Tag Archives: Federal Reserve
“You’d Be A Fool To Hold Anything But Cash Now”
Posted on 04. Mar, 2012 by Wilensky.
Interesting interview with David Stockman the other day. The Ex-White House budget director expresses some extremely strong feelings about the direction this country is headed in the upcoming months. Considering his prediction of an event of epic proportions, wouldn’t you rather be on the right side of the trade than out of the market entirely..?
Now 65 and gray, but still wearing his trademark owlish glasses, Stockman took time from writing his book about the financial collapse, “The Triumph of Crony Capitalism,” to talk to The Associated Press at his book-lined home in Greenwich, Conn:
Q: You sound as if we’re facing a financial crisis like the one that followed the collapse of Lehman Brothers in 2008.
A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.
Q: How do investors protect themselves? What about the stock market?
A: I wouldn’t touch the stock market with a 100-foot pole. It’s a dangerous place. It’s not safe for men, women or children.
Q: Do you own any shares?
A: No.
The entirety of the interview can be found here: DAVID STOCKMAN: Youd Be A Fool To Hold Anything But Cash Now.
Pension Pulse: Hidden Burden of Ultra-Low Interest Rates?
Posted on 03. Feb, 2012 by Pension Pulse.
Guest Post By: Leo Kolivakis
via Pension Pulse: Hidden Burden of Ultra-Low Interest Rates?.
Matthew Philips and Dakin Campbell of Bloomberg report, Banks Join Pensions in Squeeze as Federal Reserve’s Low Rates Erode Profit:
The Federal Reserve, which cut its target for the federal funds rate to a zero-to-0.25 percent range on Dec. 16, 2008, said last month that rates would remain “exceptionally low” at least through late 2014. While the unprecedented period of near-zero rates is meant to aid an ailing economy, it poses challenges for banks, insurers, pension funds, and savers.
The hope is that by making mortgages and other loans cheaper, ultra-low rates eventually may revive economic growth, Bloomberg Businessweek reports in its Feb. 6 issue. For now they’re squeezing profits at banks and disrupting investment strategies at insurance companies and pension funds. They’ve reduced payouts on savings accounts and bonds, and may lead to higher bank fees and insurance premiums.
“For most people, there’s been more downside to these low rates than upside,” says Barry Ritholtz, chief executive officer of FusionIQ, a New York-based investment research firm. “They’ve punished savers and people living on fixed income, and made insurance more expensive.”
For banks, low rates provided a boost at first because they could borrow money cheaply and reduce rates paid to depositors while still collecting interest on existing loans made at higher rates.
As old loans matured, banks had to make new loans at lower rates, cutting into profit. At JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC), the four largest U.S. banks by assets, net interest margins — the difference between what they pay to borrow and what they earn on loans — dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.
‘Margin Compression’
“There’s no best way to counteract net interest margin compression,” says Betsy Graseck, a Morgan Stanley (MS)analyst. “You need to have several different strategies.”
Many banks have announced cost-cutting plans, including layoffs and lower compensation. Jason Goldberg, a Barclays Capital analyst, says larger banks are increasing fees on deposit accounts and slashing debit-card rewards programs.
“There are certainly a lot of levers they are pulling,” Goldberg says. “That said, it’s a big challenge. For a lot of these banks the majority of their profits comes from net interest income.”
Low rates also present a special challenge to insurers, which need safe, predictable investment returns to pay claims.About 64 percent of the property and casualty insurance industry’s portfolio is in high-grade corporate bonds. The average yield on investment-grade corporate bonds has fallen to 4.3 percent, from 6.2 percent in July 2007, according to data compiled by Bloomberg.
Insurance Losses
Insurers suffered $32.6 billion in losses from January through September 2011 in the wake of natural disasters including Hurricane Irene and tornadoes in the Midwest. To make sure they have cash available, insurers have begun moving some of their money into shorter-term bonds, says Steven N. Weisbart, chief economist at the Insurance Information Institute. Since shorter-term bonds have lower yields, that shift leads to a further squeeze on investment income.
Data through the third quarter indicates that industry profits were down 60 percent from the same period in 2010. Weisbart says that to make up for lost investment revenue some insurers may begin tightening underwriting standards and raising premiums.
Like insurers, pension funds have long counted on bonds to help them meet future obligations. After four years of low rates, and a decade of flat performance in the stock market, corporate pension funds face record shortfalls. A January report by Credit Suisse Group AG estimated that 97 percent of companies in the Standard & Poor’s 500 have underfunded pension plans.
