Housing demand has exceeded supply even with mortgage rates rising above 6.5%.
Buyers need more supply. Period.
Conor Sen Bloomberg 25 april 2023
2023-04-29
2023-04-28
Core PCE inflation index increased 0.3% last month
The core rate of inflation has edged down to 4.6% from 4.7% in the past 12 months, but it’s been stuck in a narrow range for the past five months.
MarketWatch 28 April 2023
https://www.marketwatch.com/story/u-s-inflation-slows-again-pce-shows-2bc60ce7
First Republic It’s small enough to fail, and the risk already looks priced in
FANGs eight companies — Apple Inc., Amazon.com Inc., Alphabet Inc., Meta, Microsoft Corp., Netflix Inc., Nvidia Corp. and Tesla Inc. — have accounted for all the S&P 500’s growth this year.
The other 492 stocks are down slightly
Credit Suisse Group AG, for all its difficulties in recent years, remains a far more important institution for the rest of the world than Lehman Brothers was back in 2008. And yet its forced fire sale to rival UBS Group AG seems to have satisfied everyone that the problem is over. UBS’s share price has wavered widely in the last month, but its direction is plainly upward
Across the system as a whole, deposits are declining, although the total cash piles being kept on deposit still appear to be larger than they would have been had they merely continued to grow in line with the pre-pandemic trend
That’s why the news that First Republic’s deposits were still falling was so serious when it was announced earlier this week.
Two-year bonds still yield much more than the 10-year Treasury:
One final problem is that investors, and not for the first time, are relying on an implicit government guarantee.
The decision last month to make the depositors of Silicon Valley Bank and Signature Bank whole, even though many had money far above the deposit insurance limit, set a precedent it will be difficult to escape.
SVB’s clients, it has been widely broadcast, tended to be wealthy entrepreneurs. If they’ve been rescued, it will be politically impossible not to extend the same courtesy to everyone else.
John Authers Bloomberg 28 april 2023
Shares in First Republic plunged nearly 40 per cent on Friday
as the embattled California bank prepared to end another week of turmoil without a long-term plan for its survival.
Declaring First Republic systemically important?
The A to Z of economics
Economic terms, from “absolute advantage” to “zero-sum game”, explained to you in plain English
The Economist
https://www.economist.com/economics-a-to-z
2023-04-27
Declaring First Republic systemically important?
So if you can sell the assets for about $210 billion, then the government and all of the depositors get paid back in full; if you can’t, they don’t.
(Either way, the shareholders are, uh, in trouble.) Again, the assets are worth something like $206 billion, based on First Republic’s filings in December; that would not quite be enough to pay everyone back.
But the consensus seems to be that if you actually had to go sell everything at once, things would be considerably worse, and there would be a hole of tens of billions of dollars.
The most straightforward do-something option is that the FDIC could seize First Republic, sell its assets, and use the money to pay back depositors.
But there would be a hole of tens of billions of dollars.
And the FDIC would either have to fill that hole (declaring First Republic systemically important and using its deposit insurance fund to pay off the uninsured depositors), or not fill that hole (letting the uninsured depositors bear the loss).
Matt Levine Bloomberg 27 april 2023
https://www.bloomberg.com/opinion/articles/2023-04-27/first-republic-is-in-limbo
First Republic FDIC
https://englundmacro.blogspot.com/2023/04/first-republic-fdic.html
We are, in my view, more likely than not to return to inflation at around 2 per cent a year, or perhaps just a little bit higher
Real interest rates fell for a generation, before reaching negative levels during the pandemic. Since then, they have recovered sharply. What happens now?
In its latest World Economic Outlook, the IMF addresses this question by investigating the “natural rate of interest”, which is defined as “the real interest rate that neither stimulates nor contracts the economy”. That is also the rate at which one would expect inflation to remain stable (in the absence of shocks).
The natural rate is not directly observable. But it can be estimated.
Blanchard argues that real interest rates will remain below the real rate of economic growth, which is crucial for debt sustainability.
Summers thinks they will be somewhat higher than the Fed’s estimate of a natural rate of 0.5 per cent.
So, assume inflation will decline to 2-3 per cent.
Assume, too, an equilibrium real rate of interest of 0-2 per cent.
Then nominal short rates would be 2-5 per cent and, given risk premiums, longer-term rates would be 3-6 per cent.
At the lower end, debt sustainability would be simple. At the higher end, it would be a challenge.
Martin Wolf FT APRIL 18 2023
The future of interest rates is a riddle | Financial Times (ft.com)
Nollräntan på vanliga bankkonton gynnar SEB och Handelsbanken
Handelsbankens räntenetto ökade nästan 70 procent till rekordhöga 11,5 miljarder kronor, och SEB:s räntenetto lyfte drygt 60 procent till 11,3 miljarder, jämfört med ett år tidigare.
Ni tjänar jättemycket pengar, ändå ger ni noll i ränta på lönekonto, är det inte rimligt att ge ränta nu?
– När vi tittar på våra inlåningskonton ser vi att kunderna mer och mer binder sina pengar med olika tidhorisonter. Och där har vi justerat och lagt på räntor i paritet med hur vi har justerat de övriga räntorna, säger Carina Åkerström, vd och koncernchef Handelsbanken, till SvD.
SvD 26 april 2023
https://www.svd.se/a/kEye2L/nollrantan-pa-vanliga-bankkonton-gynnar-seb-och-handelsbanken
Den 3 maj höjer vi sparräntan från 2,50 % till 3,00 %.
Börja spara på ett sparkonto med ränta idag.
