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Rates Don't Matter - Liquidity Matters
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The cure for systemic fragility is not low interest rates forever--it's a market that transparently prices credit and risk for lenders and borrowers, qualified and marginal alike.
One of the most unquestioned narratives out there is that the Federal Reserve raising interest rates from 0% to .25% (or .50%) will crush everything and everybody. But does this make sense? Let's start by putting ourselves in the shoes of actual lenders and borrowers.
From the point of view of the lender, higher rates are positive, as they enable higher margins.
Perversely, the Fed's zero-interest rate policy (ZIRP) was negative for lenders, as the yields on issuing loans declined. This made legitimate lenders reluctant to issue loans, especially to those with less-than-sterling credit. Why take a chance for pitiful yields?
From the perspective of borrowers, another half-percent of interest is not a dealer breaker for most borrowers--what matters more than the interest rate is the availability of reasonably priced credit. What matters more than the advertised rate on a mortgage is the availability of mortgage money in the real world.
Low rates don't mean anything if borrowers can't actually obtain loans in the real world.
If I only qualify for a mortgage at 3.5% annual interest and a jump to 4% pushes me out of qualifying, I probably have no business buying the house in the first place.
Subprime borrowers, shackled to the debt-serf oars of 24% annual interest for auto loans and credit cards, will not be impacted by a notch up in the Fed rate; they are already paying the maximum rate.
Investment Riches Built on Subprime Auto Loans to Poor: 23.74% interest to buy a used car (via Joel M.).
If I'm running a business that needs to borrow money short-term for working capital, I don't care much if rates click up .50%--what matters to me is liquidity--that I can get the money I need with a phone call or email, and roll over my existing short-term debt easily.
What matters is liquidity, not the rate of interest. With rates at historic lows, any increase in rates has a modest impact on qualified borrowers. If a half-percent increase in interest kills a deal, it was a deal that should have been killed anyway, because it was too marginal to be a sound deal.
Yes, higher rates will be bad for those owning bonds, as higher rates depreciate the market value of low-yield bonds. But higher rates will be positive for lenders and minimal-impact for qualified borrowers as long as there is plenty of liquidity to grease new loans.
What we should be worrying about is not a click up in interest rates, but systemic liquidity. If the Fed maintains liquidity, the adjustment to higher rates will be modest for everyone but those who are so marginal that they shouldn't be issuing/taking loans in the first place.
If the U.S. economy is now dependent on marginal lenders and borrowers, then it is exceedingly fragile. The cure for systemic fragility is not low interest rates forever--it's a market that transparently prices credit and risk for lenders and borrowers, qualified and marginal alike.
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I remember the good old '90's when you could get a 7% savings bond. That was great. I had a job too.
You could even get a boring CD for like 4.5, now you have to buy FaceFart or some bullshit 'darling stawk' or other on full margin for any hope of a return.
I remeber when interest rates were how you measured liquidity....
Two words: carry trade.
When U.S. rates first went to 0% and the ECB was still at 0.25% and purchasing power parity was about $1.25, carry traders drove the EUR/USD from $1.25 to over $1.40. Presently, purchasing power parity is closer to $1.15. Now that the ECB has gone to ZIRP, raising U.S. rates to 0.25% will drive the Euro to parity and beyond.
All that matters is the horrible business media's interpretation of what matters. For whatever reason, holding off on a tiny rate increase a bit longer is worth 1000 Dow points. It's freaking madness.
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"Super Bowl security breach- guards helped two men sneak in! Attention terrorists, here's how to do it:"
What two "terrorists," Bush Jr., and Netanyahu, or was it Cheney, and Holder?!
The banksters need to repay us.
Ironic that the biggest terrorist in the world is protected from "terrorists" by the Secret Service.
same here, my first home had interest rate of 9.50% and I lived without granite countertops!!!
I can't beleive that you just admitted that here....
"If I only qualify for a mortgage at 3.5% annual interest and a jump to 4% pushes me out of qualifying, I probably have no business buying the house in the first place."
You sell yourself short, Charles. You deserve that home either way. Home ownership is a basic human right.
Plus, it's trendy!
"What we should be worrying about is not a click up in interest rates, but systemic liquidity. If the Fed maintains liquidity, the adjustment to higher rates will be modest for everyone"
I see. So we're advocating doing QE4 while raising the Fed Funds rate at the same time.
BOOM! My head just exploded thinking about that possibility.
And it's supposedly a 'trench fighter' saying it!
You can't end QE in the US while China, Japan and Europe keep printing. The fed or any CB's greatest fear is deflation. A strong dollar means deflation.
ND - Exactly what i have been opining on for a couple of weeks. The neo Bolsheviks will create "demand" anyway they can. They are "all in" at this stage and they are losing. Greece obviously could just be the beginning of a Club Med countries Euro crisis.
