LIBOR To Be Phased Out By 2021 ($350 Trillion In Securities At Risk)

The world’s most important reference index, LIBOR, setting the price for $350 trillion in loans, credit and derivative securities, is being phased out by 2021.  UK’s Financial Conduct Authority which regulates Libor, said the index would be phased out and that work would begin for a transition to alternate, and still undetermined, benchmarks by the end of 2021.

The Federal Reserve has already been gearing up for the replacement: last month the Alternative Reference Rates Committee, a group made up of the largest US banks, voted to use a benchmark based on short-term loans known as repurchase agreements or “repo” trades, backed by Treasury securities, to replace U.S. dollar Libor. The new rate is expected to be phased in starting next year, and the group will hold its inaugural meeting in just days, on August 1.

For reference, here is a chart of several short-term rates including the doomed LIBOR  1 month, The Fed Funds Target rate, the EFFECTIVE Fed Funds rate and the USD 1 Month GC Govt Repo rate. In this chart, you can see the problem with LIBOR during the financial crisis.

The last five year track record for several short rate measure illustrates the potential problem with replacing LIBOR with another index. Obviously, The Fed Funds Target Rate has little volatility. The Effective Fed Funds rate is noisy. LIBOR 1 Month is out. Perhaps the Repo rate (the discount interest rate at which a central bank or bank repurchases government securities) is one candidate.

The problem is that the 1 month Reverse Repo rate is more volatile than 1 month LIBOR. And notice in the first chart that Repo (or Reverse Repo) rates had some unsmooth readings on the downside (where LIBOR had some unsmooth readings on the upside).

Since millions of dollars of adjustable-rate mortgages (and CMOs) are indexed to LIBOR, this should represent an interesting transition.

Fed Keeps Rates Unchanged, But Sees Inflation Coming! (Yellen Sees Dead People)

Yes, Janet Yellen is channeling “The Siixth Sense” in that she sees inflation above 2% (not dead people).

The Federal Reserve’s Open Market Committee (FOMC) surprised absolutely no one by keeping the Fed Funds Target rate unchanged.

The implied probability of a Fed Funds rate increase doesn’t exceed 50% until March 2018.

Yellen sees inflation topping 2%. Which it has only achieved briefly in briefly in 2012. And BEFORE The Fed entered the market in a big way with QE.

Here is a video of Yellen’s announcement of no rate increase, but seeing inflation above 2%.

Case-Shiller Home Prices Rise 1% In May (5.6% YoY), Seattle Leads At 13.3% YoY

Home prices keep on rising. According to the S&P Case Shiller repeat sales index, home prices rose 1% in May and 5.6% YoY.

But the Case-Shiller home price index continues to grow at over twice that of inflation and wage growth.

The biggest winner? Seattle. The slowest growing? Cleveland, Chicago and Washington DC.

West coast home prices really took after after The Fed’s third round of quanitative easing (QE3).


The Heat Is On! Venezuela 10Y Yield Spikes to 30% (2Y Yield at 60%!)

In the immortal words of the late Glenn Frey, “The Heat is on!!”

And its not Arizona-type heat. But protesters outraged at President Nicolas Maduro with threats of a new constitution and staggering inflation. And no toilet paper.

Venezuela’s 10 year sovereign yield just spiked to 30%.

And near 60% at the 2 year mark.

Now that the Dodger’s ace Clayton Kershaw is on injured reserve for a while, here is a possible replacement from Venezuela. I mean, this dude throws fire!

Black-market Rate For Venezuelan Bolivar Collapses Beyond 8,700 Per Dollar For 1st Time

How bad are things in Venezuela under President Nicolas Maduro for the once prosperous South American nation? Well, the Caracas Stock Exchange is showing explosive growth in terms of price.

However, staggering inflation rates for the black market currerncy makes the Caracas Stock Market (valued at $2.57 trillion) only worth $3 billion based on the black-market rate.

The meltdown in Venezuela’s currency is deepening as a crippling dollar shortage and a threat of oil sanctions take their toll on the economy. The black-market rate for the bolivar traded weaker than 8,700 per dollar for the first time, according to on Friday, compared with the official rate of around 10 and a more widely used alternative rate of 2,757. That’s creating an illusion for foreigners observing the country’s stock market, which appears to be valued at $2.57 trillion — bigger than Germany’s, France’s, India’s or Canada’s — but is worth only $3 billion based on the black-market rate.

And things are only going downhill for the once prosperous country, particularly with crude oil prices hovering around $43.48.

Here is President Nicolas Madura showing his people the true value of Venezuela after several years of his leadership.

Strange Days! US Treasury Yield Curve Inverts at 6 Months (But Treasury Inflation Indexed Curve Is REALLY Inverted)

Now, here is something you don’t see everyday.

The US Treasury actives curve has inverted at the 6 month mark.

Bur the US Treasury Inflation Indexed Curve is REALLY inverted at 3 years. To near 0%.

This follows of the poor TIPS auction that showed little interest in inflation protection.

Of course, we are waiting for Congress to raise the Federal debt ceiling (which they invariably will) because Congress LOVES to spend your money. The US Federal debt to GDP rose from around 60% in late 2007 to 104% today.

Strange days!

screw the RIAA

M2 Money Growth Declines To 20 Month Low (What Happens To Wage Growth?)

Real median household income, one measure of American household prosperity, peaked in 1999, fell slightly in 2000, then declined in the early 2000s only to hit decade-peak in 2007. RMINC continued to fall again until 2012 when it finally started to rise.

What is notable is that the rise in real median household income in the 1990s corresponded with a rapid rise in the M2 money supply.from 1995 to 1999. That represented a 33% in M2 money supply.


The rapid increase in M2 Money Supply also corresponds to the high in M2 Money Velocity in 1997, as if Fed Chair Alan Greenspan expended all the M2 fuel in one massive attempt to stimulate the economy.  M2 velocity (GDP/Money Supply) has been falling ever since. Along with real median household income. EXCEPT FOR 2013 AND AFTER WHEN REAL MEDIAN HOUSEHOLD INCOME ROSE EVEN AS M2 MONEY VELOCITY WAS SINKING LIKE A ROCK.

One possible explanation lies with the redesign of the income question in 2013 and onwards.

Starting in 2013 with a partial phase-in, which was fully implemented in 2014, Census changed the questions and the methods in calculating household income.

For example, Census, starting in 2014, began to “collect the value of assets that generate income if the respondent is unsure of the income generated.”

Also, the government started to use “income ranges” as a follow-up for “don’t know” or “refused” answers on income-amount questions.

So, that is a partial explanation for the anomoly of rising real median household income with crashing M2 Money Velocity. THEY CHANGED THE HOUSEHOLD INCOME DEFINTION.

M2 Money growth has fallen to a 20 month low  while an alternative measure of money supply, the Austrian money supply, just fell to a 105 month low. 

The “Austrian” measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler’s checks, and retail money funds).

Well, M2 Money supply increases hasn’t done much for Average Hourly Earnings of Production and Nonsupervisory Employees, particularly since 2008.

Whether we are using the decline in M2 growth or Austrian money growth, neither one have benefitted the majority of Americans.