As expected, the FOMC (Federal Open Markets Committee) raised the interest rate on federal funds (the rate for overnight loans from one financial institution to another from funds held at the Federal Reserve) from a range of 0.00-0.25 to 0.25 to 0.50.
Full release here.
On the surface, this seems much ado about nothing, or, almost nothing, but the Fed's long-awaited rate increase will have ramifications across the investing and business world.
For instance, the first salvo will be to any and all loans tied to the Prime Rate, which include most credit card, revolving debt and home equity loans and lines of credit.
Shortly after the Fed's rate announcement, major banks began announcing that they were raising their prime lending rate from 3.25 percent to 3.50 percent. Wells Fargo was the first bank to announce the rate hike, followed in rapid pace by Chase, Citibank and Bank of America. The increases are effective immediately.
What that means is if you've been paying 4% (not unusual) on a home equity loan, your new rate will be 4.25%. In real terms, on $250,000, that's an additional $37 per month. Not much, one might think, but, considering that the Fed plans on continuing to increase their base FF rate - which will green light the banks to up the prime rate - the cost of borrowing will simply continue to increase.
Many analysts have shied away from calling the Fed's move ill-timed, though an equal number has called it "too late." What it certainly is not is "too little." Insofar as it is the smallest rate hike imaginable, its effects will be far reaching.
In larger, banking terms, try this: A billion dollars borrowed over seven years at 1/4% would cost $12,010,470 per monthly payment. At 1/2%, it's $12,116,790, an increase of $106,000 a month. That same billion, borrowed for just one year at 1/4% interest requires a monthly payment of $83,446,220. At 1/2%, it's 83,559,200, an increase of $112,980 per month.
With numbers like these being thrown around routinely - and daily - by the largest financial institutions, hedge funds, brokerages and their ilk, something is bound to blow up sooner, rather than later. Already we've witnessed carnage in the junk bond markets, which have been pounded in anticipation of today's Fed announcement and there will surely be more to come.
On wall Street, stocks appeared to love the move, with the Dow up 224 points, the S&P gaining 29.66, and the NASDAQ ahead by 75.77. This looks all well and good right out of the box, but there's a quadruple witching day coming up Friday on options, and year end is now within spitting distance.
It might be wise to square up one's positions - if one has any - before the end of 2015 to take advantage of tax breaks for losses and/or long term gains. Precious metals moved rather sharply throughout the day and did not pull back after the Fed announcement, despite the dollar remaining strong, which is the obvious outcome.
For now, the strong dollar will continue to stoke deflation, as imports will become cheaper. To anybody who's been Christmas shopping, the price structure is obviously on the low end this season and will likely be bargain basement after the holiday shopping ends.
Most Americans will find bargains in stores, if they have any money with which to purchase them after paying what are sure to be higher credit card bills.
According to the Federal Reserve, the US economy is supposed to be strong enough now to absorb this rate increase and the associated nuances. At this juncture, it's far too early to tell.
We shall see in coming weeks and months. As Ernest Hemingway so eloquently put it in The Sun Also Rises: "How did you go bankrupt?"
"Two ways. Gradually, then suddenly."
Wednesday, December 16, 2015
Pre-FED-Hike Notes for the Truly Deranged and/or Excited
As of 12:30 pm ET, amazingly, the Dow, NAZ and S&P are all right at (or pretty damn close) both their 40 and 200-day MAs.
In other words, the entire market will be essentially flat going into the FOMC announcement. No clues for anyone, except that move up in PMs this morning.
Putting on my best guessing hat - which stragely resembles a dunce cap - I'd say the 0.25% rate hike is all but a done deal. The Fed has gone too far and they know it.
This is really a now-or-never condition, and they must go with NOW, because NEVER doesn't really mean never. It means they will have to do this at some point. There will be significant pain ahead, but only for those who are highly leveraged, over-indebted or just plain stupid.
Everyone has had seven years to prepare for this moment. If you haven't gotten a whiff of what's coming, you are not to be pitied. You will be dismembered and disposed of by the gnarly beast of deflation.
That's my take.