Print baby,
Print the Dollars, print the Euros , print the Yen,
But just remember that there wil be no way,
To put Humpty Dumpty back together again.
'Liquidity'....reminds me of my officer of the deck watch standing days where you'd say 'water, water everywhere, but not a drop to drink'
The Rime of the Ancient Mariner
http://www.poetryfoundation.org/poem/173253
Well, yes, if you are a banker or financier, then yes. As for everyone else, not so much.
For people that own a house now is probably a good time to get cash at low rates. You can hedge or invest in something or you may need the cash if we go into a deflationary depression.
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Blame low interest rates,..nah,..the animal spirits.
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Correction! It's not liquidity that really matters, as that's not our current crisis. It's SOLVENCY!!!
So the BofA call to massively short the yen is a good one then.
"Escape velocity" here we come.
When the tide goes out, we'll see who's been swimming naked. There are going to be quite a few people who are going to recoil at the horror of it all.
Don't know where the Bankruptcy of America Muppet Looting call to short the Yen comes in here? I wouldn't trust them to tell me what time it was. I'd have to check the atomic clock after they told me.
My view is that there is no problem with cash flows as far as the USA is concerned. This Adminstration blew up Detroit without thinking twice about it.
I mean talk about free market capitalism! No investigations of these huge price moves? Would appear we have no Government at all....
"If the Fed maintains liquidity" Unfortunately capital flows effect liquidity MUCH more than the Fed or QE. If capital flows continue into the US by virue of being the "best bad bet" then liquidity becomes a non issue. Which is precisely why I believe the Fed WILL raise rates later this year. Nothing is out there right now that's proving to me that the US isn't the "best bad bet" left standing. A Grexit will likely accelarate this process. The Reserve Currency, by it's very nature will be the "last man standing". Only a matter of time.
The DEBT will be defended in my view.
No one cares about the dollar...
"The DEBT will be defended in my view." Again, it comes down to capital flows, which are the primary driver of SPX and DAX et.al. heading to nosebleed levels, capital fleeing to the "best bad bet". Keep rates low and the dollar balloons, eventually strangling the US economy, or raise rates to hopefully deflect some of that capital (which it won't of course) and the bond bubble begins to collapse. Damned if they do.....Damned if they don't. Just a matter of time.
where is kudlow? the gay coke head kike that led mom and pop right into the slaughter house a few years ago?
now he's Catholic and on the wagon so all is forgiven...? fuck him -
this is so wrong in so many ways.
lower interest rates cause cash back mortgage refis which cause banker bonuses and RVs and boats in driveways.
lower rates cause capital gains on bond funds which means bond fund maggots get their xmas BONE-US
lower rates cause leveraged stock buybacks which cause ceo bonuses and ever larger yachts.
lower short term rates means hedge fund maggots drive up the s&p on margin for the 2 and 20.
the eCONoME has been largely driven by ever lower rates for the past 30 years. jesus dude, have you been living under a rock? i'm going to stop reading this guy's crap.
Buzzie - Your point is taken however...HUgh Smith's point is that interest rates can't go nominally negative, and they are close to 0 right now. If the Fed , as they are hinting were to raise short term interest rates .25 or .5 %, that it should not impact cash flows of existing projects that are sound.
Indeed projects that are sound really only require the availability of liquidity to operate profitably. However if keeping the economy nominally growing at 2 or 2.5% requires that the Fed inspired liquidity be offered to marginally unsound projects / investments then that is a real problem with sustainability of even nominal growth.
I mainatain my hypothesis that I have espoused here for at least 2 weeks. The Fed is going to do BOTH. Raise rates 1/4 or .5% to maintain some semblence of a Western CB versus an African dictatorship, AND ensure that liquidity is there for all to access at higher rates. Credit be damned. The Fabian socialists, now neo Bolsheviks are going to grow demand if they destroy the USD in the process G'damnit !
"Tis but a token."
Bill Gross.
Rates and liquidity are subject to cash flow volume.
If cash in > cash out , rates are meaningless.
It would be a lot easier to "price credit" if it was based on something other than a banker's neurosis. Commodities anyone?
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http://cas-ncr-nter03.cas-satj.gc.ca/IndexingQueries/infp_moreInfo_e.php...
An ammo can full of small bills oughta do it.
Obamahome!!!
My worry is that the collateral that supports most of the global debt is priced based on very low real and nominal interest rates. The CAP rate is going to blow up as asset get repriced at even slightly higher interest rates causing the collateral to depreciate and you get into a vicious cycle, with weak hands and no buyers.
What matters is perception, not liquidity, nor the rate of interest.
Tell me where the line between shadow banking and 'real banking' is. One is not regulated. Neither is the other.
Is not shadow banking nothing if not a meeting of marginal borrowers and lenders?
As long as they are manipulated, I would agree. Rates lose their meaning and are twisted to benefit the overlords.