The Nation's Financial Condition

[ardilla secreta]

youth,
We're no where near 'max capacity'.

thank you increased minimum wage....

Want to see max capacity? Let’s build some new roads, bridges and airports. Let’s firm up our cyber defenses. Trump can sign his name to it.

I really can't believe he has missed this idea. Like all the great populists and back-country "emperors" before him (Huey Long comes to mind) - he is missing his change for the Trump High Speed Railway, the Trump Cross-Country Highway, His name on every bridge in every state....

someone whisper THAT in his ear and see how quickly we get some infrastructure investment....

The Donald J Trump Sewage Treatment Facility and National Security Adviser Resource Center.

[a fan]

Anyone paying attention to the repo market issues lately? This is a huge deal. This afternoons FOMC statement could be very interesting but the fact that the Fed has had to inject liquidity into the markets this week is not good at all.

I have indeed paid attention. The number of times I've heard the phrase "we've never seen this before" when it comes to financial scenarios scares the heck out of me.

[HooDat]

Anyone paying attention to the repo market issues lately? This is a huge deal. This afternoons FOMC statement could be very interesting but the fact that the Fed has had to inject liquidity into the markets this week is not good at all.

I have indeed paid attention. The number of times I've heard the phrase "we've never seen this before" when it comes to financial scenarios scares the heck out of me.

When I spend any time thinking about what is going on on Wall St. it scares me!

The problem with Wall Street over the past 20 years is that the money is "too good" - it attracts too many people and most of them have no natural insight into the toys they are playing with. I have never seen a place where the Pareto principal was more applicable - for every person at Goldman or MS or JP Morgan that knows what they are doing, there are four who have no clue and are faking it. It led to Enron, it led to 2008, it will lead to many more melt-downs.

The lack of liquidity at the overnight window is scary in what it implies. The banks have figured out that lending to each other (WHILE EVERYONE IS ASLEEP) is too risky Now it could also be attributable to a lack of liquidity in general, but when Europe is paying your to borrow their money, what makes sense anymore.....?

[foreverlax]

Anyone paying attention to the repo market issues lately? This is a huge deal. This afternoons FOMC statement could be very interesting but the fact that the Fed has had to inject liquidity into the markets this week is not good at all.

I have indeed paid attention. The number of times I've heard the phrase "we've never seen this before" when it comes to financial scenarios scares the heck out of me.

When I spend any time thinking about what is going on on Wall St. it scares me!

The problem with Wall Street over the past 20 years is that the money is "too good" - it attracts too many people and most of them have no natural insight into the toys they are playing with. I have never seen a place where the Pareto principal was more applicable - for every person at Goldman or MS or JP Morgan that knows what they are doing, there are four who have no clue and are faking it. It led to Enron, it led to 2008, it will lead to many more melt-downs.

The lack of liquidity at the overnight window is scary in what it implies. The banks have figured out that lending to each other (WHILE EVERYONE IS ASLEEP) is too risky Now it could also be attributable to a lack of liquidity in general, but when Europe is paying your to borrow their money, what makes sense anymore.....?

Agreed. The last thing the financial services and banking industry need is less regulation...the rot is in the back rooms, not the front lines.

Powell says the average homeowner debt to cash flow looks better then it did during the crash. Things around the globe softening, lead by the trade wars.

The overnight issue got "perfect storm" excuse, which doesn't make me feel any better.

Can't wait to hear how 3%+ GDP is going to solve all the issues - Fed confirmed 3% is nowhere on the horizon.

[CU88]

Anyone paying attention to the repo market issues lately? This is a huge deal. This afternoons FOMC statement could be very interesting but the fact that the Fed has had to inject liquidity into the markets this week is not good at all.

This is non partisan and everyone should be concerned with where we are heading with the fiscal side. Another tax cut, the last one was bad but so were things like cash for clunkers, TALF, etc, will crush our health as the fiat currency of the world worse than anything else our president can do that would be harmful.

I have not come across this in the news, might you have an article link that you can share?