Final note: Yesterday, over at ZeroHedge, I reiterated my call from about two years ago that silver would see $12. Another poster said $8.25 was the target, or bottom. I'm fine with that. Will be buying at $12 and buying even more if and when it ever gets to $8.
90 minutes to lift-off. Good luck to all.
In other words, the entire market will be essentially flat going into the FOMC announcement. No clues for anyone, except that move up in PMs this morning.
Putting on my best guessing hat - which stragely resembles a dunce cap - I'd say the 0.25% rate hike is all but a done deal. The Fed has gone too far and they know it.
This is really a now-or-never condition, and they must go with NOW, because NEVER doesn't really mean never. It means they will have to do this at some point. There will be significant pain ahead, but only for those who are highly leveraged, over-indebted or just plain stupid.
Everyone has had seven years to prepare for this moment. If you haven't gotten a whiff of what's coming, you are not to be pitied. You will be dismembered and disposed of by the gnarly beast of deflation.
That's my take.
Final note: Yesterday, over at ZeroHedge, I reiterated my call from about two years ago that silver would see $12. Another poster said $8.25 was the target, or bottom. I'm fine with that. Will be buying at $12 and buying even more if and when it ever gets to $8.
90 minutes to lift-off. Good luck to all.
Tuesday, December 15, 2015
Last Dance Before Yellen's Rate Hike; Stocks at the High End... with Tom Petty Video
In tribute to today's madcap stock rally in the face of tomorrow's FOMC policy rate decision, we present Tom Petty and the Heartbreakers classic, "Mary Jane's Last Dance."
Picture Mary Jane as Wall Street, High Yield Bonds, the global economy, or all three. Tom Petty is the Federal Reserve. That's all for today. Tomorrow's a big one.
Picture Mary Jane as Wall Street, High Yield Bonds, the global economy, or all three. Tom Petty is the Federal Reserve. That's all for today. Tomorrow's a big one.
Monday, December 14, 2015
Is a Global Recession Just Ahead, or, A Global Depression?
Gas prices at the pump haven't been this low since 2009, though the prices back then maintained for a very brief time, as oil plummeted during the financial crisis (remember that?), but quickly rebounded as the Fed and other central banks added extreme amounts of liquidity to markets globally and before long, crude oil was back in the $90-100/barrel range.
Last year, the price of a barrel of crude - both Brent and WTI - began a precipitous decline, cutting in half the traded price. As 2014 turned to 2015 and many culprits were blamed (Saudi Arabia, US frackers, Russia(?), the price continued to hover in the $45-65 range. By late summer, all bets were off as the price of a barrel of crude fell into the low-$40 range, and then this month declined into the 30s.
While gas at $2/gallon and lower is a boon for drivers, especially in the US, where commuters and businesses were burdened with gas above $3.00 and sometimes over $4/gallon for years, it's not such a great deal for oil producers, especially the aforementioned frackers, whose marginal profitable price per barrel was estimated at somewhere between $45 and $75 per barrel.
Plenty of rigs have gone idle, but debt has to be serviced, and most of these drillers are on the hook for millions, borrowed from banks when the getting was good, now having to pay back the costs of exploration, drilling and extraction while operating at a loss.
The oil patch is just one element of the global liquidity crunch which may be about to enter a new, more dangerous phase, when, in two days time, the FOMC of the Federal Reserve is supposed to raise the federal funds rate for the first time in more than seven years.
The Fed plans to set the rate at 0.25% for money banks can borrow from the Fed, and, while that may not sound like a big deal to most, it certainly is to banks and corporations, which have been borrowing and spending at record paces since mid-2009.
With the FOMC rate policy decision now less than 48 hours away, there's a growing nervousness on Wall Street over this unprecedented move by the Fed. It's unprecedented because there's a vast amount of evidence that the bubble the Fed has blown is about to be not only pricked, but popped and blown wide open. Simply put, the party is about to end, and the drunks on the dance floor will be looking for a ride home, but nobody will be available for a safe trip, because not just the investment and corporate community, but the Fed itself, is staggering and woozy.
