Thursday, August 25, 2011

WHERE THERE'S SMOKE, USD LIBOR IS RISING

SOMETHING NEW IN USD LIBOR?
Monthly readers are accustom to reading the monthly Macro Update and finding neat little charts of 6 Month USD Libor and Euro Dollar Libor posted here.  I've lamented each time that USD Libor remains stubbornly low and a result of straight up manipulation rather than some reflection of healthy interbank lending.

Before I go further, let's recall what LIBOR is.  LIBOR is the rate that banks say they can borrow from each other for overnight loans, but in the case of the charts I show, it is the rate for 6 month loans to each other.  LIBOR is extremely important because this rate is essentially the benchmark rate that many other interest rates are set against.  Some of you might have an 7 Year or 5 Year Option ARM, most of those reset according to some LIBOR rate plus a percentage mark up.  Needless to say, LIBOR is an important data point, and this is why I've posted it for more than a year or so. 

While we look at LIBOR as a metric to determine the cost of borrowing, it is also really an indication of the trust and fear levels in the financial markets.  If banks really trust each other, they will gladly lend to each other at low rates.  If one of them smells trouble, funding rates suddenly begin to climb.  Remember, these bankers are all buddies and they are all in the same game, if LIBOR is rising, it isn't just because someone is mildly concerned about a bank issue, it is because there is a real threat. 
Ok, so what is all the fuss about 3 Month and 6 Month LIBOR?  Let's take a look.

6 MONTH USD LIBOR



3 MONTH USD LIBOR



See, in the last month to two months, USD LIBOR has done a moonshot.  In the case of 6 Month LIBOR you are looking at a 21% increase in USD LIBOR since 7/1/2011 and 3 Month USD LIBOR has vaulted 29% since the first of July. 

Now I know that someone may say that LIBOR rates are going to be based somewhat on the costs of funds in the market, in other words that LIBOR rates will look to the Fed Funds rate or might even be forward looking anticipating future interest rate increases. I understand that, but what has happened to treasury yields during that same time period or Fed Funds rates.  Let's have a look.

FED FUNDS RATES




2 YR TREASURY BOND YIELDS





Not much change at all.  Fed Funds rates remained pegged at zero and Treasuries have simply fallen off a cliff here as the entire world has piled into US government bonds as a safe haven from the carnage that is our financial system.  And finally a skeptic may say, "Well yes the stock markets were really tanking and all LIBOR or interbank trading simply moved higher because there was a genuine concern when equity markets were getting body slammed.  I would simply highlight this graph of EURO LIBOR in response.  I've grabbed the 1 Month chart here, but all of them are the same.




Nope, not the same panic stricken increase in funding rates since July here, in fact, we see just the opposite, we see a drop in rates by about 10 bps here. Euro LIBOR is made up of 16 reporting European institutions (just like USD Libor).


IS THAT YOUR BANK THAT IS SMOKING?

We don't have to dig much deeper here to realize that there are real issues going on here that have caused the inter-banking lending rates in USD LIBOR terms to go up, and up a lot in percentage terms.  While we can't know if the drop in equity markets in general are the cause of the increase or if it something more specific related to the banking sector or if it is a particular bank here in the USA, it is pretty compelling.  I will continue to monitor these rates daily as it is obvious that CEOs of large US financial institutions mean what they say when they state, "We are well capitalized and don't need any future fund raising".  Clearly Bank of America's CEO Brian Moynihan couldn't be anything like another powerful CEO, Dick Fuld, from our favorite bankrupt investment banking firm, Lehman Brothers that uttered pretty much the same words several years ago.

Here's a little parting view of what distress in the banking sector looks like.
BAC Daily 100 Day Chart



GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/













 
 

JACKSON HOLE LOOMS - DOUBLE SECRET QE?


MONETARY POLICY JACKSON HOLE STYLE
I'm back from a glorious vacation and I have found that the placid markets delivered a teeth clenching ride down last week and a euphoric blast higher this week.  Clearly the volatility tells us that everything is JUUUUST fine with the markets.

We have some interesting things cooking, but the one that is taking center stage now is the meeting of the world financial leadership in Jackson Hole, WY.  Recall, that this is where QE II was hatched last year right after Fed Governor Bullard suggested that further quantitative easing was the right prescription for the job.  I went back and found one of the most popular posts that I've written that was penned right about that time.  It might be worth the read as you'll note that I mentioned the impact that their efforts would have on mortgage rates. 


http://goatmug.blogspot.com/2010/08/throwing-down-gauntlet-august-macro.html

"This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011. Isn't it funny how despite their efforts we continue to spiral the way of Japan. Want to get an idea for what it might look like right now? You can buy a Japanese 10 Year note and receive 1% on your money! Hello deflation! PUBLIC ENEMY # 1 - DEFLATION"
For a refresher, I'd also suggest you hit the Pulic Enemy #1 - Deflation post because it highlights the 2002 Bernanke speech where we get the entire road map of Ben Bernanke and get to read all of his arrogance and foolishness about his abilities to print and print and print to stave off deflation.  Well, we all are witnessing how Japan isn't such a bunch of idiots after all as we are finding that political will power (or better said, LACK OF IT) is a much more powerful force than Bernanke perceived.  Political leadership is not willing to do what is necessary when it comes to managing spending effectively and stamping out the influence of special interest groups.  When the "special interest groups" are the banking henchmen, it is even more of a problem and the hard medicine of taking writedowns and losses is not one that those guys eagerly accept. 

So, now more than one year after writing that post calling for mortgage rates with a 3% handle, we are getting closer and we are on the verge of receiving news from Jackson Hole that while we won't be receiving QE3 in the same monetization framework of the first two failed attempts, we'll see monetization through the use of repurchase agreements, reverse repurchase agreements, targeting interest rates to steepen the 2-10 year curve, and flattening interest rates on the long end.  We'll also finally see a termination of payments of interest on excess reserves held at the FED to stop the risk-less arbitrage that banks have been doing for oh so long.  Of course the impact won't really be that banks will lend, but we can always hope right. 

GOLD / INFLATION / PRINTING
As I wrap this post up I will close with this thought.  The markets are rallying because they are hoping and praying that some sort of QEIII will be announced.  As I mentioned I don't expect a formal QE3 announcement and neither does gold for now.  Gold is getting it's face ripped off.....all the way down to where it was a couple of weeks ago!!!  Coordinated margin hikes for gold futures trading has also conspired to drop gold almost $200 an ounce.  Call this crazy, but I could easily see the slaughter continue down to the $1450 to $1475 area that I had identified several months ago as my target for bigger and more buying.  Am I scared that gold is getting smashed, no, because effectively the FED is trying to monetize and will end up printing because that is what central banks do.  I will begin making purchases at we near the $1,600 an oz level and increase those purchases as we get to my target. 

I'll be posting select items from the monthly report.  As you know I never posted it and some of that data is stale.  I will pull out charts that are still useful and make a few comments, but nothing huge for this month since we only have a few days left!

It's good to be back and notice that nothing has changed except the un-reality of these markets.  Apparently the Euro-zone problems have all been fixed and I didn't get the memo!

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com