Is The Bottom Almost Here?

[FCharlie]

2 hours ago, SharperDingaan said:

 

There are 3 more federal reserve settings through 2022 calendar year-end, and a market expectation of a 200bp raise across the 3 settings, or 75+75+50 ?.

 

What do you think happens if the expectation changes to  50+50+50 ?

And it happens at the next rate setting ??

 

SD

 

I don't believe the current consensus is for 75+75+50.  More likely 50+25+25 and finished.

 

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

[Spekulatius]

5 minutes ago, FCharlie said:

I don't believe the current consensus is for 75+75+50.  More likely 50+25+25 and finished.

 

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Yep, I think that’s the answer for the consensus. Thanks for posting.

[mattee2264]

Yeah 50+25+25 is more my reading. Powell said he wanted to front load the rate hikes and in the latest meeting was talking about more gradual increases going forward.  He has admitted monetary policy operates with a lag which encourages a wait and see approach. 

 

I think 2023 will be far more about earnings than rates. If S&P 500 goes into an earnings recession and 2021 earnings prove to be unsustainably high then you'd expect a negative market impact. And the Fed is not really leaving itself a lot of room to cut rates when inflation has some way to go before it returns to target and remains a political issue. So pause is probably more realistic than a pivot. 

 

But yeah I think it was a little naive to think the Fed would end the bull market. The market had its usual panic before realizing that the Fed is still pretty dovish. 

 

Usually deep recessions end long bull markets but I do not think one is on the cards and bad news is good news because if things get bad enough the Fed can start easing and printing and we have seen how effective that was during the Great Flood equivalent of the pandemic! So a garden variety recession should not really trouble markets. 

 

So I kinda feel this will have the usual ending. Eventually markets will take on a bit too much risk buoyed by optimism and total lack of moral hazard and we will get some kind of financial crisis but probably years down the line. 

[wabuffo]

I don't believe the current consensus is for 75+75+50.  More likely 50+25+25 and finished.

 

The funny thing is that this same CME Fedwatch has the Fed cutting from 325-350bp in Dec, 2022 down to 275-300bp by July 2023 (i.e., a 50bp cut sometime in first half of 2023).

 

So maybe not quite finished in December.

 

Bill

[changegonnacome]

5 hours ago, mattee2264 said:

So I kinda feel this will have the usual ending.

 
Usual endings everybody remembers for the last 40 years we’re in the context of a low inflationary environments where ‘the cost’ to the Fed/economy to ease financial conditions at the first sign of trouble was effectively ZERO. It was an asymmetric trade and one they took each and every time without fail. The Fed put! 
 

This time really is different (empirically & quantifiably different) the Fed put trade is not so asymmetric it has cost considerations   - let’s see if we get a different result maybe not. The difference I see versus say the 70’s is the quantum of sovereign (and to some extent corporate debt) around makes it so, all things being equal, rates rises are likely to be more impactful in reducing aggregate demand and moderating inflation & returning price stability than they were back then. 

Edited July 31, 2022 by changegonnacome

[SharperDingaan]

23 hours ago, Spekulatius said:

How do you know what the market expectation for interest rate rises is at this point? Is this embedded in some future curve or the interest rate difference  between several durations?

 

I don’t think the prospect of a total 1.5% raise in the next three meetings is all that bullish.

 

 

Business Standard, Jul 26 article "US Fed on track for most aggressive rate hike cycle in 2022: Report"

(Indian financial press)

 

The US Federal Reserve has already hiked interest rates by 150 bps in 2022 and is expected to raise rates by another 200 bps during the remaining months of 2022. Cumulatively, this would be tantamount to about 350 bps rate hike during 2022, making it the most aggressive rate hike cycle, Acuite Ratings said in a report.

 

https://www.business-standard.com/article/international/us-federal-reserve-on-track-for-most-aggressive-rate-hike-cycle-by-200-bps-122072600856_1.html

 

The reality is that this forecast is no less accurate than anyone else's, but given that they are further away from the punch bowl - perhaps a little more objective? Point is, that if the hikes turn out smaller than expected - that's bullish. 

 

If the full year 2022 forecast is 325-350bp; and the 'revised' forecast is 150bp YTD +50+25+25, or 250bp. Shouldn't that 75-100bp forecast difference (350-250) have produced a significant rally? Most would think that either it hasn't happened yet, or it occurs after each of the next 3 rate settings - as/when actual turns out to be less than forecast.

 

Yet everyone swallows CME Fedwatch as gospel. No possibility that the messaging is being 'massaged' to draw attention away from this forecast difference  

 

Gotta love s rigged system!

 

SD

 

 

Edited August 1, 2022 by SharperDingaan

[Gregmal]

Anyone noticing that Biden is starting to rack up some wins? Peculiar timing. Totally unpredictable. Passing legislation and tackling inflation. At least that’s what’s gonna be jamming your new feeds into elections.

 

[LC]

Create the problem, sell the solution. 

[Gregmal]

It’s almost as if they waited to release the “Inflation Reduction Act” on us until they knew the numbers would ski slope down; almost guaranteeing them a future talking point on their policy successes.
 

Also, who releases CPI? Oh the same folks rewriting what a recession is? Was there any doubt? Folks still think the system isn’t rigged though. 

[Guest]

On 7/31/2022 at 10:58 AM, wabuffo said:

I don't believe the current consensus is for 75+75+50.  More likely 50+25+25 and finished.

 

The funny thing is that this same CME Fedwatch has the Fed cutting from 325-350bp in Dec, 2022 down to 275-300bp by July 2023 (i.e., a 50bp cut sometime in first half of 2023).

 

So maybe not quite finished in December.

 

Bill

 

Bill, with the "Inflation Reduction Act" aiming to decrease inflation, do you think it'll have the opposite effect? I believe you said high taxes actually increases inflation? 

[Spekulatius]

Core CPI needs to come down from the 5.9% rate before declaring victory here.

[Gregmal]

5 minutes ago, Spekulatius said:

Core CPI needs to come down from the 5.9% rate before declaring victory here.

Nah. By the time it does the market will be significantly higher. How many times do we need to see these things play out? Contrary to population wisdom, when there’s a perception of greatest uncertainty is when you have the biggest margin of safety. I’ll sell my stocks to folks when CPI hits 3

Edited August 10, 2022 by Gregmal

[Sinbius]

12 hours ago, Spekulatius said:

Core CPI needs to come down from the 5.9% rate before declaring victory here.

 

It increased 0.3% month over month....

[Libs]

On 7/1/2022 at 6:30 AM, wabuffo said:

IMHO, the Fed is and has been largely irrelevant in this cycle.  They've raised to 158% bps on IOER & really haven't done any QT yet.  That's pretty small beer, IMHO.

 

The real macro force is that since late February/early March, the US Treasury has slipped into surplus (and not deficit).  This is the most powerful deflationary force one can see.  And its not over yet.   Gold tells you that as it is the most sensitive monetary commodity & offers a real-time price indicator on the USD's increasing "scarcity".

 

I think this will force a contraction of economic growth (maybe recession, maybe not) until the compression reduces tax receipts due to unemployment & greater spending due to countercyclical Federal programs that kick in until we are back to a normal sized deficit.

 

That might not be until early 2023....  So please stow your tray tables and return your seats to their upright positions.

 

FWIW,

Bill

Bill,

 

What's your take on gold's slide, given your framework ( gold as a signal of USD scarcity/surplus)?

 

[wabuffo]

What's your take on gold's slide, given your framework ( gold as a signal of USD scarcity/surplus)?

 

Fiscal deficit has been too small for most of 2022.  Q2 had a huge surplus in April due to record tax receipts.  September has also been a surplus, though a lot smaller.  Overall its causing a shortage of USD both domestically & internationally and is reflected in USD's surge vs gold & other major currencies.  Those currencies aren't really weakening (if you compare them to gold) - its that the USD is uniquely strong.

 

Will it last into 2023.  No idea.  It will depend on whether tax receipts stay strong, IMHO as there won't be much extra on the spending side.

 

Bill

[Spekulatius]

BNB is the closest to a central bank going broke you are going so see. BNB is a publicity traded "central bank". Another one is the swiss central bank - both are organized as stock companies. BNB has been a decent dividend payer, until now:

 

https://www.nbb.be/doc/ts/enterprise/press/2022/marketrelease_nbb_21092022.pdf

 

Looks like huge Market to market losses on their Fixed income portfolio are the main culprit.

 

Edited September 22, 2022 by Spekulatius

[jefke]

BNB is a weird stock. 50% owned by Belgian gov, 50% by other shareholders.
 

IIRC Belgian gov gets a cut from the profit for "seigniorage". Shareholders have been complaining, suing for change, popping up at the AGM... but this is not run for the shareholders.

Has been trading at some silly P/E & P/B multiple. for a while. 

 

Dividend yield is determined not by their earnings, but by the return on the "statutory portfolio". Shareholders have been willing to put up with this as long as the dividend was there.

And now it's likely gone for the next x years. 

(I read about this stock in the past. Seems absurd that this exists as a publicly traded company where shareholders "should be happy with the nice dividend they get" and shut up)

[Spekulatius]

1 hour ago, jefke said:

BNB is a weird stock. 50% owned by Belgian gov, 50% by other shareholders.
 

IIRC Belgian gov gets a cut from the profit for "seigniorage". Shareholders have been complaining, suing for change, popping up at the AGM... but this is not run for the shareholders.

Has been trading at some silly P/E & P/B multiple. for a while. 

 

Dividend yield is determined not by their earnings, but by the return on the "statutory portfolio". Shareholders have been willing to put up with this as long as the dividend was there.

And now it's likely gone for the next x years. 

(I read about this stock in the past. Seems absurd that this exists as a publicly traded company where shareholders "should be happy with the nice dividend they get" and shut up)

I have been tracking this for almost a decade since someone wrote it up, more for curiosity than being interested in investing.

 

It's not really a business in a strict sense, because generating a profit isn't the primary purpose of a central bank. I would regard this as a preferred stock with certain rights to get distributions on their income. Well, that income is now gone for a couple of years as you stated.

 

I think it's odd that the Belgium government let's this one float and now would be a good time to just buy out this oddball.

[Cigarbutt]

On 9/22/2022 at 12:16 PM, Spekulatius said:

I have been tracking this for almost a decade since someone wrote it up, more for curiosity than being interested in investing.

 

It's not really a business in a strict sense, because generating a profit isn't the primary purpose of a central bank. I would regard this as a preferred stock with certain rights to get distributions on their income. Well, that income is now gone for a couple of years as you stated.

 

I think it's odd that the Belgium government let's this one float and now would be a good time to just buy out this oddball.

Interesting topic and idea!

-On the topic (have a low threshold to skip this section)

Ownership structures of central banks are often awkward and difficult to change, often as a result of specific historical path dependencies, various needs to compromise among pressure groups upon formation and the usual inertia of complex structures. The US Federal Reserve is held through private shares (commercial banks) who get a fixed 6% dividend if the central bank is 'profitable', a question which has never been raised outside of hypothetical unlikelihoods. However, central banks have been unusually profitable with expanding balance sheets and do have a monopoly on seigniorage income.

For 2022, the Fed, by a rapid back of the napkin calculation, will report +/- a breakeven operating income. Also, they would report a huge negative equity position but won't because, outside of its potential capacity to print money that's missing, they also have the monopoly about their own accounting standards ie they don't report mark-to-market losses (contrary to BNB whose reporting is influenced by IFRS revaluation concepts). At some point, noise will be made because a Treasury recap would constitute Fed fiscal involvement to an uncomfortable degree but it's really only technical in a way and the Fed has sort of described what it would do under the circumstances: they would create a deferred asset (based on future income) and use this asset as a contra liability to the mark-to-market losses...

-----

-On the idea

BNB is the typical slow moving creature reacting to events with a lag. Reading their reports during the mid 2000s bu**le years is mind boggling given their emphasis on prudence and foresight..

This could be an opportunity because of the context of a potential dividend cut.

     Assumptions (relatively conservative):

-buy now

-expect the dividend to be skipped for 3 yrs and then to come back to the avg of last 5 years for the remaining 7 yrs

-expect the dividend yield to reach 4% at the end of the 10-yr period

then the CAGR would be between 16-17%

     Potential upside

     -central banks' profits tend to be counter-cyclical, especially with use of unconventional tools (even anti-fragile?)

     Potential downside

     -BNB (along ECB) has expanded its balance sheet ++ and exposure to duration is high (may look bad for a while)

     -dependent on 'public good' policies 

     -currency risk? (since GFC and more recently, Euro to USD depreciation has had a positive contribution to results)

-----

Why was this put in the "Is the bottom almost here?" thread?

