Ben & Janet’s Famous Chili Recipe: Excess Reserves Still Around After 2008 And The Fed Is Paying MORE For Banks Not To Lend

In late 2008, The Federal Reserve did something that was not so widely noticed: It started to pay interest on excess reserves, effectively paying banks not to lend.

Excess reserves are cash funds held by banks over and above the Federal Reserve’s requirements. They have grown dramatically since the financial crisis. Holding excess reserves is now much more attractive to banks because the cost of doing so is lower now that the Federal Reserve pays interest on those reserves. The fact that banks are holding excess reserves in response to the risks and interest rates that they face suggests that the reserves are not likely to cause large, unexpected increases in bank loan portfolios. However, it is not clear what banks are likely to do in the future when the perceived conditions change.

In other words, The Fed is trying to control the price and quantity of risk.

ioerexcres.png

Excess reserves have actually declined slightly since 2015 when the article was written. But the question remains as to why financial institutions are continuing to park money at The Fed. And why The Fed is encouraging it.

Loan and lease growth YoY is slower following The Great Recession than at any time since 1975.

llbc

Part of the reason of the desire of commercial banks to park money at The Fed rather than lend it out is 1) risk (and the price of risk) and 2) compliance costs. The Dodd-Frank legislation and Elizabeth Warren’s Consumer Financial Protection Bureau have greatly increased compliance costs leading some financial institutions to avoid said costs and collect interest from The Fed instead.

What happens if the economy booms? A simple answer would be for The Fed to take away the excess reserve punch bowl. But bank lending has become so regulated (CFPB, OCC, Fed, FDIC, SEC, etc) that financial instutions may decide to continue the escape valve from actual lending.

I call excess reserves and the interest paid by The Fed to FI’s that DON’T lend … Ben and Janet’s Famous Chili recipe. If the economy does boom, I am afraid of what will happen.

kfch

Advertisements

Witchy Woman: Yellen’s Last FOMC Meeting (Fed Funds Rate Rises To 1.5% As Balance Sheet Begins Slow Unwind)

Yes, this was Federal Reserve Chair Janet Yellen’s last Open Market Committee (FOMC)  meeting. And the FOMC raised,  as widely expected, the Target rate (upper bound) to 1.50%.

fed121317

Over the past year, The Fed has raised their target rate from 0.50% on 12/13/16 to 1.50% on 12/13/17, a 100 basis point increase over 1 year. Meanwhile, the Fed’s holdings of Treasury notes and bonds has declined (unwind).

Even since Bernanke and Yellen (Beryellen?) launched us on the QE train, core inflation has rarely exceeded 2% YoY and wage growth has been terrible.

inflat

Alas, Yellen and NY Fed’s Dudley, two ardent doves, will be gone.

dotsplot

Yes, Janet Yellen is a witchy woman.

Raven Gray hair and ruby lips
Sparks Bubbles fly from her finger tips

yellenbubbles.jpg

Courtesy of Jesse from Jesse’s Cafe Americain. 

Bad Case of Unaffordable Housing: Shelter CPI Rises >2x Core Inflation (“Inflation” Cools Ahead of FOMC Meeting)

The Fed’s Open Market Committee (FOMC) meeting is today.  And according to the SF Fed’s calibration of the Taylor Rule, the Fed Funds Target rate should be 6.13% (it is only 1.25%, a spread of 488 basis points TOO LOW).

trrudie

There was nothing in this morning’s inflation report that is likely to cause the FOMC not to increase the upper bound of The Fed Fund’s Target rate to 1.5%. Why? Core inflation (less food and energy YoY) declined to 1.71%.  Core PCE Prices YoY is at 1.45% YoY (well below The Fed’s Target Rate of 2%.

coreinffed.png

Owner’s equivalent rent of residences YoY fell to 3.12%, still over twice that of core inflation. And FHFA’s house price index YoY is 2.78x hourly earnings YoY for most of the population.

fhfaearnings.png

Doctor, doctor (Yellen), stop driving up house prices for average Americans.

yellenugh

Is A Recession Looming? Low Unemployment And Declining Treasury Curve Occur Just Before Recessions (And Lousy Wage Growth)

US Real GDP is growing at 2.3% YoY.  What’s not to like?

How about the lowest unemployment rate since 2000 and the worst wage “recovery” in modern times? AND a flattening Treasury yield curve?

Yes, we are once more staring into the abyss of a recession where unemployment rates are low (as they seemingly always are just prior to the end of a business cycle). Throw in a skidding Treasury curve and … this is it?

u3102a

As we are painfully aware,  wage growth is the worst it has been in modern times after The Great Recession. Despite the staggering printing of money by The Fed (and ultra-low interest rates).

wagesgrowthfed

Of course, The Fed is raising rates cautiously and unwinding their balance sheet very slowly in order not to disrupt markets (and pop the numerous asset bubbles).

 

 

Jobs Friday: NFP Increased By 228K In November, Wage Growth Cools To 2.5% YoY, Unemployment Near 17 Year Lows

Total nonfarm payroll employment increased by 228,000 in November, and the unemployment  rate was unchanged at 4.1 percent, the U.S. Bureau of Labor Statistics reported today.