SBAB
https://www.sbab.se/1/privat/spara/sparkonto/vart_sparkonto.html
First Republic FDIC
J.P. Morgan (the guy) famously propped up failing banks during the Panic of 1907
JPMorgan (the bank) famously bought Bear Stearns & Co. (an investment bank not backed by the FDIC) during the financial crisis of 2008 with the government’s encouragement.
First Republic is looking to sell up to $100 billion of assets
First Republic’s stock collapsed on this news.
Matt Levine Bloomberg 26 april 2023
https://www.bloomberg.com/opinion/articles/2023-04-26/first-republic-calls-in-a-favor
First Republic lent a lot of money when interest rates were low, including via cheap mortgages.
Mark Zuckerberg is supposed to have taken out a 30-year mortgage for his $6m Palo Alto home at 1.05%. The value of such loans will have plunged as interest rates have risen.
The deal with many well-heeled customers was that they would agree to move their deposits to the bank as well.
But these customers, who held large balances uninsured by regulators, have now fled.
Without cheap deposit funding, First Republic has turned to short-term funding—much of it lent by the Federal Reserve and the Federal Home Loan Banks, another government-backed lender, at market rates.
This has probably demolished its ability to earn a profit.
The Economist 26 April 2023
First Republic in Standoff Between US and Banking Industry
Firms are balking at doing more after depositing billions
As the bank’s stock keeps lurching lower — dropping 49% on Tuesday and 30% on Wednesday — regulators have so far refrained from stepping in.
They’re betting that banks that deposited $30 billion into First Republic last month can hash out a deal to ensure the firm doesn’t fail and take some of their money with it.
Bloomberg 27 april 2023
The struggling regional bank’s FRC,
Deposit drops at banks merit a close look for systemic cracks: ex-Fed officials - MarketWatch
First Republic Set to Get $30 Billion of Deposits in Rescue
JPMorgan, Citi, BofA among big banks that would contribute
March 2023
https://englundmacro.blogspot.com/2023/03/jpmorgan-m-fl-banker-satter-in-typ-300.html
2023-04-26
– Återigen har vi blivit överraskade negativt på svensk inflation, säger riksbankschef Erik Thedéen
I mars låg inflationstakten på 8,0 procent enligt KPIF-måttet. Riksbankens mål är 2 procents inflation.
Än mer oroande för Riksbanken är att kärninflationen – där energipriser räknats bort – i mars låg på 8,9 procent i årstakt. Ett tecken på att prishöjningarna grävt sig allt djupare ner i ekonomin.
SvD 26 april 2023
https://www.svd.se/a/dwbG31/riksbankens-nya-rantebesked
https://englundmacro.blogspot.com/2023/04/inflationstakten-i-sverige-matt-som.html
Illusionstricket är att bankens kunder kan ta ut sina pengar när de vill. Det kan de inte
Mervyn King vågar inte bara säga att kejsaren är naken – han visar dessutom hur och varför
Att driva bank är att vifta med ett trollspö. Illusionstricket är att bankens kunder kan ta ut sina pengar när de vill. Det kan de inte
När allt brakade samman 2008 hade de ledande internationella bankerna fördubblats i storlek på fem år och finansierade 98 procent av sina delvis värdelösa tillgångar genom lån.
Bankernas kontantinsats – huvudsakligen aktieägarpengar – heter kapitaltäckning men fungerar likadant. Det är den som ska täcka förlusterna om tillgångarna sjunker i värde.
Regeringar och centralbanker tvingades ingripa i exempellös omfattning.
”Västvärlden byggde helt enkelt ett extremt osäkert banksystem”, skriver King. Han vet. Han var chefsekonom på Storbritanniens centralbank under 1990-talet samt dess chef mellan 2003 och 2013.
Det är dessa realiteter Financial Times mångårige ekonomikommentator Martin Wolf syftar på när han skriver att det internationella banksystemet är ”byggt för att krascha”.
Arvid Åhlund DN 23 april 2023
The alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”
Lord Mervyn King, former governor of the Bank of England. His book is called The End of Alchemy.
Englund blogg 1 juni 2016
https://englundmacro.blogspot.com/2016/06/the-alchemy-is-belief-that-money-kept.html
Worst day for the S&P 500 in over a month
Bad news for stock bulls who just got hit with the worst day for the S&P 500 in over a month after gloomy news from First Republic Bank rekindled worries that the lending crisis has not run its course.
Bloomberg 25 April 2023
First Republic Bank’s stock fell to its lowest level in its 38-year history on Tuesday as the bank faced fresh doubts about its viability
Can First Republic Bank recover?
First Republic Bank suffered a $100bn bank run in the wake of Silicon Valley Bank's failure and is now desperately trying to fill a $70bn deposit hole.
FRANCES COPPOLA 25 APR. 2023
https://coppolacomment.substack.com/p/can-first-republic-bank-recover
Vi har INTE det värsta bakom oss
Englund blogg 19 april 2023
https://englundmacro.blogspot.com/2023/04/vi-har-inte-det-varsta-bakom-oss.html
Räntehöjningarna går mot sitt slut, enligt SEB:s privatekonom Américo Fernández
Sluta hoppas på en återgång till nollräntan.
Även SPP:s sparekonom Shoka Åhrman höjer ett varningens finger
– Man kanske inte ska lägga 30 000 på en resa nu i sommar, hösten kan bli lika tuff igen.
Hela 72 procent av svenskarnas totala lån, där merparten är bolån, ska förhandlas om i år.