[Farfromgeneva]

Banks own treasuries as a source of liquidity because they have lots of short term borrowings and typically own a lot of assets that aren’t as liquid or have longer durations, which makes their price sensitive to changes in market rates more extreme (it’s curvilinear but basically multiple the term to maturity of a govt bond by the delta in market rates as a back of the napkin). Is treasuries, while long in duration at liquid and can be sold with a very minimal bid/ask spread so they’re held in lieu of cash which is what the fed wants to keep more money in the system. It’s partly technical but speaks to the amount of debt we’re selling as a country (treasuries) that w overnight financing of these securities has gotten way too high and problematic. Otherwise it’s the system where banks with cash lend for a few extra basis points of yield and the ones short on cash can “pledge” their most liquid securities for cash overnight. Here’s a few I just pulled up. But this is a problem.

https://www.google.com/amp/s/www.bloomb ... -third-day

https://www.google.com/amp/s/amp.cnn.co ... index.html

https://www.google.com/amp/s/www.thestr ... s-15094169

https://www.newyorkfed.org/markets/trea ... ence-rates

[Farfromgeneva]

Here’s the daily data

https://apps.newyorkfed.org/markets/autorates/sofrP

[a fan]

Banks own treasuries as a source of liquidity because they have lots of short term borrowings and typically own a lot of assets that aren’t as liquid or have longer durations, which makes their price sensitive to changes in market rates more extreme (it’s curvilinear but basically multiple the term to maturity of a govt bond by the delta in market rates as a back of the napkin). Is treasuries, while long in duration at liquid and can be sold with a very minimal bid/ask spread so they’re held in lieu of cash which is what the fed wants to keep more money in the system. It’s partly technical but speaks to the amount of debt we’re selling as a country (treasuries) that w overnight financing of these securities has gotten way too high and problematic. Otherwise it’s the system where banks with cash lend for a few extra basis points of yield and the ones short on cash can “pledge” their most liquid securities for cash overnight. Here’s a few I just pulled up. But this is a problem.

https://www.google.com/amp/s/www.bloomb ... -third-day

https://www.google.com/amp/s/amp.cnn.co ... index.html

https://www.google.com/amp/s/www.thestr ... s-15094169

https://www.newyorkfed.org/markets/trea ... ence-rates

I've never understood this practice. Why does a mature, healthy Fortune 500 type company borrow money like this? Why pay points?

High finance that's over my head, I guess.

[Farfromgeneva]

The whole financial system is Mark to model and always has been. Banks, FDIC insured deposit gathering ones, not to be confused with investment or merchant banks though activities overlap in areas, model their deposits as having average lives of 4-15yrs even in the case of demand deposits. Otherwise they’d have a mismatch when they write fixed rate loans beyond a few months even though demand deposits can be taken out immediately. Therefore they keep some liquid assets in case they have a Jimmy Stewart it’s a wonderful life run on the bank that can be quickly sold to rely depositors. It’s mostly ledgers, not cash transactions in physical form, and thousands daily, think ach, wires, loan prepayments, new loan closings, missed pmts, securities transactions with different settlements, trade gtys, letters of credit, and on and on. When it all settles up at the end of the day these institutions are either net surplus or deficit and basically just swap with each other overnight to make sure all levers balance. It’s obviously much more technical than I’m explaining but necessary to keep the “wheel” moving, no different than a drug dealer or anyone else except incredibly high volume of in and out pmts. The fed has a borrowing window to keep the wheel greased and moving.

For the sake of the velocity of money for all daily trade it’s in no ones interest for banks to hold cash (IMO it’s at the margin but I hate that we pay anything for interest on excess reserves , IOER, held at the Fed but that’s a separate topic).

The idea that a fed overseen daily system requires paying 3x the 10yr US treasury rate overnight, while de minimus bc its 1/365th of that rate that’s actually being paid, is a signal that the system is way too illiquid and it could be a sign of bigger problems but let’s see how the rest of the month goes with quarter end book closing and call reports getting filed.

[a fan]

I understand that for banks (I think), but I remember the story of the GE CEO telling someone at Treasury during the 08 crash. Why would GE need to take a 48 hour loan? How the heck do they weather downturns if they're sitting on so little cash that they need to use these loans.