Employment continued to trend up in professional and business services, manufacturing,  and health care.

Household Survey Data

The unemployment rate held at 4.1 percent in November, and the number of unemployed persons was essentially unchanged at 6.6 million. Over the year, the unemployment rate and the number of unemployed persons were down by 0.5 percentage point and 799,000, respectively. (See table A-1.)

17yrlow.png

Among the major worker groups, the unemployment rate for teenagers increased to 15.9 percent in November. The jobless rates for adult men (3.7 percent), adult women (3.7 percent), Whites (3.6 percent), Blacks (7.3 percent), Asians (3.0 percent), and Hispanics (4.7 percent) showed little change. (See tables A-1, A-2, and A-3.)

The number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 1.6 million in November and accounted for 23.8 percent of the unemployed.  Over the year, the number of long-term unemployed was down by 275,000. (See table A-12.)

The labor force participation rate remained at 62.7 percent in November and has shown no  clear trend over the past 12 months. The employment-population ratio, at 60.1 percent,  changed little in November and has shown little movement, on net, since early this year. (See table A-1.)

The number of persons employed part time for economic reasons (sometimes referred to as  involuntary part-time workers), at 4.8 million, was essentially unchanged in November but was down by 858,000 over the year. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find full-time jobs. (See table A-8.)

In November, 1.5 million persons were marginally attached to the labor force, down by
451,000 from a year earlier. (The data are not seasonally adjusted.) These individuals
were not in the labor force, wanted and were available for work, and had looked for a job  sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. (See table A-16.)

Among the marginally attached, there were 469,000 discouraged workers in November, down by 122,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.0 million persons marginally attached to the labor force in November  had not searched for work for reasons such as school attendance or family responsibilities. (See table A-16.)

Establishment Survey Data

Total nonfarm payroll employment increased by 228,000 in November. Employment continued to trend up in professional and business services, manufacturing, and health care. Employment growth has averaged 174,000 per month thus far this year, compared with an average monthly gain of 187,000 in 2016. (See table B-1.)

Employment in professional and business services continued on an upward trend in November (+46,000). Over the past 12 months, the industry has added 548,000 jobs.

In November, manufacturing added 31,000 jobs. Within the industry, employment rose in machinery (+8,000), fabricated metal products (+7,000), computer and electronic products  (+4,000), and plastics and rubber products (+4,000). Since a recent low in November 2016,  manufacturing employment has increased by 189,000.

Health care added 30,000 jobs in November. Most of the gain occurred in ambulatory health care services (+25,000), which includes offices of physicians and outpatient care centers.  Monthly employment growth in health care has averaged 24,000 thus far in 2017, compared with an average increase of 32,000 per month in 2016.

leisure hospitality

Within construction, employment among specialty trade contractors increased by 23,000 in  November and by 132,000 over the year.

Employment in other major industries, including mining, wholesale trade, retail trade,
transportation and warehousing, information, financial activities, leisure and hospitality,
and government, changed little over the month.

The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.5 hours in November. In manufacturing, the workweek was unchanged at 40.9 hours, and overtime remained at 3.5 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.7 hours. (See tables B-2 and B-7.)

In November, average hourly earnings for all employees on private nonfarm payrolls rose  by 5 cents to $26.55. Over the year, average hourly earnings have risen by 64 cents, or 2.5 percent. Average hourly earnings of private-sector production and nonsupervisory
employees rose by 5 cents to $22.24 in November. (See tables B-3 and B-8.)

The change in total nonfarm payroll employment for September was revised up from +18,000 to +38,000, and the change for October was revised down from +261,000 to +244,000. With these revisions, employment gains in September and October combined were 3,000 more than previously reported. (Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.)  After revisions, job gains have averaged 170,000 over the last 3 months.

Wage growth cooled to 2.5% YoY in November. Despite all the monetary stimulus, wage growth never exceeded 3% since The Great Recession ended in June 2009.

wagereport

Nothing in this jobs report will change the likely out come of the next FOMC meeting on December 13th. There is a 98.3% implied probability of a rate hike.

wirp120817

The Bitcoin Whales: 1,000 People Who Own 40 Percent of the Market (Bitcoin Bubble?)

ILLUSTRATION: PATRIK MOLLWING FOR BLOOMBERG BUSINESSWEEK

On Nov. 12, someone moved almost 25,000 bitcoins, worth about $159 million at the time, to an online exchange. The news soon rippled through online forums, with bitcoin traders arguing about whether it meant the owner was about to sell the digital currency.

Holders of large amounts of bitcoin are often known as whales. And they’re becoming a worry for investors. They can send prices plummeting by selling even a portion of their holdings. And those sales are more probable now that the cryptocurrency is up nearly twelvefold from the beginning of the year.
 
About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.) What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.
 

