I gave a 45-minute presentation on Yield Purchasing Power at American Institute for Economic Research in Great Barrington, MA on October 14, 2016. I am grateful to the Institute for recording video of my presentation plus extended Q&A.
While the probability of a November rate-hike has collapsed to just 8.5% (as Dec holda round 65%) it appears regional Federal Reserves have a very different perspective of when Janet should hike. Nine of the Fed’s 12 regional banks sought a quarter-point increase in the discount rate in September, up from eight in August, based on minutes of their board meetings published by Fed. This is the same number as right before the December hike in 2015.
This morning, Janet Yellen testifies before the House Financial Services Committee on financial regulation topics. While there us unlikely to be much talk of monetary policy, it may come up, although most of the lawmakers’ questions are likely to relate to the Fed’s oversight of banks; other questions may touch on the Fed's recent bank commodity oversight push, the November election, and especially the recent Wells scandal.
Japan “is the best short in the world at the moment,” according to Shannon McConaghy's Horseman Capital who said that "I don’t have a price target, but I suspect that over the next few years, a number of banks will go to zero - as in bankrupt.”
One day after what was a rather disastrous hearing for Wells CEO John Stumpf, which culminated with a Senator telling the embattled chief executive he may want to consider going to prison, the bad news continued overnight when the bank that overtook Wells in the "biggest US bank by market cap" category, JPMorgan, downgraded Wells to Netural, cutting its price target from $53.50 to $48.00 as a result of "tough Senate hearings and mounting public scrutiny following the opening of fraudulent accounts."
Wall Street is an industry that should have been allowed to go down in flames back in 2008. Bailing out these career criminals and sociopaths was one of the gravest errors in American history. An error that we as a nation continue to suffer from to this day. As an example, yesterday’s Wall Street Journal reported on the industry’s latest scheme to pocket the hard earned savings of those dwindling Americans who still have a few pennies left — structured CDs.
Regional banks have been on a run of late, but are encountering resistance stemming from 2011. If the index is rejected here, then not only is further upside in financial shares going to be a challenge, but the interest rate pendulum may again swing back to the doves.
If the goal of the EBA Stress Tests was to reassure investors and regain confidence that 'all is well' in Europe's increasingly fragile and systemically interconnected banking system, then it has utterly failed. The broadest European bank stock index is now down 7% from the post-stress-test spike highs, Italian banks are at record lows and being halted (despite Renzi's promises), Commerzbank is struggling with capital raise chatter, and Deutsche Bank and Credit Suisse are tumbling after being booted from the Stoxx 50.
Germany opposes any attempt to shield private bank investors from losses if Italy pushes ahead with plans to recapitalize lenders. Merkel’s government says that European Union rules on handling struggling banks should apply in any rescue effort, including forcing losses on shareholders and some creditors before public money can be injected. The government in Berlin rejects the argument that the U.K. vote to leave the EU constitutes an “exceptional circumstance.”
Barely has the market had time to digest last week's Brexit vote by the UK, a vote which may never actually be implemented if the "sturm und drang" campaign unleashed by the EU and the ECB on UK capital markets succeeds in changing the mind of enough "Leavers" to the point that the entire referendum is called off and Boris Johnson never triggers the Article 50 clause, and already Europe's most financially troubled nation, Italy, is using Brexit as a pretext to unleash a €40 billion ($44 billion) bailout of its insolvent banks.
Brexit is the biggest electorate riposte yet to The Age Of Inequality created by policymakers to save (some) of the world, and as BofAML's Michael Hartnett warns, investors must anticipate a shift to an increasingly populist policy response. The backdrop of Quantitative Failure nonetheless means a renewed bull market in risk assets is impossible unless fiscal policy can quickly arrest the downside in GDP & EPS forecasts.
The approximate hour Janet Yellen spent wandering in circles and spewing double talk during her presser yesterday was time well spent. When the painful ordeal of her semi-coherent babbling was finally over, she had essentially proved that the Fed is attempting an impossible task. And better still, that the FOMC should be abolished. The alternative is real simple. It’s called price discovery on the free market; it’s the essence of capitalism.
"My fear is that central banks are now taking this too far through negative interest rates in particular and that they’re going to literally destroy their own banking systems. If they’re actually successful in generating higher inflation, then they’re going to destroy their own bond markets... our government officials, and I will include the Federal Reserve in that, have failed the American people."