Sorcerer’s Apprentice: Fed Excess Liquidity Overflowing To Foreign Banks (Not Helping Main Street USA)

According to the Wall Street Journal, banks based outside the U.S. have been unlikely beneficiaries of the Federal Reserve’s interest-rate policies, and they are likely to keep profiting as the Fed changes the way it controls borrowing costs.

Foreign firms have received nearly half of the $9.8 billion in interest the Fed has paid banks since the beginning of last year for the money, called reserves, they deposit at the U.S. central bank according to an analysis of Fed data by The Wall Street Journal. Those lenders control only about 17% of all bank assets in the U.S.

foreign banks WSJ


Of course, Fed policy has helped to stoke asset prices …


But not wages of anything else on Main Street.


At least The Fed is providing shelter for foreign banks. /sarc

This story reminds me of the Sorcerer’s Apprentice from the film Fantasia. Except that Ben Bernanke and Janet Yellen are Mickey Mouse.


Yellen trying to curtail quantitative easing.


High Yield Credit Index Hit 2014 High, Yield Curve Flattens and Treasury 10Y Below 2.5% (Again) – Greece 10Y Yield Skyrockets!

I was reading someone’s forecast yesterday who said “Interest rates and inflation can only go up. There is no where to go on the downside.”

Credit yields can certainly rise along with Greek sovereign yields. The US Treasury still has room on the downside for movement.

First, the high yield option adjusted spread hit a new high for 2014.


Second, the 10Y-2Y Treasury curve flattened.


Third, the US Treasury 10Y yield is down below 2.5% … again.


Lastly, Greek 10Y sovereign yields exploded upwards by 38 basis points.


None of these indicators are pointing to a strong economic recovery. Either in the US or Greece.

Opa! (Greek for “Your cheese is on fire!”)


The Labor-less Recovery: US Real GDP Increases To 4.6%, Wage Growth Remains At 2.1% (Rentals Keep Growing)

The banner headline this morning is that US real GDP increased 4.6% in Q2, the highest since 2011 and just in time for the midterm elections.

Too bad that wages earnings growth is only 2.1%, about the same as the inflation rate.


Meanwhile, personal consumption growth grew at 2.5%, once again above the growth in wage earnings of 2.1%.


This stagnant labor recovery and income is also leading to a surge in renter occupied units.


“The labor market has yet to fully recover,” Federal Reserve Chair Janet Yellen said at a press conference after a monetary policy meeting concluded Sept. 17. “There are still too many people who want jobs but can’t find them.”

Thanks for that observation, Cpt. Obvious.


Is Mortgage Credit Too Tight? Evidence From The Federal Housing Administration (Credit is NOT Too Tight, Income Is Too Low!)

I was moderating a panel discussion at an excellent symposium yesterday on “stress tests” for banks and regulators hosted by IFE Group. The meme that mortgage credit is too tight was repeated several times, mostly by regulators.

Just for background, here are some tables from the FHA Single Family Origination Trends For June 2014.

First, the percentage of loans in the 640-679 credit score buckets has risen from 24.92% in Jan-March 2009 to 42.09% in Apr-June 2014, a 69% increase for the 640-679 credit score bucket. This growth is hardly “tight.” You will also notice that for the highest credit score bucket of 702-850, the peak share was in 2011 of 37.75% and that has fallen to only 17.40% in 2014, a substantial drop in the highest credit score bucket.


Second, the debt-to-income ratio is now averaging 39.45%, only down slightly from 41.675 in 2009. The only noticeable increase in DTI was for the lowest credit score bucket of 500-619 which fell from 40.09% in 2009 to 35.69% in the last reading. An average of 39.45% DTI is not “too high.”


So if credit score and DTI requirements are not “too high,” then what is the problem? Falling/stagnant real median household income.

Here is a chart of FHA Loan Serious Delinquencies. Notice that the first higher delinquency regime occurred when real median household income fell following the 2001 recession. The second higher delinquency regime followed the decline in real median household income starting in 2008 … and it has not abated as of yet.


As Logan Mohtashami and I keeping trying to remind folks … it is the lack of income that is causing the DTI problem, not too tight credit.

Should lenders and regulators loosen credit (again) to stimulate the mortgage market? The answer is no. We do not want to go through another credit bubble cycle again. Particularly when the gap between home prices and income has widened so much.


Treasury 10-Year Yields Touch Highest in 2 Months Before Fed (Will Fed Remove “Staying Low For A Long Time” Reference?)

There is speculation that the Federal Reserve may remove their wording that interest rates will be held low for a long, long time, as Linda Ronstadt sang.

Sept. 15 (Bloomberg) — Treasury 10-year note yields touched the highest level in two months amid speculation the Federal Reserve will delete reference to interest rates staying low for a “considerable time” when it meets this week.

The difference between yields on two-year notes and 10-yea debt, the yield curve, reached the most since Aug. 1. There’s a 59 percent chance the central bank will increase its benchmark rate by July 2015, versus 51 percent at the end of August, federal fund futures show. A report today showed manufacturing in the New York region rose more than forecast in September.


“The market is braced for a hawkish Fed,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “This shift is in the price, so the hurdle for the Fed surprising the market is not insignificant.”

The yield on Treasury 10-year securities fell two basis points, or 0.02 percentage point, to 2.59 percent as of 8:46 a.m. New York time, according to Bloomberg Bond Trader data.

The yield touched 2.62 percent, the highest since July 7 after climbing 15 basis points last week, the biggest five-day increase since the period ended Aug. 16, 2013.

And the yield curve this morning flattened by almost 50 basis points at 30 years.


Perhaps Linda Ronstadt’s Silver Threads and Golden Needles would be more appropriate.


And here is Linda Ronstadt’s commentary on Fed policy creating a boom economy through fiat money.


Fed’s Fischer Leads Committee Watching for Asset-Price Bubbles (Here Are Bubbles To Watch, Stan!)

The Federal Reserve’s Stanley Fischer is now leading a committee to watch for asset bubbles. Fed officials want to ensure that six years of near-zero interest rates don’t lead to a repeat of the excessive risk-taking that fanned the U.S. housing boom and subsequent financial crisis.

Let me help you out, Stan!

Here is a chart of the S&P 500 stock market index against The Fed’s Balance Sheet to proxy for near-zero interest rates. Yes, it looks a bubble to me!


Here is a chart of average hourly wage earnings growth YoY against The Fed’s Balance Sheet. No bubble in wages.


Similarly, there is no bubble in real median household income since The Fed’s massive intervention. Quite the opposite, in fact.


How about home prices? Yes, there appears to be a bubble in home prices since 2012 given the poor growth in wage earnings.


Gold? Gold was soaring until 2011 with the growth in The Fed’s Balance Sheet, but has been declining/stagnant since then. So, no current bubble.


There you go Stan! Home prices and equity markets are in a bubble (thanks to NO bubble in wages and earnings). And no current gold bubble either. It’s hard to sustain housing and stock market bubbles with stagnant wage earnings and household income.

Rich vs Poor

So I would watch the equity markets and home prices for excessive risk taking by wealthy investors.

Stanley Fischer with “Orange Lady” Christine Lagarde from the International Monetary Fund (IMF) looking for asset bubbles over coffee. And apparently Lagrade has been promoted to General in the Global Monetary Army.



Minneapolis Fed’s Kocherlakota Channels “Rent Is Too Damn High” With “Interest Rates Are Too Damn High”

A top Federal Reserve official on Thursday said he believes U.S. interest rates are too high, and had no “good answer” when asked why the Fed is reducing its efforts to push borrowing costs down.

“Interest rates are not low enough,” Minneapolis Federal Reserve President Narayana Kocherlakota said at a Town Hall meeting in Montana, citing subdued inflation and “unacceptably high” unemployment as evidence.

His speech was reminiscent of Jimmy McMillan’s infamous “Rent is too damned high” speech.

Kocherlakota also mentioned Meredith Willson, creator of “The Music Man”:

Back then, U.S. President Gerald R. Ford launched an anti-inflation campaign and commissioned Meredith Willson to write a song to go with it. “Who needs inflation? Not this nation,” Kocherlakota quoted from the song, to chuckles in the largely student audience.

“Mr. Willson’s pithy characterization was spot on in 1974,” Kocherlakota said. “But 40 years later, I would suggest that it’s exactly backward. Right now, this nation needs more inflation.”

True, inflation hit 12% in December 1974. Why President Ford thought that having Meredith Willson write a song like “Whip, whip, whip inflation now” was a good idea is beyond me, unless he added “Eat crow instead of cow.”


The worst was yet to come when inflation cooled then hit 14.5% under President Jimmy Carter.

But are interest rate too damn high? Actually, the 30 year mortgage rate is near all-time lows …


and it still hasn’t jump started single unit housing starts or mortgage purchase applications.


The problem, of course, is stagnant wage growth which is running at about the same growth rate as inflation.


Lowering interest rates has not helped the housing recovery or improved wage growth.

Perhaps the Minneapolis Fed President would have been better off singing Meredith Willson’s “We’ve Got Trouble in River City.”