“I think there are a few hundred guys,” says Kyle Samani, managing partner at Multicoin Capital. “They all probably can call each other, and they probably have.” One reason to think so: At least some kinds of information sharing are legal, says Gary Ross, a securities lawyer at Ross & Shulga. Because bitcoin is a digital currency and not a security, he says, there’s no prohibition against a trade in which a group agrees to buy enough to push the price up and then cashes out in minutes.

Regulators have been slow to catch up with cryptocurrency trading, so many of the rules are still murky. If traders not only pushed the price up but also went online to spread rumors, that might count as fraud. Bittrex, a digital currency exchange, recently wrote to its users warning that their accounts could be suspended if they banded together into “pump groups” aimed at manipulating prices. The law might also be different for other digital coins. Depending on the details of how they are structured and how investors expect to make money from them, some may count as currencies, according to the U.S. Securities and Exchange Commission.

Asked about whether large holders could move in concert, Roger Ver, a well-known early bitcoin investor, said in an email: “I suspect that is likely true, and people should be able to do whatever they want with their own money. I’ve personally never had time for things like that though.”

“As in any asset class, large individual holders and large institutional holders can and do collude to manipulate price,” Ari Paul, co-founder of BlockTower Capital and a former portfolio manager of the University of Chicago endowment, wrote in an electronic message. “In cryptocurrency, such manipulation is extreme because of the youth of these markets and the speculative nature of the assets.”

The recent rise in its price is difficult to explain because bitcoin has no intrinsic value. Launched in 2009 with a white paper written under a pseudonym, it’s a form of digital payment maintained by an independent network of computers on the internet‚ using cryptography to verify transactions. Its most fervent believers say it could displace banks and even traditional money, but it’s only worth what someone will trade for it, making it prey to big shifts in sentiment.

Like most hedge fund managers specializing in cryptocurrencies, Samani constantly tracks trading activity of addresses known to belong to the biggest investors in the coins he holds. (Although bitcoin transactions are designed to be anonymous, each one is associated with a coded address that can be seen by anyone.) When he sees activity, Samani immediately calls the likely sellers and can often get information on motivations behind their sales and their trading plans, he says. Some funds end up buying one another’s holdings directly, without going into the open market, to avoid affecting the currency’s price. “Investors are generally more forthcoming with other investors,” Samani says. “We all kind of know who one another are, and we all help each other out and share notes. We all just want to make money.” Ross says gathering intelligence is legal.

Ordinary investors, of course, don’t have the cachet required to get a multimillionaire to take their call. While they can track addresses with large holdings online and start heated discussions of market moves on Reddit forums, they’re ultimately in the dark on the whales’ plans and motives. “There’s no transparency to speak of in this market,” says Martin Mushkin, a lawyer who focuses on bitcoin. “In the securities business, everything that’s material has to be disclosed. In the virtual currency world, it’s very difficult to figure out what’s going on.”

Ordinary investors are at an even greater disadvantage in smaller digital currencies and tokens. Among the coins people invest in, bitcoin has the least concentrated ownership, says Spencer Bogart, managing director and head of research at Blockchain Capital. The top 100 bitcoin addresses control 17.3 percent of all the issued currency, according to Alex Sunnarborg, co-founder of crypto hedge fund Tetras Capital. With ether, a rival to bitcoin, the top 100 addresses control 40 percent of the supply, and with coins such as Gnosis, Qtum, and Storj, top holders control more than 90 percent. Many large owners are part of the teams running these projects.

Some argue this is no different than what happens in more established markets. “A good comparison is to early stage equity,” BlockTower’s Paul wrote. “Similar to those equity deals, often the founders and a handful of investors will own the majority of the asset.” Other investors say the whales won’t dump their holdings, because they have faith in the long-term potential of the coins. “I believe that it’s common sense that these whales that own so much bitcoin and bitcoin cash, they don’t want to destroy either one,” says Sebastian Kinsman, who lives in Prague and trades coins. But as prices go through the roof, that calculation might change. 

BOTTOM LINE – It’s not necessarily illegal for big holders of some cryptocurrencies to discuss trading with one another. That puts small buyers at a disadvantage.

Bitcoin actually broke through the 17,000 barrier yesterday before retreating and is now back to 14,500 area.
bitcoinwilderide
Bitcoin has no intrinsic value? And that makes it different than the US Dollar, how?
Here is the Elizabeth Warren commemorative $5 Dollar bill.
indian-five-dollar-bill

Trumpcoin? Bitcoin Reaches $15,600 Mark (Up From $710 On 2016 Election Day of Trump)

Crypto-currency  Bitcoin has experienced a tremendous run-up since the 2016 election (November 8th) of Donald Trump. In fact, it has risen from $710 on election day 2016 to $15,600 as of today.

trumpcoin

The US Treasury 10 year yield rose dramatically on election day 2016, but today’s 10-year yield is about the same as it was in late November 2016.

The US Treasury 10Y-2Y curve continues to flatten as Trump enthusiasm waines as Democrats ferociously attempt to block almost any change proposed by Trump or Republicans.

trump102

Oddly, Bitcoin was left off the list off the Financial Systems Vulnerabilities Monitor.

db710a1c-411e-4040-8b88-654c5013a4a1-original