year-to-date. China offshore defaults rose to $3.3 billion in 2018, and are up another $275 million in 2019.
The Dow is up over 200 points on a deal preventing a US government shutdown. Democrats agreed to build a wall between the US and Mexico … 55 miles of the 2,000 mile US-Mexico border. As if drug traffickers (and cartels), human traffickers and gangs like MS-13 can’t figure out how to bypass the 55 miles of additional walls.
A friend of mine testified in the US House of Representatives that CoCo (Contingent Convertible) bonds are the savior of the banking industry. Apparently he didn’t know about Deutsche Bank’s precarious position!
Additional Tier 1 contingent convertible bonds, CoCos, are among the riskiest debt because they can be wiped out to create capital for a bank in a financial crisis. While they are sold as perpetual bonds, they are typically callable after five years. Secondary market pricing of the debt is based on the expectation they will be redeemed at the first call date.
One CoCo bond stands out in the CoCo Loco-sphere: Duetsche Bank’s 6.25% bond. Which is signalling a potential wipe out.
This is not surprising given Deutsche’s performance since the global financial crisis when it peaked at $125 per share in May 2017 and is now trading at an abyssmal $8.31 per share.
Deutsche Bank’s 6.25% CoCo bond is going loco!
Financial markets are experiencing “The Crazy World of Libor, Swaps and Treasury Yield Curves.”
In other words, all three curves have a downward sloping section, all at different times, but all short-term (less than 6 year maturities).
What uncertainties are in financial markets and the unlying economies, you may ask? How about trade (e.g., US and China trade flows), Brexit, China’s recession, Japan’s ongoing stagnation (despite negative interest rates), Italy and Germany’s slipping into darkness, not to mention uncerainty about The Fed’s path for balance sheet unwind.
The Fed’s balance sheet is a particular concern since the 10-year Treasury Note yield began to rise when the unwind began, but rates have gone DOWN when the unwind got serious in 2018. Or is Fed Chair Jerome Powell really “The Iceman”?”
Here is a photo of Fed Chair Jerome Powell weiliding his “ice axe.”
The Baltic Dry Index seems to be signalling declining shipping costs … or foundering trade between the US and China.
The Baltic Dry Index is a composite of the Capesize, Panamax and Supramax Timecharter Averages. It is reported around the world as a proxy for dry bulk shipping stocks as well as a general shipping market bellwether.
Yes, the BDI is measuring some distress for China Imports YoY in USD.
No, that isn’t the SS Minnow foundering.
It seem s that banks willingness to lend to consumers hass fallen. Perhaps it should be an index of “Willing.”
Bank willingness to lend to consumers, a prime driver of Federal Reserve monetary policy, typically slumps to zero before a recession.
Yes, as The Fed continues to unwind its balance sheet, bank willingness to lend to consumers is melting.
The Federal Reserve Open Market Committee (FOMC) looks at the bank willingness to lend numbers.
As Bruce Springsteen famously mumbled, The Fed’s Balance Sheet is “Goin’ Down.”
As of Feburary 6, 2016, The Federal Reserve of New York further shrank The Fed’s Balance Sheet by $14.2 billion.
This week it was $11.665 billion of US Treasury Notes and Bonds and $2,525 billion of US Floating Rate Notes. For a grand total of $14.2 billion reduction in liquidity.
Now The Fed has unwound $434 billion of its prodigious balance sheet.
While other central banks filling their punch bowls ever further.
So, The Fed is continuing its draining of the monetary punch bowl on autopilot.
The S&P Multi-Asset Risk Parity Index measures the performance of a multi-asset risk parity strategy that allocates risk equally among equity, fixed income and commodities futures contracts.
The risk parity strategy by firms such as AQR Capital suffered a big set back when The Fed started raising the Fed Funds Target rate near the end of Janet Yellen’s term as Fed Chairman. Risk parity recovered but then suffered a second knock-down as Powell continued raised the target rate and the balance sheet began shrinking.
But as The Fed looks in full retreat, the Risk Parity index has rallied.
Has The Fed surrendered?
One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday.
The three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.
The 3-month LOIS spread (3-month Libor – Overnight Indexed Swap rate) has been receding … again as of Feb 5th (Libor rates on Bloomberg as not updating on Feb 7).
Typically, Libor rates rise ahead of Fed rate hikes. While the “catching up” explanation is likely, it is also possible that Libor is signalling a cut in the Fed Funds rate coming up.
The stock market is pleading for SLOWDOWN in monetary normalization.
Yes, it is possible that Libor is signalling that The Fed will try to give more oxygen to financial markets.
My favorite Bloomberg headline of all time is: “Former Fed Chief Yellen Says Rates Could Next Move Up or Down.” Wow, how insightful. But of course, she was refering to The Fed Funds Target rate which she kept at 25 basis points seemingly forever. However, current Fed Chair Jerome Powell could either raise, lower of keep rates constant, depending on the state of economy.
But then again, both the ECB and Bank of Japan are currently at zero (ECB) and below zero (BOJ). The US Fed is headed in a direction that differs from other central banks.
While Powell has been increasing The Fed Funds Target rate AND shrinking The Fed’s balance sheet, Europe is drowning in negative target rates (Eurozone, Switzerland, Sweden, Denmark) as is Japan.
But in terms of central bank balance sheets, only the US is shrinking their balance sheet.
There are currently around $9 trillion of bonds trading at negative interest rates.
As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.
The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.
So, former Fed Chair Janet Yellen thinks rates could go up or down.