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Thu, 29th June 2017

Anirudh Sethi Report

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Archives of “Interest” Tag

WSJ on Yellen:”indicates era of extremely stimulative monetary policy is coming to an end”

The Wall Street Journal recap of Yellen’s speech and remarks earlier today

  • Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years
  • That will change the central bank’s policy-making stance, she said
  • Noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate
  • The Fed’s benchmark short-term interest rate will continue to move up to its long-term average, she said.
None of which comes a surprise, Fed communication efforts in past days have been on this message.

David Stockman Offers “More Proof Of Janet Yellen’s Idiocy”

During the last 129 months, the Fed has held 86 meetings. On 83 of those occasions it either cut rates or left them unchanged.

So you can perhaps understand why Wednesday’s completely expected (for the last three weeks!) 25 bips left the day traders nonplussed. The Dow rallied over 100 points that day.

Traders understandably believe that this monetary farce can continue indefinitely, and that our Keynesian school marm’s post-meeting presser was evidence that the Fed is still their friend.

No it isn’t!

Our monetary politburo has expanded its balance sheet by a lunatic 22X during the last three decades and in the process has systematically falsified financial asset prices and birthed a mutant debt-fueled of simulacrum of prosperity.

But once it begins to withdraw substantial amounts of cash from the canyons of Wall Street as per its newly reaffirmed “normalization” policy, the whole house of cards is destined to collapse.

There will be a stock market implosion soon, and that will in turn generate panic in the C-suites as the value of stock options vanish. Like in the fall of 2008 — except on an even more sweeping and long-lasting scale — corporate America will desperately unload inventories, workers and assets to appease the robo-machines of Wall Street.

But there is nothing left to brake the casino’s fall.

SNB leaves rates unchanged at March 2017 meeting

Swiss National Bank leaves rates unchanged at March 2017 monetary policy meeting

  • 3 month LIBOR lower target range -1.25%
  • 3 month LIBOR upper target range -0.25%
  • Sight deposit rate -0.75%

All as expected.

  • Will remain active in FX market as necessary
  • Swiss Franc significantly overvalued
  • Swiss forecasts is marked by considerable uncertainty from international risks
  • Raises 2017 CPI forecast to 0.3% vs 0.1% in Dec
  • 2018 CPI 0.4% vs 0.5% prior
  • 2019 CPI 1.1%
  • Maintains 2017 GDP at “roughly” 1.5%

WSJ: America Can’t Escape the Debt Vortex: Total obligations … hit 370% of GDP

The Wall Street Journal on ‘credit bubbles’:

  • Credit bubbles usually pop at some point and the consequences aren’t pretty
  • The stock-market crash of 1929 followed a credit boom, and so did the crash of 2008
  • In both cases, Washington overreacted, producing a 10-year depression in the 1930s and a weak recovery after the 2009 recession
The piece goes on (this is a summary, link to the full piece below), bolding mine:
Lacy Hunt, an economist with Hoisington Investment, estimated at a recent conference held by Grant’s Interest Rate Observer that debt of all kinds in the U.S. now totals more than $69 trillion. That’s more than double the $30 trillion recorded by Fed statisticians as recently as 2000. If the Hunt figure is correct, then total debt is now about 370% of GDP, up from 294% in 2000.
The article concludes:
  • There isn’t much the Fed can do about this except make it worse
  • Nor is there much that Mr. Trump can do except make it worse. But he seems intent on that-threatening trade wars against America’s biggest trading partners. If the president blocks their ability to earn dollars, he diminishes their ability to bail us, and themselves, out of the global debt slough. The past decade of government and Fed profligacy is not his fault, but that still isn’t an argument for recklessness. If this ends in tears, Mr. Trump will get the blame.

Hit by rating downgrades, India Inc’s debt profile plunges

At ten a day since April last year it’s been raining downgrades for India Inc. Downgrades have now outnumbered upgrades every month for the past 18 months, save in January this year. Moreover, at 112, the number of companies that saw their ratings rise in February is the lowest since May 2016. After Lodha Developers, Reliance Comm and Tata Steel in January, IFCI and IDBI Bank saw their ratings drop last month.

