Bloomberg opinion article: “Big U.S. Banks Get a Little Taste of the ‘Doom Loop’ - Deepening bond losses cut into capital ratios, which put cash payouts to investors at risk.” Not only payouts. Thread #equities#bonds#banksbloomberg.com/opinion/articl…
1/According to the author US banks are getting a little taste of the European style bond doom-loop. When bond prices fall owners have to mark them to market which for a bank eats into their capital base.
2/In weak European countries this led to the fear that the banks would have to be bailed out, leading to strains in government finances, increasing risk and pushing bond prices further down. A vicious circle that still haunts Europe.
3/In the US it should not be so bad. Bond prices have fallen, but because of expectations of rising rates, not fears of sovereign default. But still the losses have led some banks to slow their stock buybacks.
4/These are unrealised losses and if banks hold on to the bonds until maturity the losses evaporate, and the risk can be hedged (at cost to income). But it could be a problem given the expected rate environment for the next couple of years.
5/So this is not a full-scale doom loop but could impact cash payouts to investors.
6/IMHO this is correct. But it is not only buybacks that would be impacted by the erosion of the capital base. Appetite for lending could also suffer, which raises the risk of lack of liquidity, especially in a tightening environment.
7/Banks cutting lending in a slowing economy could pressure on credit quality, eroding the capital base. A sovereign (especially a reserve currency sovereign) cannot default if it is willing to print as needed to service its debt. But that is not the only thing to worry about.
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FT opinion article: “How shadow banks threaten the global economy”. The Fed seems to think the financial world is separate from the economy. See how that works out. Thread #markets#equities#bondsft.com/content/d22ec3…
1/The author points out that the next crisis will arise from shadow banking “institutions”. Especially those that lend to corporates. They have a lot of debt, especially in the US, and the cost is set to rise.
2/Private markets are taking over from public ones, with investors seeking yield. “Swing a stick in Manhattan and you’re bound to hit someone involved in private lending”. Debt is now much higher.
FT opinion article: “The dollar’s rapid rise increases risks for global economy - Dangers are particularly acute for developing countries already facing number of crises”. Our currency, but your problem #dollar#Fed#markets#bonds#equitiesft.com/content/099cf5…
1/According to the author the recent rise in the dollar has attracted less attention than it should. In theory it should help exports by weaker countries and ease US inflation.
2/This year the dollar is strongly up due to expectations of more aggressive Fed monetary policy, economic outperformance and safe haven status.
FT opinion article: “Let the Fed put money where it is really needed”. She means CBDC. The problem is that the Fed now needs to take money away, not add to it. This is not going to end well. Thread #Fed#monetary policy #markets#bonds#equitiesft.com/content/0c8636…
1/The author argues that the Fed has overreached its mission. It has fuelled a shadow banking system and an asset bubble and will now have to create a recession in order to control inflation.
2/And politicians have been happy to outsource the decisions because they can then claim they are not to blame. The Fed is being asked to do stuff it is not qualified to do (same as the Supreme Court).
FT opinion article: “Central bankers should think twice before pressing the brake even harder - The war against Ukraine has brought a new negative supply shock on top of the old one”. Harder? Thread #bonds#equities#centralbanks#monetarypolicyft.com/content/41c248…
1/According to the author the invasion of Ukraine has silenced the debate about “transitory” inflation. But where central banks stood impacts how they react. Initially the idea was that inflation was the result of supply issues that could be ignored. This view lost out.
2/Central banks made hawkish turns and have painted themselves into a corner, as the Ukraine crisis has brought a new supply shock. Central banks committed to tightening when the second shock made things worse.