‘Dispiriting Year’
The combined deficit at the 100 largest defined-benefit plans increased by $236.4 billion last year, according to an annual pension study by Milliman Inc., a Seattle-based actuarial and consulting firm.
“This was an unusually dispiriting year,” wrote John W. Ehrhardt, a co-author of the report. Depressed interest rates were responsible for 90 percent of the funding shortfall accrued since the middle of 2011, Ehrhardt says. “It’s all about having to cope with low rates right now.”
To address the shortfalls, companies have been making record levels of cash contributions to their pension funds over the past year. Boeing Co. (BA) recently announced that it would contribute $1.5 billion to its pension plan in 2012.
Traditionally, pension funds followed a simple allocation rule of thumb, investing 60 percent of their money in stocks and 40 percent in bonds, according to Ehrhardt.
‘More Sophisticated’
“That was the answer for many years,’” he says. “Things have gotten much more sophisticated.”
The biggest change over the past decade has been the position pension funds have begun taking in alternative investments. Between 2006 and 2010 they doubled their exposure to riskier investments — including real estate, private equity, and hedge funds – to 20 percent, according to Milliman.
Lately, pension funds have been trying to boost yields by buying bonds with longer maturities. By lengthening the average maturity of their bond portfolios by about six to eight years, funds have been able to get about two percentage points of extra yield, says Ari Jacobs, a pension specialist at consulting firm Aon Hewitt. That strategy carries its own dangers: When interest rates rise, the value of existing bonds falls–and longer- maturity bonds drop more than shorter-maturity ones.
“The traditional tools to manage a portfolio, like time horizon and diversification, have been thrown out the window,” says Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago. “All the lessons my generation has learned over our lifetime have been seriously called into question these last few years.”
Indeed, the ‘traditional tools’ to manage a portfolio, like time horizon and diversification, are not working as well as the past precisely because in an ultra-low interest rate environment, all asset classes are highly correlated.
The only real refuge from a shock in such an environment is government bonds. The article above blames the Fed for ultra-low rates but the reality is that the bond market still fears debt deflation, which is why rates remain at historic low levels. It’s not just ‘QE’, there remains a deep fear that the world is slipping into a debt-deflationary spiral.
How should pensions adapt in such an environment? Go back to read my comment on ATP, the world’s best pension/ hedge fund. I added insights from Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), the best pension plan in North America. Read his comments carefully. The folks at HOOPP and ATP get it.
What else will help pensions? The macro environment. This morning’s strong jobs report out of the U.S. crushed expectations. Stocks rallied and bond yields jumped on the news. While this is good for pensions, it won’t make enough of a difference to shore up severely underfunded pension plans.
Importantly, you need a significant jump in real yields and a huge boost in stocks and other risk assets to help close the huge deficits pensions have experienced in the last few years. But even that won’t be enough. We still need serious pension reform and a better approach to managing assets and liabilities at pension plans.
And don’t cry for banks, they always find ways to profit off money for nothing and risk for free. In an ultra-low interest rate environment, the name of the game remains trading, and the big banks are going to continue pushing hard on trading revenue from their capital markets operations. Fees from underwriting, IPOs and merger arb will also add to banks’ bottom line.
But what about savers, workers and many others trying to survive these volatile markets? They’re getting crushed because most of them do not enjoy the benefits of a defined-benefit pension plan. That is the real tragedy of our time, one that needs to be addressed by courageous politicians willing to make the case for boosting DB plans.
Finally, Fed Chairman Ben Bernanke says he won’t tolerate inflation to boost jobs, but I can assure you he’s doing everything in his power to counteract restrictive fiscal policy, reflate risk assets and stoke inflationary expectations. When it comes to deflation or inflation, the Fed prefers to err on the side of the latter, and so do pensions and financial institutions.
Below, Bloomberg excerpts from Bernanke’s testimony before the House Budget Committee on the U.S. economy, budget deficit and Fed monetary policy. Bernanke says the economy has shown signs of improvement while remaining vulnerable to shocks. Barring a collapse in Europe, the U.S. economy will continue to surprise to the upside for the remainder of the year.
Einhorn Ends 2011 Just Over +2%, Closes FSLR Short, Warns On Asia, Mocks “Lather. Rinse. Repeat” Broken Markets
Posted on 18. Jan, 2012 by Wilensky.
Anyone wondering why FSLR just jumped, it is because as was just made known, David Einhorn’s Greenlight has decided to close its FSLR position, after bleeding that particular corpse dry. “Our largest winner by far was our short of First Solar (FSLR) which fell from $130.14 to $33.76 paper share and was the worst performing stock in the S&P 500.” Einhorn also announces that he was among the “evil” hedge funds who dared to provide market clearing transparency and buy CDS on insolvent European governments: “We also did well investing in various credit default swaps on European sovereign debt.” As for losers, Einhorn and Kyle Bass can commiserate: “For the second year in a row, our biggest loss came from positions designed to capitalize on eventual weakening of the Yen.” He summarizes the global economic environment as follows: “The global environment is very complicated. On the one hand the Federal Reserve has taken a much-needed break from quantitative easing (at least for the moment). Accordingly, inflation in oil and food has abated, providing relief to the US economy. Bearish forecasts that the US was headed back into recession proved wrong for the third time since the end of the last recession. On the other hand, Asia appears to be in much worse shape than it was at this time last year and could be a drag on the world economy going forward. Very few people trust any of the economic data coming out of China, making it difficult to gauge the situation there. Some of the smartest people we know have very dim views. The Chinese have been a leading growth engine for the last two decades and are largely credit with leading the world out of the recession in 2009. A change in their economic circumstances could really upend things.” Yet the best thing is his summary of the current investing climate in our utterly and hopelessly reactionary broken markets.
U.S. recovery still on ropes in late summer: Fed
Posted on 07. Sep, 2011 by Maxwell Leary.
(Reuters) – The sluggish U.S. recovery failed to gain speed in recent weeks and softened in some areas of the country, as volatile stock markets and sputtering factory activity weighed on growth, the Federal Reserve said on Wednesday.
“Economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity,” the Fed said in its Beige Book collection of anecdotal reports of economic conditions in the Fed’s 12 districts.
A sharp decline in stock markets since mid-July and increased economic uncertainty have made businesses gloomier about the outlook in several regions, the Fed said.
Growth was modest or slight in five districts through late August, while the remaining seven described activity in terms such as “very subdued” or expanding “more slowly.”
U.S. consumer and business confidence nose-dived last month after a bruising political battle over the U.S. budget led Standard & Poor’s to strip the nation of its much-prized triple-A credit rating and sent stock markets tumbling. Employers responded by putting the brakes on hiring.
Full article available @:
The Fed’s Toolkit Revealed
Posted on 29. Aug, 2011 by Live Trading News.
The slowdown in US growth has raised speculation the US Federal Reserve may have to provide additional monetary support to the economy, and the Fed Chairman say they are monitoring the issues and standing by.
With interest rates already effectively Zero and the Fed’s balance sheet at a record US$2.85-T, US central bank officials has not acted yet to stimulate economic activity further yet.
Persistent unemployment and new turbulence in financial markets has added pressure on the Fed to do something.
US Fed Chairman Ben Bernanke noted last week that the Fed is prepared to respond to possible further weakness.
Here are some of the measures he said that are still available to the Fed, as follows;
1. Bolster easy policy assurances
The Fed has promised to hold benchmark interest rates very low for an extended period. It could bolster that commitment by extending the pledge to the securities holdings acquired through unconventional monetary policy. Or it could pledge to hold rates near Zero until a specific date beyond the timeframe currently expected by the markets.
2. Bond Buys
New purchases of long-term Treasury assets is seen as a possibility. The Fed believes its 2 rounds of bond-buying have held longer-term rates down and encouraged investors to move into riskier assets, helping drive the stock market higher. The Fed could also increase the average maturity of its securities holdings to put further downward pressure on long-term borrowing costs.
3. Lower the interest rate on excess bank reserves
The Fed could lower the 0.25% interest rate it currently pays banks on excess reserves held at the Fed. Doing so could encourage banks to put those reserves to use by lending them out. But Mr. Bernanke has said the likely impact of moving this already low rate even lower would be marginal.
4. Raise the Fed’s inflation target
By temporarily setting a target for inflation above what the Fed now considers consistent with long-term price stability, the Fed would again be communicating to markets that any tightening of monetary policy is a long way off. But, Mr. Bernanke has made it clear this is a controversial proposition within the Fed and is an unlikely course of action. He did not mention this possibility in his most recent remarks on possible easing tools.
Stay tuned…
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world
Investors trade in tight range ahead of Bernanke speech
Posted on 24. Aug, 2011 by Maxwell Leary.
(Reuters) – World stocksedged up and oil advanced on Wednesday as investors tried to position themselves ahead of a Federal Reserve Chairman Ben Bernanke’s key speech.
The gains follows weeks of market turmoil, with disappointing U.S. economic news and escalating worries about the debt crisis in Europe hitting sentiment. Benchmark stock indexes are on track for their worst month since the fall of 2008, after the Lehman Brother fall.
World stocks as measured by MSCI .MIWD00000PUS were up 0.1 percent on the day but were on track for a 10.3 percent year-to-date loss. The U.S. benchmark Standard & Poor’s 500 markets/index?symbol=us%21spx”>.SPX index was nearly flat after the opening.
European shares were also higher, though Japanese shares sold off following a Moody’s downgrade of the country’s sovereign debt.
Tokyo’s Nikkei average finance/markets/index?symbol=jp%21n225″>.N225 closed down more than 1 percent. Overseas investors in particular reacted negatively to Moody’s Investors Service’s downgrade of Japan’s sovereign debt rating.
Although U.S. stocks were near flat, they were supported by stronger-than-expected U.S. durables data. The U.S. government data showed new orders for long-lasting U.S. manufactured goods rose more than expected in July on strong demand for aircraft and motor vehicles.
Full article available @:
FRBSF Economic Letter: Boomer Retirement: Headwinds for U.S. Equity Markets? (2011-26, 8/22/2011)
Posted on 23. Aug, 2011 by Harvey Sax.
Boomer Retirement: Headwinds for U.S. Equity Markets?
By Zheng Liu and Mark M. Spiegel
Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.
via FRBSF Economic Letter: Boomer Retirement: Headwinds for U.S. Equity Markets? (2011-26, 8/22/2011).
Markets Rally Ahead of Fed News
Posted on 23. Aug, 2011 by Live Trading News.
US shares add to gains on anticipation of Fed action
US Stocks are rallying Tuesday, with the S&P 500 and the NAS up more than 2%, as buyers emerged before a highly anticipated address by US Federal Reserve Chairman Ben Bernanke later this week.
Technology and other growth stocks drove much of the market’s gains, with the S&P Information Technology Index .GSPF up 2.4%.
A weaker-than-expected reading of the US housing sector was the latest in a string of discouraging data that has raised expectations the US Fed will take measures to prop up the economy.
New US single-family home sales fell more than expected in July to hit a 5-month low.
Some are speculating the Mr. Bernanke could unveil measures to revive the struggling economy, though others say he is most likely to outline gradual actions, which would fall short of a 3rd round of Quantitative Easing.
Shares with historically high growth rates or expected to show strong growth were among Tuesday’s leaders after getting hit hard in recent weeks, analysts at Credit Suisse said in a note. Big percentage gainers on the S&P included tech shares Nvidia (NASDAQ:NVDA) and JDS Uniphase (NASDAQ:JDSU).
“Growth stocks that recently have been hurt the most are doing quite well today, which is encouraging, since in a tough correction or a bear market, growth stocks with higher valuations typically tend to decline more so than the market,” Lip said.
Even financials, which had been knocked lower early, turned positive, with the S&P Financials Index .GSPF up 1.9 percent.
UBS AG (NYSE:UBS) shares trading in the United States advanced 4.5% to 13.78. The bank said it plans to slash around 3,500 jobs in a cost-cutting measure.
But Bank of America Corp (NYSE:BAC) remained under pressure, with shares down 2.2% to 6.28, the biggest loss on the DJIA, on fears of possible write-offs and the need for capital.
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world
Fed concerned about European banks’ U.S. units
Posted on 18. Aug, 2011 by Maxwell Leary.
(Reuters) – The Federal Reserve Bank is taking a closer look at the U.S. units of Europe’s biggest banks, concerned that a euro zonedebt crisis could spill into the U.S. banking system, the Wall Street Journal reported.
The $2.5 trillion U.S. money market funds industry — which supplies short-term dollar funding to banks — has retreated from the euro zone in recent months, concerned that the continent’s debt crisis is spiraling out of control.
That and the drying up of interbank lending has led to a trebling of dollar funding costs for euro zone banks in the last month. One bank was forced to borrow dollars at the European Central Bank on Wednesday.
