Here’s how banks in the US earned over $25 billion in 2017 by lending money to the Federal Reserve and why that number could double in 2018

Banks in the US can hold excess reserves with the Federal Reserve. In 2008, as part of the Emergency Economic Stabilization Act of 2008 it was mandated that interest would be paid on reserve balances held with the Federal Reserve. What is of significance is the interest rate on excess reserves.

Since 2015, the Federal Reserve has set the interest rate on excess reserves equal to the top of the target range for the federal funds rate. Why is this important? Look at the graphs below.

Excess Reserves of Depository Institutions
Excess Reserves of Depository Institutions; Source: Board of Governors of the Federal Reserve System (US)

Continue reading “Here’s how banks in the US earned over $25 billion in 2017 by lending money to the Federal Reserve and why that number could double in 2018”

Crude oil is up 23% over the past year and it has started making an impact; US 3-year bond yields at a 11-year high

Crude oil at $65.5 a barrel is up 23% over the past year and Brent is up some 27% during the same period. Gasoline prices are up 16% over the past year and we aren’t yet in the US driving season (which pushes up the price and begins in July). Continue reading “Crude oil is up 23% over the past year and it has started making an impact; US 3-year bond yields at a 11-year high”

Apparently, there are days when no one trades some Japanese government bonds; Could China devalue their currency or sell US Treasurys?

Some 80% of 10-year Japanese government bonds are held by the Bank of Japan. And apparently there are days when no one trades those 10-year bonds because there is no point of trading it. Why? Well, because the Bank of Japan has a policy to control yield curves and since they hold majority of it there are hardly any price movements.

But is also claimed that there are days when the 2-year bonds aren’t traded. That is interesting because the Bank of Japan only holds a small proportion of 2-year bonds. How to traders keep their jobs then? They trade bond futures instead. Continue reading “Apparently, there are days when no one trades some Japanese government bonds; Could China devalue their currency or sell US Treasurys?”

Not an April Fools’ Day joke – this really is how the US Dollar has performed against each currency of the world over the past one year

Here is the performance (1-year % change) of the US Dollar (USD) mapped against currencies and countries around the world (the data set is after the map),

USD 1-year change mapped (data as of 31-March-2018)
USD 1-year change mapped (data as of 31-March-2018)

Continue reading “Not an April Fools’ Day joke – this really is how the US Dollar has performed against each currency of the world over the past one year”

Markets should ignore cyclical factors and focus at the structural factors instead

How often do analysts get the markets wrong? How often to fund managers get stock picks wrong? They get things wrong far more often then they get it right.

2017 was probably the worst year for hedge funds. And the start of 2018 isn’t turning out to be any better.

The problem probably lies with everyone focussing on the business cycle rather than the structural factors driving the markets. Continue reading “Markets should ignore cyclical factors and focus at the structural factors instead”

High (or hyper) inflation or long term zero (or negative) interest rates – how might the world pay its debt?

The divergence of interest rates, bond yields, inflation, currency strength, budget deficit and total debt of countries around the world has never been bigger. We look at how the US, the UK, the Eurozone, Japan, