Now that the Trump tax cuts have been passed and US companies have had the opportunity to incorporate the changes into their projections, we are starting to see big payoffs, particularly for banks. This development is supportive of further gains in share prices.
This is a thought piece. And so it’s going to be relatively) brief since I haven’t fleshed out all of my ideas here. But I want to run something by you based on a piece Matt Klein wrote over at FT Alphaville on macro policy. Let me point to the […]
I think I have the answer to at least one question: why was the Fed talking to big money investors in the first place. My thoughts follow below.
This week all eyes will be on the Fed because of its expected interest rate hike and the messaging that will accompany its policy decision. But credit markets should also be focused elsewhere, because credit growth has been decelerating across a wide array of markets for months now. And this trend has not let up in recent months.
For years, many Fed watchers have claimed that the Federal Reserve has a secret third mandate beyond inflation and full employment. And this past February 21st, for the first time a Fed President said directly that, indeed, the Fed does have a third mandate: financial stability.
While most analysts have been focused on credit growth which has re-emerged after the sovereign debt crisis, cross border inter-bank lending has decreased, fragmenting the euro zone along national lines. In a crisis scenario, one should expect that fragmentation to increase dramatically, putting extra stress on national central banks and increasing financial fragility in the eurozone’s periphery.
The unexpected ‘Leave’ victory in the recent referendum on EU membership introduces considerable political risk by elevating tail risk scenarios to reasonable worst case status. However, in a global economy that is already slow and already lacks policy space, the referendum outcome also introduces economic and financial risk. Below I have some general thoughts on those risks, with the US dollar, Italian banks, and Japanese deflation foremost among them. At a later point, I hope to also go into some more detailed scenario handicapping.
Since the Global Crisis, interest rates in many advanced economies have been low and, in many cases, are expected to remain low for some time. Low interest rates help economies recover and can enhance banks’ balance sheets and performance, but persistently low rates may also erode the profitability of banks if they are associated with lower net interest margins. This column uses new cross-country evidence to confirm that decreases in interest rates do indeed contribute to weaker net interest margins, with a greater adverse effect when rates are already low.
The primacy of monetary policy continues unabated as central banks go further and further down the rat hole of increasingly desperate measures to boost demand. First, it was quantitative easing. Now, the latest scheme is negative interest rates. They tell us that monetary policy is not exhausted and that still more policy initiatives lie ahead, particularly helicopter money. However, we should be sceptical that any of these policies will gain meaningful traction before another economic downturn. Brief comments below
About a month ago, I wrote a post on how market contagion would happen due to deteriorating credit conditions in energy high yield. And while this doesn’t necessarily lead to recession or financial crisis, it has already meant a real economy slowdown in the US. When the business cycle does […]
There are a lot of competing narratives going around as to why Greece is in such trouble relative to the rest of the eurozone. A lot of this centers on whether Greek fiscal profligacy or poor credit controls by foreign banks was the main cause of the Greek debt crisis. Let me throw my hat into this ring with a few comments. What I say below will generally shade toward the problem being one of fiscal profligacy worsened by an ECB monetary policy that was inappropriate for the eurozone periphery as a whole and Greece in particular.
The existence of capital controls eliminates contagion and makes it possible to bail-in deposits that would normally be considered to have systemic consequences. The more I look at it, the less benign this bailout deal appears. Indeed it looks to me as if it was set up to do considerable damage to the Greek economy. Once this becomes apparent, Greeks are surely likely to change their minds about staying in the Euro.