Economics Corner: So are we done with rate hikes?

[El Presidente]

In the US and Oz, rate hikes have started to create hairline cracks in the glass infrastructure.  The US you can see it in the banking sector. In Oz it is in the household sector and the reason is that the majority of mortgages are on variable rates. 

Yet inflation is proving stubborn, unemployment at all time lows, rents at all time high's.  Both Fed/Reserve would love to kick in another 1% rise to take the sting out of the game.  It doesn't look like they have the cojones to do it as something is likely to break. 

Intriguing 

What's your call? 

[Corylax18]

Its time to pay the piper. Over a decade of near zero world wide rates was always going to have consequences. SVB was poorly managed, Credit Suisse has been poorly run for years. Silvergate was heavily tied to Crypto and other speculative assets. Its not a surprise that these are the first dominoes to fall. But I do think they're just the first and will be far from the last. 

The U.S. is far less exposed to variable rate mortgages (less than 10% of total) but we are holding all time record levels of credit card debt, about 1 Trillion dollars worth, at very high and very Variable rates. (many Cards are near 30% right now)

Weather they raise rates again or not, the problems where cast in stone two years ago, five years ago. Some very stupid choices where made, by some very powerful people. They better keep raising rates, I'll be disappointed by anything less than a .5% raise from the Fed at the next meeting, but I wouldnt be at all surprised by .25%. The fed isnt supposed to make monetary policy based on transient, everyday events, but that went out the window a long time ago.  

15 minutes ago, El Presidente said:

unemployment at all time lows

This is HIGHLY misleading, at least in the US. You have to go back to the Late 70s (before women entered the workforce en masse) to see Labor Force Participation rates lower than we have today. When everything is "free" fewer people work, the evidence makes that crystal clear. 

https://ycharts.com/indicators/labor_force_participation_rate#:~:text=US Labor Force Participation Rate is at 62.50%%2C compared to,long term average of 62.84%.

[El Presidente]

4 minutes ago, Corylax18 said:

This is HIGHLY misleading, at least in the US. You have to go back to the Late 70s (before women entered the workforce en masse) to see Labor Force Participation rates lower than we have today. When everything is "free" fewer people work, the evidence makes that crystal clear. 

https://ycharts.com/indicators/labor_force_participation_rate#:~:text=US Labor Force Participation Rate is at 62.50%%2C compared to,long term average of 62.84%.

 Perhaps better to say "Available workers seeking work" at an all time low. 

It is certainly the cause of wages inflation in certain sectors here. 

 

[dominattorney]

30 minutes ago, El Presidente said:

 Perhaps better to say "Available workers seeking work" at an all time low. 

It is certainly the cause of wages inflation in certain sectors here. 

 

Will something break? It's already broken. However, I agree w @Corylax18, as usual, that unemployment levels are artificially suppressed. We may disagree as to the cause. In my mind it reflects the fruits if automation in the modern economy driving down the need for jobs in general. We are at a historical tipping point where we will soon have to confront the possibilities of universal basic income. There is a great degree of resistance to this concept which is emotionally and politically motivated, and titans of industry stoke the opposition. However, it is nonetheless on the horizon as many traditional jobs are rendered unnecessary by modern technology. Skilled labor is still a need, but one that our present educational and employment system is ill equipped to meet in its present form. 

The system will break. It's already broken. The question is will we even possess the ability to asses blame when the driving forces behind the economy are so varied and opaque to analysis?

[rcarlson]

 I think they'll pause to let things stabilize.  The risks of another rate hike are mighty high.  

[Corylax18]

13 minutes ago, rcarlson said:

 I think they'll pause to let things stabilize.  The risks of another rate hike are mighty high.  

Are they? As I alluded to in my first post, I don't think it matters what they do at this point. Its far too little, far too late, but that doesn't mean you stop trying. 

Everybody is freaking out that tech companies are getting rid of people. Facebook just announced another 10k or so layoffs for the first half of this year.

Sky is falling, right? Wrong, they will still have more employees than they did before covid hit. Employees they don't need, employees they never actually needed. They went from 48k employees before the pandemic to 87k Before they started layoffs last November. So the 25k ish layoffs in the last 6 months doesn't even get close to "bursting the bubble."

We'll see what happens when these cumulative Finance and Tech related layoff start working their way deep into 6 and then 7 figures. These are high paying positions, for people with, mortgages, car payments, credit card bills, etc. We'll see how smart their buying sprees over the last couple years where when the income goes away. Have fun paying your $1100 a month car note and $5k a month mortgage with no income. 

A temporary pause in interest rate hikes wont help those people though. Saying we cant do the right thing now, because it will hurt people who made bad choices for years is just bad policy. Its that kind of thinking thats gotten us here now. 

[rcarlson]

40 minutes ago, Corylax18 said:

Are they? As I alluded to in my first post, I don't think it matters what they do at this point. Its far too little, far too late, but that doesn't mean you stop trying. 

Everybody is freaking out that tech companies are getting rid of people. Facebook just announced another 10k or so layoffs for the first half of this year.

Sky is falling, right? Wrong, they will still have more employees than they did before covid hit. Employees they don't need, employees they never actually needed. They went from 48k employees before the pandemic to 87k Before they started layoffs last November. So the 25k ish layoffs in the last 6 months doesn't even get close to "bursting the bubble."

We'll see what happens when these cumulative Finance and Tech related layoff start working their way deep into 6 and then 7 figures. These are high paying positions, for people with, mortgages, car payments, credit card bills, etc. We'll see how smart their buying sprees over the last couple years where when the income goes away. Have fun paying your $1100 a month car note and $5k a month mortgage with no income. 

A temporary pause in interest rate hikes wont help those people though. Saying we cant do the right thing now, because it will hurt people who made bad choices for years is just bad policy. Its that kind of thinking thats gotten us here now. 

Bad policy or not, I think the fear of expanding bank crises will cause them to pause.  I'm just prognosticating.  

[LLC]

4 minutes ago, rcarlson said:

Bad policy or not, I think the fear of expanding bank crises will cause them to pause.  I'm just prognosticating.  

I’m not an expert but I agree because of the banking issues they may pause to let things settle before resuming. 

[targa88]

Given the current circumstances- as it applies to the banking sector - the Fed will cool its jets for a while.

However, as alluded to earlier - rates will continue to increase - which will increase the likelihood of more bankruptcies / foreclosures. In which case loan losses/provisions will also increase. The spiral will continue.

There is no control or accountability metrics that will work.

[PuroDiario]

They will keep raising even if more tamed, that’s my view. Some time ago I posted about excess earnings / savings financing current consumption, to take that out more layoffs needed. More layoffs require companies not to be able to earn excess profits that easy, and many companies have passed to consumers well above increase in costs hence you see companies with pretty good earnings given all else. These two factors need to be out of the discussion before cooling down inflation…at the same time highly relevant political implications in upcoming electoral time so…let’s see. 

[NSXCIGAR]

So much for the Fed's "soft landing."

Gotta love these ivory tower types with the arrogance to think they can manage an economy like a machine. That's what too much college will do to you. 

[GoodStix]

I don’t know if the western central banks will pause or not in the short term, but rates will head higher in ‘23 and remain “high” for years.  High only in comparison to far too many years of near zero or even negative rate foolishness.  Weak men create hard times.  Here we are.  Inflation is here to stay for many years — massive public and private debts, and political, demographic, and geopolitical issues hugely impacting energy, mineral resources, fertilizers, food, declining industry in Germany and China, and the re-industrialisation of North America.  All of it inflationary from a North American or Australian perspective.  Much hurt ahead for most of the world.  Eventually a bright future for NA and Australia, they’re far better poised than most.  But thru the valley first.  JMO.

[dominattorney]

10 hours ago, Corylax18 said:

 

Everybody is freaking out that tech companies are getting rid of people. Facebook just announced another 10k or so layoffs for the first half of this year.

Sky is falling, right? Wrong, they will still have more employees than they did before covid hit. Employees they don't need, employees they never actually needed. They went from 48k employees before the pandemic to 87k Before they started layoffs last November. So the 25k ish layoffs in the last 6 months doesn't even get close to "bursting the bubble."

I read somewhere that these texh companies were paying people not to work during covid. Doesn't surprise me in the least. Taking on double your necessary workforce to simply amble by and prevent the competition from scooping someone who might be an asset to them is the peak of foolishness. Almost. The person believing their worthless job where they produce nothing is secure might top that. 

[Marco_011t556]

got to stop rate hike....otherwise banks will keep bankrupt lol those bond price dropped a lot and their balance sheet cant sustain

[Corylax18]

11 hours ago, rcarlson said:

Bad policy or not, I think the fear of expanding bank crises will cause them to pause.  I'm just prognosticating.  

That "fear" is a huge part of what got us here. As @GoodStix says "weak men create hard times" Weak men have been bowing to the Bank's and Hedge Fund's Tantrums for a decade now. Every time they mention a hike, everybody "panics" and says they go bankrupt. Maybe they should. We've been fine without Bear Stearns, and Lehman Bro's. We'll be fine without SVB, Credit Suisse and Silver gate. 

Its time for the Fed to stop listening to the lobbyists, bankers and traders and start doing the right thing. 

1 hour ago, 011t556 said:

got to stop rate hike....otherwise banks will keep bankrupt lol those bond price dropped a lot and their balance sheet cant sustain

 

11 hours ago, LLC said:

I’m not an expert but I agree because of the banking issues they may pause to let things settle before resuming. 

Rate increases didnt cause the issues at SVB, Credit Suisse or Silvergate. Bad business did, they set themselves up for this by making very risky and very stupid investments. Again. The regulators missed it/allowed it to happen. Again. 

Lower interest rates wont solve the problem. (they'll make it worse, like they've been doing) Its all the same shit from 2001 and 2008. 

 

[Corylax18]

1 hour ago, dominattorney said:

I read somewhere that these texh companies were paying people not to work during covid. Doesn't surprise me in the least. Taking on double your necessary workforce to simply amble by and prevent the competition from scooping someone who might be an asset to them is the peak of foolishness. Almost. The person believing their worthless job where they produce nothing is secure might top that. 

If they could hire and fire them all within a 2 year period, they clearly didn't have a very good plan for monetizing their services. Imagine how many P&C staff they had to cycle through. Meanwhile, Meta set records for both Revenues and Profits in 2021, despite all that bloat. A broken system indeed. 

[Marco_011t556]

46 minutes ago, Corylax18 said:

That "fear" is a huge part of what got us here. As @GoodStix says "weak men create hard times" Weak men have been bowing to the Bank's and Hedge Fund's Tantrums for a decade now. Every time they mention a hike, everybody "panics" and says they go bankrupt. Maybe they should. We've been fine without Bear Stearns, and Lehman Bro's. We'll be fine without SVB, Credit Suisse and Silver gate. 

Its time for the Fed to stop listening to the lobbyists, bankers and traders and start doing the right thing. 

 

Rate increases didnt cause the issues at SVB, Credit Suisse or Silvergate. Bad business did, they set themselves up for this by making very risky and very stupid investments. Again. The regulators missed it/allowed it to happen. Again. 

Lower interest rates wont solve the problem. (they'll make it worse, like they've been doing) Its all the same shit from 2001 and 2008. 

 

 

agree,,now the problem is, FED seems dont know how those banks distribute their portfolio..SVB died coz it over distribute its balance sheet to the mbs..and, corporate are panic and draw all the capital out...no bank can sustain..but for sure, the CEO of SVB is stupid enough to disclose such message (which i think they only need USD 1-2B to cover the problem originally..

[Corylax18]

1 hour ago, 011t556 said:

 

agree,,now the problem is, FED seems dont know how those banks distribute their portfolio..SVB died coz it over distribute its balance sheet to the mbs..and, corporate are panic and draw all the capital out...no bank can sustain..but for sure, the CEO of SVB is stupid enough to disclose such message (which i think they only need USD 1-2B to cover the problem originally..

Yeah, this all started over $1.8B in losses on $21B worth of "mixed securities", much of it Mortgage Backed Securities. Sound familiar?

Any decently run bank should be able to deal with a sub 10% loss on an investment that itself, its less than 10% of their total portfolio. It might hurt, but for a properly capitalized bank, with correct asset ratios, that kind of a loss shouldn't be catastrophic. The fact that it was for SVB speaks volumes to the quality(or lack there of) of their former management. 

[Corylax18]

24 minutes ago, therealrsr said:

When they called to raise 2 billion after the forced sale of 21 billion of their portfolio at an 8.5% loss customers freaked and funding dried up.  Was that a stupid release by their CEO?  Yes, but it was going to come out regardless when seeking the capital. 

 

24 minutes ago, therealrsr said:

A fair ciriticism is they should have held a higher cash percentage as they were just above 50% of the average cash allocation.  That would have buffered the withdrawl impact, but not convinced it would have averted.

Its all about these two things. An 8.5% loss on less than 10% of your overall assets shouldn't bring any bank any where close to the edge. They were grossly under capitalized. Of course investors panicked when the bank publicly said "we need more of your money to pay our losses." Anybody in their right mind would yank their cash from that bank instantly. Its hard to even call what they where running a bank, at the end it was more of an investment firm than anything.   

[Namisgr11]

Personally, I expect the Federal Reserve to continue course with a 0.25% rate hike.  Inflation is their primary target, and while the metrics of it are down sharply from last summer's peak, they still hover well above the arbitrary 2% target the Fed have latched onto.  Unless something happens in the banking sector well beyond what's transpired already, I'd be surprised if the Fed took any pause.

As to the US economy, it's coming off of two consecutive quarters of GDP growth, and so as of now the negativity toward the current state of the economy being voiced by some here would seem to be more projection than actual fact based on where things stand right now.

As to investing, the US markets are coming off an unprecedented lengthy bull run.  Correction in the least is due.  And if the economy should slip into mild recession later this year, as seems entirely possible, then perhaps a bear market will hurt stock returns for a year or so, while providing a potentially interesting re-entry point for those who've reduced their weighting in equities.  On the other hand, short-term interest rates in the US are at 20+ year highs, and for those of us retirees represent an easy and relatively risk-free source of significant income that hasn't been available for a long, long time.

Finally, with respect to labor force participation, the recent level of 62.5% is essentially the same as recorded in August, 2018, and being the highest since the start of the pandemic continues the trend of rising labor participation since the first surge of the pandemic decimated the numbers in 2020.

[dominattorney]

1 hour ago, Corylax18 said:

If they could hire and fire them all within a 2 year period, they clearly didn't have a very good plan for monetizing their services. Imagine how many P&C staff they had to cycle through. Meanwhile, Meta set records for both Revenues and Profits in 2021, despite all that bloat. A broken system indeed. 

Essentially having corporations bay a UBI rather than the government. I saw a YouTube video from a fired meta worker alleging she was paid not to work. One could reasonably retort that her failing to work is ultimately why she was fired. But it's not completely absurd to believe she would be telling the truth. 

[Corylax18]

40 minutes ago, dominattorney said:

Essentially having corporations bay a UBI rather than the government. I saw a YouTube video from a fired meta worker alleging she was paid not to work. One could reasonably retort that her failing to work is ultimately why she was fired. But it's not completely absurd to believe she would be telling the truth. 

I'm generally skeptical of conspiracy theories or things like that. But only because I have very little faith in people to plan, execute, then keep quiet. I don't doubt she was paid not to work, but my instincts tell me the cause was more along the lines of incompetence than any kind of well executed plan.

[dominattorney]

43 minutes ago, Corylax18 said:

I'm generally skeptical of conspiracy theories or things like that. But only because I have very little faith in people to plan, execute, then keep quiet. I don't doubt she was paid not to work, but my instincts tell me the cause was more along the lines of incompetence than any kind of well executed plan.

I dont think it's a conspiracy theory plotted by malicious elites. I agree incompetence is behind it if it indeed occurred. The type of incompetence that would cause a manager to fear that if they don't pay someone with a (probably inflated) resume to sit in our building, a competitor might hire him or her instead and get a leg up. 

[SteveA]

Watched this the other night. Left me a bit concerned.

https://www.pbs.org/wgbh/frontline/documentary/age-of-easy-money/

[DikkeSigaar]

More increases to come without a shred of a doubt.