Because we've been witnessing the fastest tightening ever?

edited for spelling mistakes

Edited September 26, 2022 by Cigarbutt

[Gamecock-YT]

Setting up for another October crash at this rate. 

[Spekulatius]

On 9/26/2022 at 11:40 AM, Cigarbutt said:

Interesting topic and idea!

-On the topic (have a low threshold to skip this section)

Ownership structures of central banks are often awkward and difficult to change, often as a result of specific historical path dependencies, various needs to compromise among pressure groups upon formation and the usual inertia of complex structures. The US Federal Reserve is held through private shares (commercial banks) who get a fixed 6% dividend if the central bank is 'profitable', a question which has never been raised outside of hypothetical unlikelihoods. However, central banks have been unusually profitable with expanding balance sheets and do have a monopoly on seigniorage income.

For 2022, the Fed, by a rapid back of the napkin calculation, will report +/- a breakeven operating income. Also, they would report a huge negative equity position but won't because, outside of its potential capacity to print money that's missing, they also have the monopoly about their own accounting standards ie they don't report mark-to-market losses (contrary to BNB whose reporting is influenced by IFRS revaluation concepts). At some point, noise will be made because a Treasury recap would constitute Fed fiscal involvement to an uncomfortable degree but it's really only technical in a way and the Fed has sort of described what it would do under the circumstances: they would create a deferred asset (based on future income) and use this asset as a contra liability to the mark-to-market losses...

-----

-On the idea

BNB is the typical slow moving creature reacting to events with a lag. Reading their reports during the mid 2000s bu**le years is mind boggling given their emphasis on prudence and foresight..

This could be an opportunity because of the context of a potential dividend cut.

     Assumptions (relatively conservative):

-buy now

-expect the dividend to be skipped for 3 yrs and then to come back to the avg of last 5 years for the remaining 7 yrs

-expect the dividend yield to reach 4% at the end of the 10-yr period

then the CAGR would be between 16-17%

     Potential upside

     -central banks' profits tend to be counter-cyclical, especially with use of unconventional tools (even anti-fragile?)

     Potential downside

     -BNB (along ECB) has expanded its balance sheet ++ and exposure to duration is high (may look bad for a while)

     -dependent on 'public good' policies 

     -currency risk? (since GFC and more recently, Euro to USD depreciation has had a positive contribution to results)

-----

Why was this put in the "Is the bottom almost here?" thread?

Because we've been witnessing the fastest tightening ever?

edited for spelling mistakes

@Cigarbutt There is no particular reason I stuck this BNB drama in this thread other than it fits loosely the narrative here and I found the situation mildly interesting and entertaining.

 

You could absolutely play the stock here with the expectations that the dividend comes back in a few years and the stock recovers. I do think that there may be risk that the Belgium state takes advantage of the situation and either buys out the public shares cheaply or recapitalizes it's central bank and zeros the shares that way.

 

I would guess however that this is probably unlikely and perhaps not even possible by law (but I have no idea). So not investment  from me but I keep watching the stock as perhaps a situation arises that makes me put a little money in.

 

I think there is a broader applicability for regular banks stocks that have large bond portfolios (EXSR, I am looking at you!) that are market to market in GAAP but apparently those unrealized losses don't affect statutory capital

 

Feels a bit like Coyote going over the cliff but keep defying gravity unless he decides to look down....

 

[mjm]

29 minutes ago, Spekulatius said:

@Cigarbutt There is no particular reason I stuck this BNB drama in this thread other than it fits loosely the narrative here and I found the situation mildly interesting and entertaining.

 

You could absolutely play the stock here with the expectations that the dividend comes back in a few years and the stock recovers. I do think that there may be risk that the Belgium state takes advantage of the situation and either buys out the public shares cheaply or recapitalizes it's central bank and zeros the shares that way.

 

I would guess however that this is probably unlikely and perhaps not even possible by law (but I have no idea). So not investment  from me but I keep watching the stock as perhaps a situation arises that makes me put a little money in.

 

I think there is a broader applicability for regular banks stocks that have large bond portfolios (EXSR, I am looking at you!) that are market to market in GAAP but apparently those unrealized losses don't affect statutory capital

 

Feels a bit like Coyote going over the cliff but keep defying gravity unless he decides to look down....