Or did I misunderstand the story?

Appreciate you taking the time to answer my dumb questions.

[Farfromgeneva]

GE was a bank, so we’re the auto manufacturers, in 04-06 GM made more in GMAC (which was financing CRE, RE and small businesses as well as cars) than their total profits for the year. GE used their industrial strength credit rating to borrow very cheaply and do everything financial which is why jack welch could beat EPS estimates for like 40 straight quarters by a penny, managed earnings with GE Capital.

For the people who jumped straight to their agendas about “finance needs more regulation not less and are the root cause of all problems”, the folks that said the more regulation that came would lead to more shadow banking and non regulated credit, but they get their leverage from banks so it did in fact drive a lot of credit and risk out of the light. Smart regulation, not fighting the last battle as govt is wont to do, and leadership are what is needed. This report is really great in highlighting the various risks in the banking system for anyone interested in reading it.

https://www.fdic.gov/bank/analytical/ri ... ction3.pdf

[a fan]

Oh, right. Forgot about GE Capital. Was thinking GE appliances, etc.

That makes more sense, thanks!

And thanks for the link!

[Farfromgeneva]

https://www.google.com/amp/s/www.cnbc.c ... risks.html

The crisis in 2008 was largely a liquidity/mark to market driven problem moreso than a solvency one. The shadow system can exacerbate this.

[Typical Lax Dad]

GE was a bank, so we’re the auto manufacturers, in 04-06 GM made more in GMAC (which was financing CRE, RE and small businesses as well as cars) than their total profits for the year. GE used their industrial strength credit rating to borrow very cheaply and do everything financial which is why jack welch could beat EPS estimates for like 40 straight quarters by a penny, managed earnings with GE Capital.

For the people who jumped straight to their agendas about “finance needs more regulation not less and are the root cause of all problems”, the folks that said the more regulation that came would lead to more shadow banking and non regulated credit, but they get their leverage from banks so it did in fact drive a lot of credit and risk out of the light. Smart regulation, not fighting the last battle as govt is wont to do, and leadership are what is needed. This report is really great in highlighting the various risks in the banking system for anyone interested in reading it.

https://www.fdic.gov/bank/analytical/ri ... ction3.pdf

Yes regarding GE Cap and GMAC. GMAC left a lot of commercial RE borrowers high and dry.

[foreverlax]

https://www.google.com/amp/s/www.cnbc.c ... risks.html

The crisis in 2008 was largely a liquidity/mark to market driven problem moreso than a solvency one. The shadow system can exacerbate this.

Hedge funds are the .01% way of getting around the regs that are supposed to protect the individual investors

[Farfromgeneva]

It’s not hedge funds. Retail investors are balls deep in RICs, mortgage reits, business development companies. Go look up the top shareholders in BANX, IVR. Angel oaks mutual fund. Older people looking for income have propped up a lot of these dividend paying vehicles. There’s a ton of middle market lenders that have public stocks and they’re not held by hedge funds or institutional investors except mutual funds owned by most 401ks and IRAs. It’s a consequence of a low rate world.

Can’t keep jumping to these conclusions, this affects many individuals. Insurance companies and pension funds that have to meet ALM expectations for given years down the road are forced to take on risks. This isn’t just Bill ackmans and leon blacks of the world, this is everyone. FinTech companies making unsecured loans, greensky, every Endor finance company for new HVAC units, subprime auto lenders all indirect finance. The originators are not regulated by and large and go unseen, a lot of the paper then ends up in the hands of bans after the fact

[Farfromgeneva]

Fidelity, the big mutual fund company everyone practically has some stake in a fund of, invested in private wework. This isn’t just about big bad rich guys. This stuff affects everyone and there’s demand for access, as well as conflicting revs and laws that encourage/force access to credit that cause all of this. The refs have practically pushed any risk based pricing out of the banking system which is why they all are looking for fee income generating opportunities.