It may be a big, bad boogey man, like the 2000 scare, or the Mayan calendar, or those pesky asteroids which dare to come within 100,000 miles of dear planet earth. Or, it could be the real thing.
Nothing lasts forever, and, from the looks of the bond, commodity, and emerging markets, the long "recovery" and stock market rally seems to have run out of steam. Global trade is down, global GDP keeps being revised lower, US manufacturing is fading, China is becoming a basket case. It all points to reduced growth, or, in proper recession terms, negative growth.
If you're in the market, there's still a day and a half to get out, and probably more, if you can handle small losses. If you're not in the market, but still have to drive, eat, and breath, good news. In recessions and, especially, depressions, everything (except debt) is cheaper.
Hedge, buy, or sell accordingly.
--FR
Last year, the price of a barrel of crude - both Brent and WTI - began a precipitous decline, cutting in half the traded price. As 2014 turned to 2015 and many culprits were blamed (Saudi Arabia, US frackers, Russia(?), the price continued to hover in the $45-65 range. By late summer, all bets were off as the price of a barrel of crude fell into the low-$40 range, and then this month declined into the 30s.
While gas at $2/gallon and lower is a boon for drivers, especially in the US, where commuters and businesses were burdened with gas above $3.00 and sometimes over $4/gallon for years, it's not such a great deal for oil producers, especially the aforementioned frackers, whose marginal profitable price per barrel was estimated at somewhere between $45 and $75 per barrel.
Plenty of rigs have gone idle, but debt has to be serviced, and most of these drillers are on the hook for millions, borrowed from banks when the getting was good, now having to pay back the costs of exploration, drilling and extraction while operating at a loss.
The oil patch is just one element of the global liquidity crunch which may be about to enter a new, more dangerous phase, when, in two days time, the FOMC of the Federal Reserve is supposed to raise the federal funds rate for the first time in more than seven years.
The Fed plans to set the rate at 0.25% for money banks can borrow from the Fed, and, while that may not sound like a big deal to most, it certainly is to banks and corporations, which have been borrowing and spending at record paces since mid-2009.
With the FOMC rate policy decision now less than 48 hours away, there's a growing nervousness on Wall Street over this unprecedented move by the Fed. It's unprecedented because there's a vast amount of evidence that the bubble the Fed has blown is about to be not only pricked, but popped and blown wide open. Simply put, the party is about to end, and the drunks on the dance floor will be looking for a ride home, but nobody will be available for a safe trip, because not just the investment and corporate community, but the Fed itself, is staggering and woozy.
It may be a big, bad boogey man, like the 2000 scare, or the Mayan calendar, or those pesky asteroids which dare to come within 100,000 miles of dear planet earth. Or, it could be the real thing.
Nothing lasts forever, and, from the looks of the bond, commodity, and emerging markets, the long "recovery" and stock market rally seems to have run out of steam. Global trade is down, global GDP keeps being revised lower, US manufacturing is fading, China is becoming a basket case. It all points to reduced growth, or, in proper recession terms, negative growth.
If you're in the market, there's still a day and a half to get out, and probably more, if you can handle small losses. If you're not in the market, but still have to drive, eat, and breath, good news. In recessions and, especially, depressions, everything (except debt) is cheaper.
Hedge, buy, or sell accordingly.
--FR
Sunday, December 13, 2015
Climate Change Agreement: The Farce Is Strong in This One
Editor's Note: OK, this is a blog called Money Daily, which means that there should at least be a post every day. That sounds reasonable enough, but, as a writer, editor and publisher for many years (spanning the decades from the 1980s to the present), I'm old enough and wise enough to realize that - unless I'm serially unemployed (not yet, but working on it) or have no other obligations in life (sadly, I do) - writing something coherent and reasonable and, yes, maybe even stimulating and/or thought-provoking every day is a tall order.
Nevertheless, I've taken a long hiatus of about one year due to moving (twice), running another business (badly), managing a five acre property (working) and sawing and chopping lots and lots of wood to burn this winter (working on that too), and that is now at an end, mainly because I have found more free time, a renewed interest in money, economics and politics and because something inside me tells me I can long longer be silent on a growing number of issues.