SvD 26 april 2023
https://www.svd.se/a/76yWpK/familj-levde-som-overklass-sedan-kom-rantehojningarna
Housing-Market Bottom
Key housing indicators have rebounded in early months of 2023
Mortgage rates have likely peaked with Fed hikes almost done
Historically, housing has been a critical driver of the broader business cycle. Low interest rates can boost demand for homes, which drives up prices, building activity and construction jobs. Higher prices also help support consumer spending through the so-called “wealth effect.”
And when the Federal Reserve raises rates, it all tends to go in reverse.
Now, with the Fed poised to wrap up its tightening campaign — perhaps next week — mortgage rates have probably peaked.
The S&P CoreLogic Case-Shiller index of prices in 20 US cities in February was nearly 5% below last year’s peak
They jumped more than 40% from June 2020 to June 2022.
Matthew Boesler Bloomberg 25 april 2023
The Only Way to Stop Bank Runs Is to Get Rid of Banks
It has been one of the ideas often proposed since the 2008 financial crisis, under the name of narrow banking. It’s a idea I don’t buy, as I’ll explain.
Under the international Basel standards, a bank must be able to pay out at least 3% of retail deposits if they are fully insured
Different countries’ regulators often impose higher outflow expectations than these minimums. Maybe they could lift them a touch further, but this is all shifting proverbial deckchairs
/https://en.wiktionary.org/wiki/rearrange_the_deck_chairs_on_the_Titanic/
Liquidity rules only protect banks against fluctuations in customers’ needs for liquidity caused by economic or financial stresses outside a bank. Bank runs are totally different beasts: A run is a panic that — whether or not it had a rational cause — will almost certainly be ruinous. And typically happens much faster than 30 days!
The only way to guarantee no run is to force banks to match all deposits with assets that have cash-like qualities: For instant-access deposits, that means central bank reserves and very short-term government bills. Such a bank is a so-called narrow bank — in reality no bank at all.
It’s little more than a utility for making payments – it makes no loans and creates no money for the economy.
The main way to help prevent runs has been deposit insurance.
A bad idea would be to get governments to insure all deposits.
If all banks are narrow banks, how does anyone borrow money?
Paul J. Davies Bloomberg 25 april 2023
Emergent narrow banking
Matt Levine Bloomberg 20 april 2023
2023-04-25
Jerome Powell faces a tough row
to hoe fending off politicians who favor easy-money policies while maintaining the stability of the nation’s banking system and lowering U.S. inflation to 2%.
From 1979 to 2009, annual increases in the consumer price index averaged 4% vs. 1.8% in the 2010s. Now the U.S. may be reverting back to that prior norm.
Although President Joe Biden nominally supports Powell, the Fed’s sovereignty over the money supply is a grant from Congress that can be withdrawn.
Congress could favor low unemployment over price stability, or the president could appoint left-leaning governors like he did with Lisa Cook to appease Congress.
Last year, Powell pronounced that such printing of money has few consequences for inflation, apparently endorsing Modern Monetary Theory.
Peter Morici MarketWatch April 25, 2023
Still Rethinking the Fed
John Mauldin April 21, 2023
https://englundmacro.blogspot.com/2023/04/still-rethinking-fed.html
The widely accepted idea that rates will eventually fall back to pre-pandemic levels...
https://englundmacro.blogspot.com/2023/03/the-future-doesnt-look-good-for.html
We are more likely looking at 4% than 2% inflation over the next decade
https://englundmacro.blogspot.com/2022/06/we-are-more-likely-looking-at-4-than-2.html
Fastighetsutvecklaren Serneke Karlatornet har fått ett uppköpsbud av det skånska fastighetsbolaget Doxa.
Budet innebär en premie på 83,4 procent jämfört med aktiens stängningskurs på måndagen och värderar Serneke till drygt 1 miljard kronor.
DN/TT 25 april 2023
https://www.dn.se/ekonomi/uppkopsbud-pa-serneke/
Doxas största aktieägare är fastighetsprofilen Greg Dingizian med 17,9 procent av aktierna, Percy Nilsson med 15,3 procent och Bergendahl & Son med 10 procent. Vidare äger Balders vd Erik Selin 5,1 procent av aktierna i Doxa.
https://www.di.se/live/profiltata-skanebolaget-doxa-lagger-miljardbud-pa-serneke/
Fastighetsmiljardären Erik Selin, Balder, Ola Serneke och räntan
https://englundmacro.blogspot.com/2022/09/fastighetsmiljardaren-erik-selin-balder.html
Parts of Spain are forecast to hit 40C
Elsewhere, temperatures will rise above 40C in parts of Western and Central Africa this week, according to forecasters.
In India, regions on the country’s east reached 40C to 44C last week, with demand for electricity to power cooling devices jumping to an all-time high.
Bloomberg 24 April 2023
2023-04-24
Commercial Real-Estate
The sudden surge in interest rates caused property values to fall, while the rise of remote work and e-commerce are reducing demand for office and retail space.
Investors and economists say these two forces haven’t come together on this scale since the 1970s, when a recession followed surging oil prices and a stock-market rout while new technologies enabled jobs to move out of major cities.
Commercial mortgages account for around 38% of the median U.S. bank’s loan holdings
Office-building prices are down 25% since early 2022, estimates real-estate analytics firm Green Street. Prices of malls are down 19% since early 2022 and down 44% since 2016.
WSJ 24 April 2023
https://www.wsj.com/articles/commercial-real-estate-woes-run-deeper-than-in-past-downturns-e0c1f2b3
US banks increasingly worried about falling commercial property valuations
Not all properties had been hit equally, he added: “Class A is holding up. Rents may be declining but they are not in trouble. Class B and C absolutely are.”
“The question we all have is whether contagion will spread from the office sector,” said Bryan McDonnell, head of PGIM’s real estate debt business, which has $122bn under management.
“If you get to a confidence issue then, all of a sudden, people might put all commercial real estate in the same bucket.”
FT APRIL 22 2023
https://www.ft.com/content/705df695-c81c-4ddf-8d56-a0a6e9cd7500
350 California Street was worth $300 million four years ago.
It might sell for 80% less now, brokers say,
WSJ 27 April 2023
https://www.wsj.com/articles/san-francisco-commercial-real-estate-office-buildings-471742ea
Banking’s Next Threat? It Might Be Commercial Real Estate
Robert Burgess Bloomberg 13 mars 2023
https://englundmacro.blogspot.com/2023/03/bankings-next-threat-it-might-be.html
A $1.5 Trillion Wall of Debt is Looming for US Commercial Properties
Neil Callanan Bloomberg 8 april 2023
https://englundmacro.blogspot.com/2023/04/a-15-trillion-wall-of-debt-is-looming.html
IMF “expansionary austerity”
The IMF’s latest World Economic Outlook presents the results of its own investigation into various debt-reduction programs undertaken by 33 emerging-market economies and 21 developed economies between 1980 and 2019. “On average,” the authors note, “consolidations do not lead to a statistically significant effect on the debt ratio.”
But it is unclear whether this welcome (albeit late) volte-face will extend beyond the IMF’s research department and how it might affect the Fund’s lending activities. Early indications are not promising.
To be sure, this is hardly a new insight. John Maynard Keynes emphasized it nearly a century ago, and many have reiterated it ever since. It was certainly known to the negotiators who crafted the London Debt Agreement of 1953, which dramatically reduced West Germany’s burden of public debt.
Jayati Ghosh Project Syndicate
In 2013, the International Monetary Fund produced a report acknowledging that it had “underestimated” the effects that austerity would have on Greece’s economy.
The IMF’s bizarre belief in “expansionary austerity” would be laughable if it were not so damaging.
Jayati Ghosh Project Syndicate 14 August 2019
https://englundmacro.blogspot.com/2019/08/in-2013-international-monetary-fund.html
London Debt Agreement of 1953
https://www.networkideas.org/wp-content/uploads/2016/09/Debt_Relief.pdf
2023-04-23
Still Rethinking the Fed
This week I’m traveling and unable to write a full letter, so I’m instead going to revisit a theme I have written about in the past and is still very appropriate today. The most recent was last year in Time to Rethink the Fed. In hindsight, my opinions have not changed much but I do have a few additional insights.
I believe Fed officials are largely responsible for the cycles of bubbles, booms, and busts over the last 30 years. Furthermore, they share some of the blame (clearly not all) for the growing divisions and tribalism in our society. Much of it springs from the wealth disparity they aided and abetted.
What we have today isn’t working and the time has come to amend the Federal Reserve Act and change its purposes and authorities.
I realize these are bold words. I fully acknowledge the gravity of what I’m proposing here.
It also will take time. I do not expect anything to happen of any substance until we get to The Great Reset, where we will be forced to think and do many things now unthinkable in the current environment.
In the 1870s the Bank of England pioneered the “lender of last resort” concept. British writer Walter Bagehot (a co-founder of The Economist magazine) famously summarized the central banks’ job as averting panic by “lending freely, to solvent firms, against good collateral, and at high rates.”
As former Morgan Stanley Asia Chairman Stephen Roach explained in this early 2022 Project Syndicate piece. Quoting (emphasis mine):
“Consider the math: The inflation rate as measured by the Consumer Price Index reached 7% in December 2021. With the nominal federal funds rate effectively at zero, that translates into a real funds rate (the preferred metric for assessing the efficacy of monetary policy) of -7%.
“But only to a point. The forward-looking Fed still faces a critical tactical question: What federal funds rate should it target to address the most likely inflation rate 12–18 months from now?
“No one has a clue, including the Fed and the financial markets.”
Walter Bagehot, 19th-century British economist and journalist. His father-in-law, James Wilson, founded The Economist magazine that still exists today. Bagehot was its editor from 1860–1877. (Incidentally, if you want to sound very British and sophisticated, mention Bagehot and pronounce it as they do, “badge-it.” I don’t know where they get that from the spelling of his name. That’s an even more unlikely pronunciation than the one they apply to Worcestershire.)
Bagehot wrote an influential 1873 book called Lombard Street: A Description of the Money Market.
How did the Fed act in 2008? In exact opposition to Bagehot’s rule. They sprayed money in all directions, charged practically nothing for it, and accepted almost anything as collateral. Not surprisingly, the banks took to this largesse like bees to honey. Taking it away from them has proved very difficult. We now find ourselves in an era of speculation about what will happen when interest rates are raised.
I assume and the markets agree with me that the Fed will raise rates another 25 basis points in May. That will take fed fund rates up to 5¼%. And while inflation is coming down, real rates are still below zero.
The Fed has taken on a third unwritten mandate, that of “financial stability,” which really means stock market stability. The low rates that keep the stock market happy also financialized the entire economy.
John Mauldin April 21, 2023
https://www.mauldineconomics.com/frontlinethoughts/still-rethinking-the-fed
Time to Rethink the Fed
John Mauldin February 4, 2022
https://www.mauldineconomics.com/frontlinethoughts/time-to-rethink-the-fed
2023-04-22
När Kinas nye ledare Deng Xiaoping hösten 1978 besökte Singapore
imponerades han av välståndet, de ekonomiska frizonerna och hur detta kombinerades med en auktoritär politik.
Lee Kuan Yew var det självständiga Singapores förste premiärminister mellan 1959 och 1990.
Besöket skulle i grunden rita om världsekonomin
Jan Jörnmark Smedjan 17 april 2023
https://timbro.se/smedjan/sa-foddes-det-moderna-kina-i-singapore/
The S&P 500 finished the week a hair lower, leaving this year’s gain above 7.5%.
Investors are losing their ability to resist a stock rally that much of Wall Street is convinced is doomed. At a time of fairly intense skepticism among the pundit class.
Bloomberg 21 April 2023
Investors Pour Cash Into Stock ETFs Even as Bearish Warnings Rise - Bloomberg
2023-04-21
Nordea och de tre svenska bankerna lånat ut 2 331 miljarder kronor till fastighetsförvaltning och bostadsrättsföreningar
Av de svenska bankerna har Handelsbanken störst exponering – 41 procent när lån till bostadsrättsföreningar räknas med – medan SEB och Swedbank har 21 procent vardera.
Totalt hade Nordea och de tre svenska bankerna lånat ut 2 331 miljarder kronor till fastighetsförvaltning och bostadsrättsföreningar vid årsskiftet.
Om två år tror Nordea att styrräntan är nere på 2 procent, Handelsbanken 2,75 procent medan SEB och Swedbank spår 3 procent, det vill säga tillbaka på dagens nivå.
Om bankernas prognoser stämmer borde det vara hanterbart för både svenska bolåntagare och fastighetsbolagen.
Agnetha Jönsson DI 21 april 2023
https://www.di.se/analys/bankerna-ar-nyckeln-i-jatteskiftet/
Stress test
Every year the biggest U.S. banks endure a tedious exercise, where their businesses are put through a series of theoretical contortions to see how they’d perform in a crisis. One flaw in this plan is that the Federal Reserve, which designs the stress test, has tended to assume that when bad times come, interest rates would fall, not rise. This misconception was corrected by the market, which just staged an exam of its own.
An unanswered question is what rising rates will do to borrowers, and the economy more broadly. Office towers, shopping malls, warehouses and other commercial real estate are a worry. Morgan Stanley’s (MS.N) investment bank wrote off $70 million of debt in the last quarter, centered on its holdings of such property.
It’s a drop in a bucket that holds $223 billion of loans, but it’s also a reminder that it’s hard to see from the outside where these risks will surface.
https://www.reuters.com/breakingviews/wall-street-aces-its-real-life-stress-test-2023-04-20/
Fed has now made a supervisory error of monumental proportions:
It fixated on large banks and overlooked smaller regional banks like SVB, Signature, and First Republic, where accidents were waiting to happen.
In its February 2023 stress test, the Fed conceded that it needed to start thinking more broadly about different shocks, and it allowed for the possibility of a new “exploratory market shock” – still a recession, albeit one accompanied by higher inflation.
https://englundmacro.blogspot.com/2023/03/the-failure-of-svb-is-symptomatic-of.html
Yi Gang governor of China’s central bank
With an economics phd from America, where he also taught, Mr Yi is the kind of reform-minded, well-travelled technocrat that is disappearing from China’s policymaking establishment.
The Chinese official even argued—only half-jokingly—that he was reluctant to intervene in currency markets, partly because traders at hedge funds, securities firms and commercial banks are much better paid, and presumably therefore smarter, than him and his hard-working team at the central bank.
This was music to the ears of the crowd in Washington.
After covid-19 struck Fed slashed interest rates by 1.5 percentage points to near zero. The People’s Bank of China (pboc) cut them by only 0.2 percentage points.
Conversely, since the start of 2022, as the Fed has raised rates by 4.75 points, the pboc has nudged down rates another 0.2 points.
The Economist 20 April 2023
Gud skapade ekonomer för att få astrologer att framstå som trovärdiga
Den amerikanske ekonomen John Kenneth Galbraith brukade säga att Gud skapade ekonomer för att få astrologer att framstå som trovärdiga.
Ekonomijournalistik kan också som bekant (när den ägnar sig åt att försöka gissa framtiden) få drag av vad forskaren Emma Frans brukar kalla ”horoskop för killar”.
Jag lägger ingen värdering i detta (själv är jag skorpion) men ekonomier är komplexa saker.
Katrine Marçal: Vad säger det att jag skriver texten i minikjol?
DN 21 april 2023
The chorus of stock bulls predicting US equities will weather a recession has got it wrong, if history is any guide.
Optimists say stocks hit this cycle’s low in 2022 and an economic contraction this year or in early 2024 would only dent the rebound. The market backs them up: The S&P 500 Index has gained more than 8% so far this year, quickly reversing the slump after Silicon Valley Bank’s failure in March.
But a look at every US recession since 1929 suggests it’s a question of when, not if, the stock market takes a tumble.
On no occasion in almost 100 years did equities avoid falling to a new trough after the economy entered a contraction.
Förmågan att föra ett samtal dör
när det anförs att man bara kan välja en av dem, och vad mera är; det valet avgör huruvida man är nazist eller landsförrädare.
(Jag ber om ursäkt för vulgariteten, men detta är den intellektuella höjd som återkommande definierar det publika gräl som vi kallar ”samhällsdebatten”.)
