2024-01-17 11:48:00
Macro: Another reason why banks should not be saved from collapse
The banking system is an important, if not critical, component of any economy. The collapse of a bank is not a game, and certainly not the collapse of the banking system as a whole or even parts of it (such as the regional banks). This is why, on the one hand, they are subject to stricter regulation (which is sometimes insufficient, as was proven in the mortgage crisis of 2008) and on the other hand, they often receive lifelines that they do not deserve, in what many see as a “bug” in the Western capitalist system in general, and in the United States in particular.
The government and the regulator are very afraid of the collapse of the banks and will do everything to prevent it from happening. This gives the banks an “insurance certificate” to take excessive risks, and mainly prevents the “cleaning” of the market from the failed entities. If someone starts a business and fails, he is probably not good enough, he will go bankrupt and look for other sources of income. This is how the free market cleans up failed businesses and directs the workforce and entrepreneurship to the place where the relative advantages are revealed. This is how capitalism works. But if the market doesn’t clean up due to the government’s artificial resuscitation activity, as in the case of the banks, failed pockets of inefficiency remain.
This is perhaps a tolerable price for maintaining systemic financial stability. The problem is more serious when the banks not only benefit from the government’s safety net, but use it itself to generate additional profits for themselves, whether by taking excessive risks (after all, what will happen? The government will save them), or, in cases where there is no limit to brazenness, with the same money that the government spends to save them. This is exactly what is happening now with the regional banks in the United States.
As you may remember, at the beginning of 2023, the banks were caught up in a crisis that led to the collapse of three medium-sized banks, Silicon Valley Bank, First Republic Bank and Signature Bank, and called into question the stability of the system. The reason was that the banks’ holdings in long-term deposits lost their value due to the rise in yields, and on the other hand, the public’s deposits decreased and even began high redemptions, in what looks like the beginning of the “run to the banks” phenomenon. In order for the banks to be able to pay the customers requesting their deposits, they had to sell the long deposits, thereby “locking in” the losses. When rumors begin to circulate about liquidity difficulties in the banks, more and more customers ask for their money at once, which led, as mentioned, to the collapse of three banks, in what could have developed into a general crisis in the financial system.
Here the Fed intervened to prevent the catastrophe while it was still in the enemy, as it has done many times in the past. The mechanism this time included a network of short-term loans, which will flow liquidity to the banks and allow them to maintain the long-term deposits without having to realize their holdings in bonds at loss prices. The program called the Bank Term Funding Program (BTFP) was launched in March 2023 and was hailed as a success, as it prevented the collapse of more banks ahead of time, and ultimately led to the stability of the system, as of now. The problem is that now the banks are using it as a machine to create profits out of nothing. Or rather from the taxpayers’ money.
The banks that borrow money from the Federal Reserve under the BTFP can also “lend” it back to the Fed, that is, deposit it with the Fed, for interest. Since November, the interest paid by the banks for the bailout program is lower than the interest they receive on the deposits with the Fed, and this is exactly what they have been doing quietly in recent months in ever-increasing volumes. That is, they borrow money from the Fed that they don’t really need as part of the rescue plan, only to lend it back to the Fed at a higher interest rate and create profits out of nothing at the expense of the taxpayer, and without risk. Now, after several months of the banks taking advantage of the “bug” in the system, the Fed is about to close the BTFP program. This whole story should rekindle the question of whether the price of the collapse of a few banks is worth creating distorted incentives in the financial and economic system. A question that has no clear answer.
Macro: Should we fear the return of inflation?
Last week the inflation data came out a little higher than expected and shook the markets a bit. During the trading day, the NASK already fell by 1.5%, but already on the same day it corrected the decline and finished in the green, as the index data became clearer, and it seems that the service sector, which is more worrisome in terms of the “stickiness” of inflation, was better than expected. In addition, on Friday it was announced The producer price index was also lower than expected and rekindled market expectations for interest rate cuts.
What is more important than the producer price index itself is that according to the analysts’ analyzes of various components of the producer and consumer price index that were published last week, it appears that the PCE figure that should be published this week should actually be lower than the CPI and as you know the PCE is the index by which the Fed determines the interest rate policy, More than the CPI.
In addition, a significant part of the increase in the consumer price index is attributed to the shelter component. 0.5% this month and 6.2% at an annual rate, and is now responsible for two thirds of the remaining inflation. The analysts continue to point out that the housing component is a figure that is belatedly affected by the inflation situation, which is why it lags behind the other components of the index in a significant way. This is why it should also be the next engine for the further drop in inflation, the pound to pound that everyone expects. The problem is that we have been reading about this for months and the expected decrease in the housing component has not yet arrived. The fact that the housing component was so significant in the consumer price index is part of the reasons for the optimism in relation to the PCE, since the housing component there is much less significant than in the CPI.
And yet it seems that the market is beginning to realize that the journey to lower interest rates will not be so smooth and so fast. With the opening of the shortened trading week (after there was no trading on Monday due to Martin Luther King Day) it seems that the market is starting to move slightly towards the Fed. Expectations for the first interest rate cut in March have already fallen below 60% compared to 77% on Friday. Regarding May, the market still expects a 98% certainty that we will be after at least one interest rate cut, and a 63% certainty that we will be after two interest rate cuts. At the end of the week the figures were 99% and 82%. These are still expectations that are very far from the statements of Fed officials, even in the last few days. In addition, bond yields jumped sharply and the dollar strengthened again against the basket of currencies, at the same time as the declines in the stock markets. In other words, the market is starting to make adjustments between the fantasies and the reality regarding interest rate cuts, although there is still a long way to go.
Another interesting point regarding the bonds is that the curve continues to return to the normal state. The two-year returns are already lower than the 20- and 30-year returns. The 2-10 ratio is still reversed, albeit to a minimal extent. At the same time, the bonds are very short – less than a year, still with significantly higher yields than the long bonds. So here, too, there is still a long way to go until a return to full normality.
Macro: Economists survey: There will be no recession, but economic weakness is expected
The survey of economists by the Wall Street Journal indicates a sharp decrease in the chances of a recession in 2024. In the last survey conducted among businessmen and academics from the field of economics, the result was a 39% chance of a recession, compared to October when the figure was 48%. No recession, but not really impressive growth either. The survey indicates an expectation of a very moderate growth of only 1% during the year 2024. The economists, by the way, agree with the Fed. In their opinion, we will see two or three interest rate cuts and that’s all.
The survey also shows that economists expect a sharp decrease in the employment of new workers and an increase in unemployment. They expect the average number of new employees per month to be 64 thousand compared to 225 thousand in 2023 and 399 thousand in 2022. At the same time, unemployment will rise to 4.3% at the end of the year. This is a historically very low rate, but a significant increase compared to the current figure: 3.7%.
The economists point to a trend that started in 2023 and they predict that it will continue in 2024. The strengths in the labor market are concentrated in specific sectors, while in other, cyclical sectors, employment is weak. For example, the main ones responsible for creating jobs were the health, hospitality, leisure and government sectors. But manufacturing in the United States is weak, and employment in this sector is unchanged, in the transportation and residential sectors employment has even decreased. If we didn’t know that the economy grew by more than 2% (apparently) in the fourth quarter, and that growth is also expected in 2024, we would say that these are figures that are typical of a recession. This is how we get a recession without a recession.
Macro: The Empire State Index indicates weak production
We said that production is weak, and the Empire State index that tests production in New York reinforces this claim. The figure published on Tuesday indicates minus 43.7 – the lowest figure since the outbreak of the Corona in 2020, and the second lowest reading in history after May 2020. Economists expected minus 4, which means that this is a very significant miss. Any negative figure means a contraction in production. This is the third month in a row that this index has decreased, mainly due to a decrease in new orders, but all index data have decreased – new orders, existing orders, number of employees, working hours, delivery times (which indicates a “drying up” of new orders), etc. Without a doubt, Almost without realizing it, the high interest rate does harm the real economy, At least in the field of production.
Micro – so finally invest in Bitcoin?
11 ETFs on the spot price of Bitcoin were approved last week after a long wait, and immediately after that the rule of “selling with knowledge” was fulfilled and the price of Bitcoin was cut. Since then he has recovered a little but not significantly. The ETFs allow the ordinary investor, as well as institutional entities, to easily invest in Bitcoin without getting involved in matters of security, digital wallets, etc.
Is it worth investing in Bitcoin? That’s a question I can’t answer because I really have no idea. The opinions regarding Bitcoin in particular and the crypto market in general are divided in an abysmal and extreme way, and quite a few emotions are also involved in the matter (for no logical reason).
However, there is now a wide selection of certificates that try to track the same property. There are certain differences between them, but these are less interesting for the average investor. Surprisingly, there are also very significant differences in the management fees, and here perhaps you should be interested in the details. Some of the certificates charge low management fees at first, but are expected to raise prices later. Here is the table with the current prices (the certificates where the management fees are temporary are marked with *):
As you can see the cheapest certificate that does not intend to raise management fees (at least for now) is that of Vaneck. The most expensive certificate is Grayscale. This may be because this certificate was previously a mutual fund, and one of the few options for investing in Bitcoin in the United States, so it has accumulated quite a few assets. Now its definition has been changed and it has become an ETF, so maybe Grayscale trusts that the customers will just stay and not pay attention to the cheaper alternatives. It doesn’t really work since the outflow of funds from the certificate is recorded. It is not clear who would want to pay 1.5% when they can get the same product for 0.25%.
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