Corporate India’s debt profile isn’t getting better and, in fact, maybe worsening. Sample this: More than R7 lakh crore of debt is with companies that have had an interest cover (PBIT/interest) of less than one for 12 straight quarters.

That’s roughly a fifth of all bank loans to the industry. For instance, Punj Lloyd and Kesoram Industries together owe lenders over R12,000 crore — the interest cover (PBIT/interest) at both companies has been less than one for 12 straight quarters now.

As Credit Suisse points out, more than a third of corporate loans remain on the books of chronically stressed companies. And at the end of the December 2016 quarter, 41% of the total borrowings belonged to companies with an interest coverage ratio of less than one. Unfortunately, these firms aren’t doing too well — their ebitda, or earnings before interest, tax, depreciation and amortisation, fell 10% in Q3FY17.

Again, as Credit Suisse points out, three ADAG Group companies — RPower, RInfra and RCom — have a gross debt of close to R80,000 crore but each of them reported an ebit (earnings before interest and tax) loss in the December 2016 quarter.

In Latest Tightening Move, China To Cut Money Supply Growth To 12%

For a majority of China watchers, while Beijing’s goalseeked GDP reports are largely dismissed as politburo propaganda, most of the attention falls on the PBOC and banking sector’s credit creation, and particularly, how this translates into broad money supply, or M2, growth: after all, in a nation which has roughly $35 trillion in bank assets, the biggest variable is how much cash is being injected into the system, and what happens with said cash.

Which is why a Reuters report overnight that China plans to target broad money supply growth of around 12 percent in 2017, down from 13 percent in 2016, has been promptly noted as the latest signal to contain debt risks while keeping growth on track. The M2 growth target was endorsed by leaders at the closed-door Central Economic Work Conference in December, according to sources with knowledge of the meeting outcome.

As a reminder, yesterday even the NY Fed released a note in which central bank researchers warned about the unsustainability of Chinese debt. Under the PBOC’s new “prudent and neutral” policy, the central bank has adopted a modest tightening bias in a bid to cool torrid credit expansion, though it is treading cautiously to avoid hurting the economy. 

“It’s not necessary to maintain last year’s high money supply growth,” said a source who advises the government. “A money supply rise of 11 percent should be enough for supporting growth, but we probably need to have some extra space, considering risks in the process of deleveraging.”

In 2016 China’s money supply target was 13%, roughly double the country’s GDP , though it ultimately grew just 11.3% due to the effects of the central bank’s intervention to support the yuan currency, which effectively drained yuan liquidity from the economy.  Last year’s M2 target reflected Beijing’s focus on meeting its economic growth targets, but top leaders have pledged this year to shift the emphasis to addressing financial risks and asset bubbles.

Negative rates put corporate Japan in a spending mood

The introduction of negative interest rates a year ago by the Bank of Japan is prompting listed companies here to funnel the money they save on borrowing costs toward takeovers and capital investment.

The average borrowing rate of 1,387 nonfinancial companies listed on the first section of the Tokyo Stock Exchange and which released their third-quarter results by December 2016 has shrunk to an estimated 1.06%, down 0.11 percentage point from a year earlier. Interest-bearing debt has increased nearly 1 trillion yen ($8.84 billion) to about 207 trillion yen, while interest payment costs have fallen 10% to about 1.63 trillion yen. Some 30% of the companies have increased their borrowings.

 Telecommunications giant SoftBank Group is one of the companies that has benefited the most from negative interest rates. Chairman and CEO Masayoshi Son bought British chip designer ARM Holdings for about 24 billion pounds ($29.8 billion) at the current rate in 2016 and has announced other bold global plans.

SoftBank’s interest-bearing debt has jumped 16%, or about 1.9 trillion yen, to a little more than 14 trillion yen over the past year. However, its average borrowing rate — obtained by dividing interest payment costs by average interest-bearing debt — was 3.53%, down 0.18 percentage point.

Negative interest rates have also lowered borrowing costs for corporate bonds. Borrowing costs for SoftBank seven-year bonds issued in April 2016 were 1.94% per annum, 0.19 percentage point lower than the cost for the seven-year bonds it issued six months earlier.

Greece : Banks worry over sudden bad loan spike in January

Nonperforming loans last month posted a major spike of almost 1 billion euros, reversing the downward course set in the last few months of 2016. This has generated major concerns among local lenders regarding the achievement of targets for reducing bad loans, as agreed with the Single Supervisory Mechanism (SSM) of the European Central Bank for the first quarter of this year.

Bank sources say that after several months of stabilization and of a negative growth rate in new nonperforming exposure,the picture deteriorated rapidly in January, as new bad loans estimated at 800 million euros in total were created.

This increase in a period of just one month is considered particularly high, and is a trend that appears to be continuing this month as well. Bank officials attribute the phenomenon to uncertainty from the government’s inability to complete the second bailout review, fears for a rekindling of the crisis and mainly the expectations of borrowers for extrajudicial settlements of bad loans.

Senior bank officials note that a large number of borrowers will not cooperate with their lenders in reaching an agreement for the restructuring of their debts, in the hope that the introduction by the government of the extrajudicial compromise could lead to better terms and possibly even to a debt haircut

BOJ on edge after Trump claims devaluation

While Bank of Japan officials see no grounds for Donald Trump’s accusation of currency devaluation, they still worry that the bank’s unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.

“I have no idea what he is saying,” said one baffled BOJ official after learning about the criticism Trump leveled against the central bank. 

 Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% — the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.

BOJ Gov. Haruhiko Kuroda refuted Trump’s accusation in the Diet on Wednesday, saying Japan’s monetary policy is designed to defeat persistent deflation and not to keep the yen weak. “We discuss monetary policy every time Group of 20 finance ministers and central bankers meet,” he said. “It is understood among other central banks that [Japan] is pursuing monetary easing for price stability.”

In fact, U.S. monetary policy is chiefly responsible for the yen’s depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar — the higher-yielding currency — than the yen.

US Real Estate Under Pressure as Fed Prepares to Stop Mortgage Reinvestments

The US Federal Reserve will stop its mortgage and mortgage-backed security (MBS) reinvestments in April 2018 in order to prevent further expansion of its $4.2-trillion balance sheet, a negative signal to the US real estate market.

After the 10-year commercial mortgage-backed securities (CMBS) issued at the height of the mortgage meltdown in 2007 expire this year, real estate prices are likely to tumble due to a projected decline in effective demand. Higher Fed rates will also contribute to a contraction in demand as credit affordability is declining, meaning that already sky-high US property prices might be peaking.

According to Morgan Stanley, the termination of Fed MBS reinvestment will result in higher mortgage costs for consumers, falling in line with the gradual normalisation in the regulator’s interest rate policies.

“Applying this informal guidance to our expectation for the rates path leads us to believe the Fed will halt its MBS reinvestments in April 2018,” Morgan Stanley said. “Ending Treasury reinvestments is not necessary for a gradual normalization of the balance sheet; the economy should grow into the Fed’s Treasury portfolio within about a decade.”

The Fed has been relentlessly criticised by President Donald Trump and Republicans in Congress for having dramatically expanded its balance sheet during the past eight years to no avail as economic growth remains feeble and domestic US investment is low. While the new White House administration is tackling the issue of Fed independence, and the GOP-controlled House is weighing a Fed reform, the regulator might seek to reduce its bloated balance sheet as soon as it can.

Any substantial effort in this regard would likely not be feasible in 2017, as the refinancing of 10-year CMBS issued during the mortgage crisis will need Fed assistance. April 2018 is thus the earliest the regulator will be able to address the issue.

“We believe the FOMC will halt its reinvestments of MBS in April 2018, preceded by a ramp-up in messaging and an announcement at the March 2018 FOMC statement,” Morgan Stanley said.