Tove Lifvendahl 12 april 2023
https://www.svd.se/a/Q7EOpq/carola-och-bengt-sager-samma-sak
Emergent narrow banking
We have talked a few times recently about, like, the theory of banking. That theory goes roughly like this.
Banks fund themselves with deposits, which are basically short term and safe: If you have $100 in a bank account, you expect that it will always be worth $100, and you expect to be able to withdraw five $20 bills any time you want. Meanwhile banks invest their money in assets (loans, bonds) which are basically long term and risky: Banks make loans to risky businesses that don’t have to be repaid for years.
This business — “fractional reserve banking,” it is often called — is inherently risky and fragile. Everyone knows this
No, this is bad, it’s antiquated, we should fix it. Let’s get rid of fractional reserve banking and do something else.
Conceptually the main way to do that goes something like this:
Banks should take short-term safe deposits and invest them in short-term safe assets.
Long-term risky assets should be funded with long-term risky liabilities.
This is loosely speaking called the “Chicago plan,” or “narrow banking.”
Matt Levine Bloomberg 20 april 2023
https://www.bloomberg.com/opinion/articles/2023-04-20/banking-gets-a-bit-narrower
Gamla Mor Anna och bankernas affärsmodell
https://englundmacro.blogspot.com/2023/03/gamla-mor-anna-och-bankernas.html
This idea of 100% reserves on checking deposits would be advocated by other economists in the 1930s, including Lauchlin Currie of Harvard and Irving Fisher of Yale.
A more recent variant of this reform idea is to be found in the "narrow banking" proposal.
https://englundmacro.blogspot.com/2023/03/banking-stands-revealed-as-part-of.html
2023-04-20
U.S. existing-home prices fall nearly 1% in March
The median price for an existing home fell by 0.9% from last March, dropping to $375,700 this year.
MarketWatch 20 April 2023
2023-04-19
Andy Beal, America’s richest banker, makes a massive bond bet on inflation
While some regional bank chiefs mismanaged rising rates, billionaire Andy Beal patiently waited years for yields to rise before buying Treasury inflation-protected securities like crazy.
As the Federal Reserve was about to embark on a rapid series of big rate hikes to fight inflation, the sole owner and chief of Beal Bank, based in Plano, Texas, started buying.
Beal bought Treasury inflation-protected securities, mostly with durations of up to three years. He bought a lot of them.
By the end of 2022, Beal Bank’s assets had more than quadrupled to $32.6 billion. The asset rise made Beal Bank the nation’s 61st biggest bank.
Beal has essentially made a massive bet on inflation, buying $21.2 billion of Treasury bonds, Beal Bank’s filings with the Federal Deposit Insurance Corporation show. Just about all of those bonds are TIPS, says a person familiar with the trade who was not authorized to speak publicly.
In the years leading up to the 2008 financial crisis, Beal virtually shut down his bank amid the ill-fated lending boom, putting him in a strong financial position to swoop-in after the crash to buy up distressed assets on the cheap. He made a fortune.
Beal also publicly backed and financially supported the presidential campaigns of Donald Trump, his longtime friend.
MarketWatch 19 April 2023
A $1.2 trillion liquidity crunch looms for Europe’s lenders,
testing their ability to stand on their own after more than a decade of easy money from the European Central Bank.
The biggest hurdle will come in late June, when banks will have to pay back about 478 billion euros, equivalent to some $525 billion, of ultracheap loans to the central bank.
Those loans were handed out at the height of the pandemic to ensure banks kept lending as lockdowns brought business to a halt.
Italian banks, once a weak link in the European financial system, will be in the spotlight.
They account for nearly 30% of the TLTROs that still need to be repaid and, unlike banks in Germany and France, don’t have enough extra cash parked at central banks to cover the repayments.
WSJ 19 April 2023
https://www.wsj.com/articles/european-banks-say-goodbye-to-easy-money-70292f5
Targeted long-term refinancing operation - TLTRO
https://englundmacro.blogspot.com/2022/07/ecb-erbjod-2200-miljarder-euro-i.html
Vi har INTE det värsta bakom oss
april Vi har det värsta bakom oss, snart sjunker inflation och räntor och börsen vänder uppåt igen.
Det är det eviga budskapet från alla dem som har intresse av att få ut detta budskap.
Tro dem inte Vi har nedgången framför oss.
När? Mycket snart.
Börsen ser ut att tappa fart - förlorar momentum.
Sedan faller börsen av sin egen tyngd.
Före börsens öppning 19 april 2023
Stocks Fall as Recession Fears Grow
Stocks and bond yields fell Thursday, pressured by weak corporate earnings reports and economic data that reinforced investors’ recession fears.
WSJ 20 April 2023
Anders Borg har en blandad syn på marknaden och ekonomin. Han har vid flera tillfällen sagt att att ”vi har det värsta bakom oss” vad gäller inflationen, och att en räntetopp snart är här. Samtidigt beskriver han estimaten inför stundande rapportsäsong i USA som ”väldigt mörka”.
DI 21 april 2023
2023-04-18
Who was to blame for the failures of Silicon Valley Bank, Signature Bank NY, and Credit Suisse?
The most obvious culprits are the bankers.
In a speech last week, Pablo Hernandez de Cos, chair of the Basel Committee on Banking Supervision, despairingly opined: We need to start by asking why, in 2023, some banks have failed to meet basic risk management and governance practices.
it only takes a couple of rogue banks to destabilise the whole system.
At the time of its failure, Silicon Valley Bank was the US’s 16th largest bank by assets. But under the US’s regulatory regime, it was treated as a small bank.