To that end, I'll endeavor to put something on this blog every weekday (come on, everyone needs a weekend) and sometimes on weekends. I will do my best to write posts that are entertaining, enlightening, interesting and provocative. And, I'll go back to using my most significant and enduring signature. --FR
In Paris, France, recently, two weeks were spent by highly-paid representatives from nearly 200 countries to reach an agreement that is not binding on any of the participants, includes goals and suggestions that individual countries can choose to either accept or reject, and a vast array of proposals that are unenforceable.
This is the cumulation of the global climate change summit just ended in Paris over the weekend. It also marks the beginning of the end of the absurd notions of the "climate change" proponents. No nation would agree to a mandated agreement, particularly the United States of America, because it would have required approval from our congress, which was a dubious outcome at best.
Not to belabor the issue, the climate change agreement - hailed by Secretary of State John Kerry as "significant" on FoxNews Sunday, today - is yet another glowing example of the failed leadership in the global community. Thousands of delegates gather together to plan, prepare, eat, drink, party and come up with an agreement that is null and void from the start.
In other words, the entire exercise was a complete waste of time, energy and (using the term very, very loosely) talent. The delegates, for wasting so much time and TAXPAYER MONEY, should be docked two weeks pay. Further, the people responsible for this latest craziness - a non-binding agreement to not raise the global temperature by another degree by 2050 - should simply resign, if for only the paramount reason that they have no real clue of what they're supposed to be doing, other than possibly enriching themselves and their close business allies.
Climate change is real. The climate is always changing. There's no doubt about that. But, thinking that humans are actually causing the climate to change in any significant way, or, the ultimate hubris of thinking that they can actually do anything to fix it, is just plain stupid.
The climate change agreement is a farce. A total disgrace. Let's just be happy that the issue won't be addressed again for - from what I'm hearing - another eight years - 2023. Well, at least that's good news.
--FR
Nevertheless, I've taken a long hiatus of about one year due to moving (twice), running another business (badly), managing a five acre property (working) and sawing and chopping lots and lots of wood to burn this winter (working on that too), and that is now at an end, mainly because I have found more free time, a renewed interest in money, economics and politics and because something inside me tells me I can long longer be silent on a growing number of issues.
To that end, I'll endeavor to put something on this blog every weekday (come on, everyone needs a weekend) and sometimes on weekends. I will do my best to write posts that are entertaining, enlightening, interesting and provocative. And, I'll go back to using my most significant and enduring signature. --FR
In Paris, France, recently, two weeks were spent by highly-paid representatives from nearly 200 countries to reach an agreement that is not binding on any of the participants, includes goals and suggestions that individual countries can choose to either accept or reject, and a vast array of proposals that are unenforceable.
This is the cumulation of the global climate change summit just ended in Paris over the weekend. It also marks the beginning of the end of the absurd notions of the "climate change" proponents. No nation would agree to a mandated agreement, particularly the United States of America, because it would have required approval from our congress, which was a dubious outcome at best.
Not to belabor the issue, the climate change agreement - hailed by Secretary of State John Kerry as "significant" on FoxNews Sunday, today - is yet another glowing example of the failed leadership in the global community. Thousands of delegates gather together to plan, prepare, eat, drink, party and come up with an agreement that is null and void from the start.
In other words, the entire exercise was a complete waste of time, energy and (using the term very, very loosely) talent. The delegates, for wasting so much time and TAXPAYER MONEY, should be docked two weeks pay. Further, the people responsible for this latest craziness - a non-binding agreement to not raise the global temperature by another degree by 2050 - should simply resign, if for only the paramount reason that they have no real clue of what they're supposed to be doing, other than possibly enriching themselves and their close business allies.
Climate change is real. The climate is always changing. There's no doubt about that. But, thinking that humans are actually causing the climate to change in any significant way, or, the ultimate hubris of thinking that they can actually do anything to fix it, is just plain stupid.
The climate change agreement is a farce. A total disgrace. Let's just be happy that the issue won't be addressed again for - from what I'm hearing - another eight years - 2023. Well, at least that's good news.
--FR
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