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.

Yellen Hints That The Fed’s Balance Sheet Unwind Could Start In September

Just like a request to take out the trash, Yellen and The Fed are saying that the long promised balance sheet unwind will start soon .. like in September.

Why not now? Oh, inflation is sufficiently below their target rate of 2%.

Yes, Yellen has a lot of excess baggage. Here is The Fed’s balance sheet.

Not to mention $2 trillion in excess reserves.

I see Fed people.

Just like The Fed, not every gift is a blessing.

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).

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Why Fannie Mae’s 50% DTI For Mortgages Won’t Get To 100,000 Loans

The mortgage giant Fannie Mae reecently raised their Debt-to-income (DTI) ratio from 45% to 50%. The Urban Institute, a left-wing think tank, claimed in a study by Ed Golding and Laurie Goodman that this increase in DTI will increase mortgage lending by 100,000 (mostly to minorities). fannie_mae_raises_dti_limit_0

While Golding and Goodman are very intelligent people, they have forgotten one economic rule: lower credit standards can’t compensate for lack of savings and lack of earnings.

Wage growth (average hourly earnings) and personal savings rate are lower today than they were pre-1980. And wage growth never quite recovered from The Great Recession, although the personal savings rate is higher.

Unfortunately, while homeownership has correlated with home prices from 1995 through 2005, home prices have been rising since 2012 while homeownership has declined.

According to the US Census, black alone homeownership in Q1 2017 is estimated to be 42.7% while white alone is 71.8%. Hispanic homeownership rate is 46.6%. A clear gap between races in homeownership.

With low wage growth and low personal savings rates, it will be hard to raise homeownership rates among minorities unless there is a corresponding increase in loan-to-value (LTV) ratios and/or a decline in required credit (FICO) scores.

The Abduction of the Sabine Women

sabinewomen

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 dolartoday.com 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.