It didn’t have to submit itself to the intrusive supervision and stress testing imposed on the US’s biggest banks. It was subject to reduced Basel liquidity coverage ratio and net stable funding regulations. It was exempted from large exposures reporting. And it was able to avail itself of special concessions afforded to small banks, such as opting-out from including fair value losses on available-for-sale securities in regulatory capital calculations.
The Bank for International Settlements is now seizing the opportunity created by the failures of Silicon Valley Bank and Credit Suisse to review international capital and liquidity regulations with a view to tightening them up. Never waste a good crisis, as the saying goes. But it might find it hard to buck the current political trend towards “nationalism and sovereignty”
This year is the tenth anniversary of the financial crisis in Cyprus, which saw an unprecedented bail-in of uninsured depositors in two banks.
It’s less than fifteen years since the fall of Lehman Brothers, and here we are, talking about banks again, and trying to figure out what to do to make them safer.
COPPOLA COMMENT 18 April 2023
Banking Crises Are Preventable, But Human Nature Gets in the Way
From 1300s Venice to 2023 Silicon Valley, financial panics arise from an endless cycle of complacency, risk-taking and fear.
One of Jamie Dimon’s daughters called him up from school with a question more than a decade ago: “Dad, what’s a financial crisis?”
The billionaire who runs JPMorgan Chase & Co. tried to put her at ease. “It’s the type of thing that happens every five to seven years,” he told her, he later testified to the Financial Crisis Inquiry Commission.
She asked him on the phone why people seemed so surprised by the calamity. In Washington, when he told this story, he said we shouldn’t be.
That’s because the history of banking is, at least in part, a kind of horror story that keeps repeating itself.
Max Abelson Bloomberg 15 april 2023
Few Banks Are Hedging Interest-Rate Risk
A research paper says unhedged securities holdings are more widespread than investors might realize.
The paper—“Limited Hedging and Gambling for Resurrection by U.S. Banks During the 2022 Monetary Tightening?”—contends that hundreds of other banks share that risk, which played a role in the collapse last month of Silicon Valley Bank.
The paper didn’t single out individual institutions, instead presenting an analysis of aggregate data.
“These banks have taken a large risk, which is profitable for bank shareholders on the upside, but the losses are borne by the FDIC on the downside,” they wrote, referring to losses incurred in the SVB failure by the Federal Deposit Insurance Corp.
Matt Grossman WSJ 18 April 2023
https://www.wsj.com/articles/few-banks-are-hedging-interest-rate-risk-21ed1947
Real Interest rates will return toward their extremely low pre-pandemic level
That would be in keeping with the downward trend in the natural real interest rate since the early 1980s, itself the result of aging populations and disappointing total factor productivity growth.
it is reasonable to assume that in two or three years, we will return to a world in which advanced-economy central banks’ nominal policy rates are regularly constrained by the effective lower bound (ELB).
Even though nominal policy rates have risen significantly since 2020, with the US Federal Reserve’s policy rate now at 4.75-5%, real (inflation-adjusted) short-term policy rates are still barely positive in the United States, and they remain materially negative in most other advanced economies.
According to the Federal Reserve Bank of Cleveland, the US ten-year real interest rate was only around 2%, and that was its highest level since the 2008 financial crisis.
Willem Buiter Proj Synd 18 April 2023
The Economist: How the state could take control of the banking system
Banks are inherently unstable.
By May 1st the Federal Deposit Insurance Corporation (fdic) will produce a menu of options for Congress about how to reform or expand the backstop the regulator provides, which is currently capped at $250,000 per depositor. Many blame the limit for the run which brought down Silicon Valley Bank (svb).
Banks are inherently unstable. They offer deposits that are instantaneously redeemable while holding long-dated, illiquid assets such as mortgages and business loans.
The mismatch means even well-managed institutions are vulnerable to a run that might be sparked by a misunderstanding. The fragility of banks is matched by severe consequences if they fail: runs tend to be contagious events that can cause credit crunches and recessions.
Despite the danger banks pose, governments tolerate their existence. The transformation of liquidity and maturity is thought to enable a greater provision of credit and faster economic growth than would be possible under the alternative: a system of “narrow banks” in which deposits are fully backed by only the safest assets.
In a crisis, central bankers follow a dictum attributed to Walter Bagehot, a former editor of The Economist, to lend freely, secured by good collateral and at a penalty rate of interest.
The Fed’s latest facilities barely seem Bagehotian at all, valuing long-term securities at par even when the market has heavily discounted them, and imposing an interest penalty of a mere tenth of a percentage point.
The prospect of banks becoming de facto government-funded should alarm anyone who values the role of the private sector in judging risk. Yet the difference between deposit financing underwritten by multiple layers of the state and funding that is provided directly by the state itself is getting harder to distinguish.
The Economist 12 April 2023
The alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”, Wolf
Lord Mervyn King, former governor of the Bank of England. His book is called The End of Alchemy.
Billions were wiped off the value of US lenders last night
as aftershocks from the collapse of Silicon Valley Bank (SVB) continued to rattle the markets.
State Street, one of America’s oldest banks, saw its share prices tumble after revealing that clients had pulled tens of billions of dollars at the start of the year.
Schwab's results also revealed it had bolstered its finances by borrowing $45.6bn from the Federal Home Loan Bank system – a move sometimes viewed as a sign of financial stress.
News of the withdrawals sparked concerns at other US banks. Northern Trust was down 6pc and BNY Mellon fell 7pc.
The downbeat figures fuelled fears that the US financial system could experience further turbulence in the wake of the worst banking crisis since 2008.
