Wednesday, September 19, 2018
Thursday, August 2, 2018
Thursday, July 26, 2018
FDIC Chairman's "Living Will" Speech @ Wharton, NY Fed Revises GDP Down, FDIC Publishes Annual Report & Survey Shows Slight Wage Relief
You can learn a great deal by listening to the "public" speeches given by Fed leadership. It's one thing to give testimony on Capital Hill, it's quite another to give a speech in front of people that actually know what you're talking about. In this speech, Gruenberg, the Chairman of the FDIC, discusses the actions taken over the past 10 years to ensure against another "Great Recession".
He discusses the establishment of the Dodd-Frank Act and the authority it gave the FDIC to manage the orderly failure of banks in times of crisis. Among other things, the new authorities gave the FDIC:
The ability to place the financial firm, including its holding company, into a receivership process;
An Orderly Liquidation Fund to assure liquidity for the orderly wind down and liquidation of the failed firm;
Authority to impose a short stay on derivatives contracts; and
The ability to coordinate with foreign authorities in the case of a firm with global operations.
The Evolution of the Living Will Process
As a way to create a framework around an orderly bank liquidation, the FDIC created the living will process. According to Gruenberg, the living will "required both the Federal Reserve and the FDIC to consider the objectives of the process, the standards and the guidance that would need to be provided to the firms to achieve the objectives, and the means of engagement with the firms to assist them in following the guidance". This process required banks to provide a description of the following:
The firm’s strategy for orderly resolution in bankruptcy during times of financial distress;
The range of actions the firm proposes to take in resolution;
Liquidity and capital needs and resources of the firm;
A description of the firm’s organizational structure, material entities, interconnections, and interdependencies; and
The firm’s corporate governance process.
The only thing that really matters here is liquidity. With the right liquidity and capital resources, any crisis can be avoided or at least pushed off, but for how long?
The truth is, none of these changes would have saved Lehman Brothers or Bear. None of these resolutions would have made AIG confess to creating bad securities. The truth is, everything happened exactly how the banks wanted it to happen. They got a huge bailout, 10 years of free money, and trillions in reserves at the Fed. To top it all off, Dodd-Frank approved a resolution to pay banks for those reserves. Who pays the interest? We do. The American taxpayer. We don't control rates or the amount of reserves held at the Fed, but we have to pay whatever rate the Fed sets on those reserves. Sounds fair. This is why people are gravitating toward Bitcoin and precious metals.
In other news, Nowcast is a forecast of the upcoming GDP announcement. It was updated and revised down to 3.11%. The leading causes are due to a decline in:
- capacity utilization,
- industrial production,
- general business conditions (as reported in a daily brief last week); and,
- retail sales.
In other words, all things driven by consumer demand are starting to decline, while anything driven by debt (inflation, pricing and housing) are on the rise.
The Empire State Manufacturing Survey/Business Leaders Survey included a supplemental survey on wages, a critical piece of the consumer demand equation. Wages are of key interest because without wages, GDP will continue to fall -- not everyone has access to massive amounts of debt. What does the survey show? Job openings are taking longer to fill, manufacturers are hiring more, and starting pay is going up. Will it be enough to impact earnings? My guess is no. Why? Wall Street doesn't like wage increases.
Friday, June 22, 2018
The FDIC Lowers Credit Standards, Household Debt Jumps, General Business Conditions Fall & There's An Increase in Jumbo Loans
On February 14, 2018, the FDIC Board of Directors adopted a rule to permit the removal of "external credit ratings".
"The final rule removes references to external credit ratings and replaces them with appropriate standards of creditworthiness."
In other words, as long as a bank makes under $1 billion in total assets it doesn't need to reference external credit ratings in order to label an asset or security as "investment grade". These classifications are used for capital allocation and pledged assets. The rule reduces the need to classify assets as investment grade with a much lower bar -- as of this ruling "An entity has adequate capacity to meet financial commitments if the default risk is low, and the full and timely repayment of principal and interest is expected."
The rule also "adds cash to the list of assets eligible for pledging and separately lists Government Sponsored Enterprise obligations as a pledgeable asset category."
So mortgaged backed securities are now considered pledgeable assets as well as cash? And, if you have cash, why do you need to pledge assets?
Household Debt Jumps as 2017 marks the 5th consecutive year of annual growth based on the latest Quarterly Report on Household Debt and Credit.
The report reveals that total household debt reached a new peak in Q4 of 2017, rising $193 billion to reach $13.15 trillion. Balances climbed:
- 1.6% on mortgages,
- 0.7% on auto loans,
- 3.2% on credit cards; and,
- 1.5% on student loans.
According to the Empire State Manufacturing Survey, a monthly survey of manufacturers in NY conducted by the Federal Reserve, the general business conditions index fell five points to 13.1.
A report by the Fed regarding jumbo loans -- these are loans that are over ~$625,500 -- suggests the number is growing.
Wednesday, April 11, 2018
Reason #1: The price of Bitcoin and cryptos in general falls every year in Q1. Each year, the price rebounds and soars by the end of the year.
As you can see from the charts above, this is a normal trend for Bitcoin and one that the community has come to expect.
Reason #2: Despite the call for regulation by central banks, nation states are starting to realize their own power. While the SEC and CFTC battle over who gets to regulate cryptocurrency, Arizona just passed a bill allowing it as a form of payment by the Department of Revenue. In other words, you will be able to pay your Arizona taxes in Bitcoin. There's also a resolution passed in Congress calling for a pro-bitcoin national policy. When/if that resolution gains traction, the price of Bitcoin will soar.
Reason #3: Third and perhaps most importantly, hedge funds and other large institutional players are just now getting into the market. They could not enter the market prior to Bitcoin futures which started in December 2017. Below is one of my favorite videos in support of this, hedge fund manager clearly explains what institutional players are doing right now.
It might take six to eighteen months, but Bitcoin is a much more valuable way to store your digital currency. Remember, only 9% of the world's currency is physical, the rest is digital. Institutions get it and they're getting on board.
Final thoughts: Bitcoin is extremely volatile. For this reason, you don't want to buy at the highs, but rather the lows. Bitcoin is officially in a low cycle and now is a great time to buy. If you don't buy now, save up to buy next year at this time.
Where to buy? You can buy Bitcoin from an exchange (Binance or Local Bitcoin) to hold yourself or you can purchase an investment product, like an IRA. Bitcoin IRAs have the same tax treatment as traditional IRAs.
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