 

remember the Bank for International Settlements in Swizterland and it appears that individuals can no longer own shares in it it appears.  It was kind of like a Central bank for Central banks if I remember correctly.

[Cigarbutt]

17 hours ago, mjm said:

remember the Bank for International Settlements in Swizterland and it appears that individuals can no longer own shares in it it appears.  It was kind of like a Central bank for Central banks if I remember correctly.

That's interesting! (downside risk of private sharse 'withdrawal' by public entity)

Here are some references i found (if looking for details):

Press release: The BIS announces the withdrawal of all shares held by its private shareholders against payment of CHF 16,000 per share

Press release: Withdrawal of privately held shares of the BIS: Final decision of the Hague Arbitral Tribunal

Press release: BIS completes redistribution of shares

TL:DR version

BIS is not BNB but they rhyme. It turns out that central banks, working in the general public interest, can decide to withdraw shares held privately but may have to do so in a reasonable way and may accept to be challenged.

Long story short: BIS shares traded in 2000 at around 4% dividend yield, BIS offered an around 2% dividend price and was eventually told to pay an around 1.5% yield price (the cost of which was eventually passed on to remaining central banks owning BIS, except the Federal Reserve who let its shares to be distributed to the remaining League-of-Nations type of global coalition).

-----

Interesting also (if looking for a 'pivot' that would signal a potential return to central banks' positive net worth and unconventional profitability) is today's press release by the Bank of England which is starting to feel the inflation heat from the trickling up effect. Of course, their planned intervention should be short term in nature and should not derange their described plan to tighten when..

Bank of England to start unlimited bond purchases to stabilise market | Reuters

edit: i decided to let the 'sharse' spelling in place in sympathy for your 'Swizterland'

Edited September 28, 2022 by Cigarbutt

[Spekulatius]

Since we keep digging into this BNB rabbit hole, it is interesting to note that BNB was a very boring dividend stock for most of its history dating back decades. They paid a slowly growing dividend until 2008. In 2008 the GFC happened and BNB on behalf of the government (I presume) let their balance sheet mushroom, I guess that was sort of a QE. I am not really sure why they did that as the European central bank does monetary policy, but ma be these smaller satellite banks did thismon top of the ECB for local needs, although they had a a lot of USD assets at some point.

 

Initially this was great and interest income mushroomed  (the BNB dividend gets paid a share of the fixed income form their bond portfolio ) and so disintegrated dividend in 2009/10. However then , the income started to drop (lower interest rates) over the year and the stock price reflects that.

 

Nw we got huge MTM losses in fixed income apparently that prevents BNB from paying out dividend but I think eventually, the higher interest rate (should they persist ) should lead to higher interest income and hence dividends eventually.

 

That assumes that the left tail (BNB goes broke or more likely gets taken under) does not happen. So with a longer perspective and knowledge of the local idiosyncrasies (which I don’t have) this could be an interesting Investment eventually. I also think it’s possible that these thinly traded shares gets washed out totally before that in some sort of liquidity event. So, it’s an interesting one to watch.

[Spekulatius]

Just now, Spekulatius said:

Since we keep digging into this BNB rabbit hole, it is interesting to note that BNB was a very boring dividend stock for most of its history dating back decades. They paid a slowly growing dividend until 2008. In 2008 the GFC happened and BNB on behalf of the government (I presume) let their balance sheet mushroom, I guess that was sort of a QE. I am not really sure why they did that as the European central bank does monetary policy, but ma be these smaller satellite banks did thismon top of the ECB for local needs, although they had a a lot of USD assets at some point.

 

Initially this was great and interest income mushroomed  (the BNB dividend gets paid a share of the fixed income form their bond portfolio ) and so disintegrated dividend in 2009/10. However then , the income started to drop (lower interest rates) over the year and the stock price reflects that.

 

Nw we got huge MTM losses in fixed income apparently that prevents BNB from paying out dividend but I think eventually, the higher interest rate (should they persist ) should lead to higher interest income and hence dividends eventually.

 

That assumes that the left tail (BNB goes broke or more likely gets taken under) does not happen. So with a longer perspective and knowledge of the local idiosyncrasies (which I don’t have) this could be an interesting Investment eventually. I also think it’s possible that these thinly traded shares gets washed out totally before that in some sort of liquidity event. So, it’s an interesting one to watch.