Telegraph 17 April 2023
https://www.telegraph.co.uk/business/2023/04/17/ftse-100-markets-live-news-imf-boe-latest/
2023-04-17
ECB to Lift Deposit Rate to 3.75% Peak in July?
Euro-area inflation — while slowing considerably this year — is still more than three times the ECB’s 2% target and a core measure that strips out volatile elements like food and energy is hitting fresh records every month.
Bloomberg 17 april 2023
2023-04-14
Börsens fastighetsbolag måste hantera obligationsförfall på över 30 miljarder kronor i år
DI 13 april 2023
https://www.di.se/nyheter/miljardbomben-tickar-kommer-fler-nyemissioner/
Många av de svenska börsnoterade fastighetsbolagen är högt belånade
https://englundmacro.blogspot.com/2023/01/manga-av-de-svenska-borsnoterade.html
Inflationstakten i Sverige, mätt som KPIF - Bara 8 procent
Inflationstakten i Sverige, mätt som KPIF, landade enligt SCB på 8,0 procent i mars.
Den underliggande inflationen, det vill säga KPIF exklusive energi, kom in på 8,9 procent.
DI 14 april 2023
https://www.di.se/live/klart-lagre-inflationstakt-an-vantat-i-sverige/
2023-04-10
A $1.5 Trillion Wall of Debt is Looming for US Commercial Properties
Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them?
Neil Callanan Bloomberg 8 april 2023
Strains in commercial real estate may be raising the risk for equities
Commercial real estate (CRE): Investors have sharpened their focus on this sector, given regional banks’ significant share in CRE lending. Even before the banking-industry turmoil, however, CRE was facing risks from long-term trends, with remote work threatening the office sub-sector.
Apr 4, 2023
https://www.morganstanley.com/ideas/alternative-assets-economic-headwinds-q2-2023
Rolf Englund om Löntagarfonderna 1975 i Svensk Tidskrift
Den artikeln hade jag glömt. Återfanns i dag med hjälp av Bing
https://www.svensktidskrift.se/arkiv100/1975/38%20Rolf%20Englund%3B%20L%C3%B6ntagarfonderna.pdf
Räntan (A) är vad som behövs för att stoppa inflationen.
Räntan (B) är den som gör att bostadsmarknaden kollapsar.
Om A är större än B har vi ett stort problem.
Englund: Englunds lag 3 (Inflation and the housing market) (englundmacro.blogspot.com)
I 25 år har vi levt med sökmotorn Google. Det här är Google 2.0.
För någon månad sedan frågade min mamma om jag kunde hjälpa till att besvara ett formellt brev på engelska. Det som skulle ta henne någon timme kunde jag som van skribent lösa på 20 minuter, tänkte hon.
I själva verket tog det en minut.
Jag testade att klistra in mejlet som hon fått i Chat GPT och förklarade i ett par punkter hur det skulle besvaras. ”Skriv i vänlig stil”, avslutade jag instruktionen.
Förslaget från AI-roboten kom inom några sekunder. Det var i det närmaste felfritt. Där fanns även en artig hänvisning till att brevskrivaren precis blivit mamma – och en förstående formulering om hur detta påverkade hennes möjligheter att klara en deadline.
Att det är ett slags omvälvning kan vi utgå ifrån. Vi har nu tillgång till hjälpmedel som – redan i dag – presterar ungefär lika väl på en tenta i biologi, kemi och juridik som en toppstudent.
Peter Wolodarski DN 9 april 2023
Microsoft AI och Englund om Martin Wolf “The Crisis of Democratic Capitalism”
Alla pratar om AI – här är termerna du behöver kunna
The toothpaste is already out of the tube.
OpenAI last week launched a new system that will allow businesses to plug ChatGPT into their proprietary databases, allowing its chatbot to carry out tasks on their systems like retrieving information, making bookings and even running new software that it creates.
While the plugin announcement didn’t get much attention in the mainstream press, many technologists saw it as a stunning leap forward for ChatGPT. Not only could it search and synthetize information it had been trained on, it could take action.
The Cassandras are out in force claiming artificial intelligence will be the end of mankind. They have a very good point.
It is not every day that I read a prediction of doom as arresting as Eliezer Yudkowsky’s in Time magazine last week. “The most likely result of building a superhumanly smart AI, under anything remotely like the current circumstances,” he wrote, “is that literally everyone on Earth will die.
The debate we are having today is about a particular branch of AI: the large language models (LLMs) produced by organizations such as OpenAI, notably ChatGPT and its more powerful successor GPT-4.
We are already well on our way to Raskolnikov's nightmare at the end of Crime and Punishment, in which humanity goes collectively mad and descends into internecine slaughter.
If you still cannot foresee how GPT-4 will be used in 2024 to “flood the zone” with deepfake content, then I suggest you email Eliezer Yudkowsky.
But just make sure it’s really him who replies.
Niall Ferguson Bloomberg 9 april 2023
Pausing AI Developments Isn't Enough. We Need to Shut it All Down
BY ELIEZER YUDKOWSKY MARCH 29, 2023 6:01 PM EDT
Yudkowsky is a decision theorist from the U.S. and leads research at the Machine Intelligence Research Institute. He's been working on aligning Artificial General Intelligence since 2001 and is widely regarded as a founder of the field.
https://time.com/6266923/ai-eliezer-yudkowsky-open-letter-not-enough/
What Is ChatGPT? What to Know About the AI Chatbot
Englund: What Is ChatGPT? What to Know About the AI Chatbot (englundmacro.blogspot.com)
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