In a dramatic shift, the U.S. branches of foreign banks became net borrowers of dollars from their overseas affiliates for the first time in a decade, Federal Reserve data released last week showed.
The Fed’s New York branch — which oversees U.S. units from many European banks — is now asking for more information about whether the banks have reliable access to the funds needed to operate in the United States, the Wall Street Journal said.
New York Fed officials “are very concerned” about European banks facing funding difficulties in the United States, a senior executive at a major European bank who has participated in the talks told the Wall Street Journal.
The New York Fed was not available to comment.
On Wednesday, one euro zone bank borrowed $500 million from the European Central Bank at a rate much above those at which banks can get dollars in the open market. It was the first time since February 23 a bank used the central bank’s facility.
Fed officials recently have held meetings with U.S.-based executives from top European banks to discuss their funding positions, the Wall Street Journal said.
Full article available @:
Fed Faces Criticism as Political Season Intensifies
Posted on 17. Aug, 2011 by Maxwell Leary.
Don’t mess with Texas, at least when it comes t0 monetary policy.
Rick Perry, the latest entrant into the race for the Republican presidential nomination and already among the frontrunners, fired a shot across the bow of the Federal Reserve Monday. “If this guy prints more money between now and the election,” the Lone Star state’s governor said “it would be almost…treasonous.”
That kind of scathing criticism of the Fed usually was leveled behind closed doors. In the same Texas tradition, in the 1960s President Lyndon B. Johnson excoriated then-Fed Chairman William McChesney Martin for raising interest. But that was …
Full article provided @:
Fed’s Lockhart says U.S. recession risks have risen
Posted on 15. Aug, 2011 by Maxwell Leary.
(Reuters) – The risk of a new U.S. recession has risen over the last couple of months, but an outright contraction will most likely be avoided, Atlanta Federal Reserve Bank President Dennis Lockhart said on Monday.
Lockhart said there is plenty the central bank could do if the economydoes deteriorate further, including ramping up asset purchases or shifting their composition.
Recent market volatility, driven in part by concerns of slowing economies both in the United States and Europe, threatens consumer confidence and could put a crimp on spending, Lockhart told a Rotary Club meeting.
“The events of the last several weeks are a reminder that circumstances can quickly arise that may call for additional monetary stimulus,” Lockhart said
Last week, the Fed took the unprecedented step of promising to keep interest rates near zero for at least another two years. Lockhart said that in his view, the pledge hinged on economic conditions, and could be altered as the economic winds shift.
Full article available @:
http://www.reuters.com/article/2011/08/15/us-usa-fed-lockhart-idUSTRE77E4DQ20110815?feedType=RSS&feedName=topNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FtopNews+%28News+%2F+US+%2F+Top+News%29
Fed Said to Follow Basel Capital Rules for Biggest U.S. Banks
Posted on 11. Aug, 2011 by Maxwell Leary.
Aug. 10 (Bloomberg) — Federal Reserve officials are drafting rules for the
biggest U.S. banks that won’t be more stringent than international capital
standards agreed to in Basel, Switzerland, according to a person familiar with
the discussions.
Federal Reserve Governor Daniel Tarullo cited a “goal of
congruence” between the Basel standards and the Fed’s work on rules under the
Dodd-Frank Act, which overhauls banking regulation, in a June 3 speech. The
central bank hasn’t veered from that, according to the person, who declined to
be identified because the rules are still being drafted.
The Basel Committee on Banking Supervision, which includes
regulators from the U.S. and Europe, set an additional capital buffer standard
for the largest international banks in June that will range from 1 percentage
point to 2.5 percentage points of risk-weighted assets. That comes on top of a
requirement of 7 percent of common equity for all banks.
Full article available @:
Fed Officials Say It’s Business as Usual
Posted on 08. Aug, 2011 by Maxwell Leary.
Federal Reserve officials publicly declared it was business as usual in the face of Standard and Poor’s downgrade of US government debt, but privately they acknowledged these were unchartered waters.
Within 90 minutes of S&P’s decision, a joint release from US banking regulators declared that, despite the downgrade of US paper, there would be no change in the risk-weighting of treasury bills, bonds and notes or any paper guaranteed by the US government. In other words, banks do not have to post any additional capital against their Treasury positions.
Regulators also announced that the treatment of US treasuries at the Fed’s discount window would be unchanged. Typically, the riskier an asset, the more collateral banks have to post to borrow from the Fed’s emergency lending facility.
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