[foreverlax]

It’s not hedge funds. Retail investors are balls deep in RICs, mortgage reits, business development companies. Go look up the top shareholders in BANX, IVR. Angel oaks mutual fund. Older people looking for income have propped up a lot of these dividend paying vehicles. There’s a ton of middle market lenders that have public stocks and they’re not held by hedge funds or institutional investors except mutual funds owned by most 401ks and IRAs. It’s a consequence of a low rate world.

Can’t keep jumping to these conclusions, this affects many individuals. Insurance companies and pension funds that have to meet ALM expectations for given years down the road are forced to take on risks. This isn’t just Bill ackmans and leon blacks of the world, this is everyone. FinTech companies making unsecured loans, greensky, every Endor finance company for new HVAC units, subprime auto lenders all indirect finance. The originators are not regulated by and large and go unseen, a lot of the paper then ends up in the hands of bans after the fact

Completely agree this affects individual investors.

My point - "mutual funds" are regulated by Investment Company Act of 1940, which helps to "protect" the individual investor

Hedge Funds

Like mutual funds, hedge funds pool investors’ money and invest the money in an effort to make a positive return. Hedge funds typically have more flexible investment strategies than mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk), short-selling and other speculative investment practices that are not often used by mutual funds.

Unlike mutual funds, hedge funds are not subject to some of the regulations that are designed to protect investors. Depending on the amount of assets in the hedge funds advised by a manager, some hedge fund managers may not be required to register or to file public reports with the SEC. Hedge funds, however, are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.

Hedge fund investors do not receive all of the federal and state law protections that commonly apply to most mutual funds. For example, hedge funds are not required to provide the same level of disclosure as you would receive from mutual funds. Without the disclosure that the securities laws require for most mutual funds, it can be more difficult to fully evaluate the terms of an investment in a hedge fund. It may also be difficult to verify representations you receive from a hedge fund.

[Farfromgeneva]

I can’t even begin to get into it all but your missing a lot using basic investopedia definitions. Market is 90%+ and regulations includes to be long biased, mutual funds misrepresent all the time, look at angel oak providing daily liquidity, proshares and etf backed funds, fidelity and jeffries trading outside of end of day NAVs and the act from 1940 is designed to protect retail investors and is anachronisic in the modern world. HF are for sophiscates investors (the test of sophistication may leave a lot
To be desired) but there’s a lot your missing. Additionally the definitions you underline and cite as proof say things like “some” while you make blanket assertions of all.

Ares and fortress are public as is blackstone. Got any clue what they are doing in their private credit funds? Look at BDCs like main st, prospect capital, alcentra, capitala (close friend is CFO there). They’re middle market loans to medium sized businesses where the book value often lies on really squishy (bad) quality of earnings reports that come from some top ten (usually like a BDO to grant thornton, large but below the big four) accounting firms.

These are all public vehicles regulated that have tons of risk the rules can’t even begin to cover. And they’re all a symptom of low rates and the retail worlds demand for income when we have QE, rate cuts etc.

[CU88]

I can’t even begin to get into it all but your missing a lot using basic investopedia definitions. Market is 90%+ and regulations includes to be long biased, mutual funds misrepresent all the time, look at angel oak providing daily liquidity, proshares and etf backed funds, fidelity and jeffries trading outside of end of day NAVs and the act from 1940 is designed to protect retail investors and is anachronisic in the modern world. HF are for sophiscates investors (the test of sophistication may leave a lot
To be desired) but there’s a lot your missing. Additionally the definitions you underline and cite as proof say things like “some” while you make blanket assertions of all.

Ares and fortress are public as is blackstone. Got any clue what they are doing in their private credit funds? Look at BDCs like main st, prospect capital, alcentra, capitala (close friend is CFO there). They’re middle market loans to medium sized businesses where the book value often lies on really squishy (bad) quality of earnings reports that come from some top ten (usually like a BDO to grant thornton, large but below the big four) accounting firms.

These are all public vehicles regulated that have tons of risk the rules can’t even begin to cover. And they’re all a symptom of low rates and the retail worlds demand for income when we have QE, rate cuts etc.

Frafromgeneva, I learned a lot today. Thanks.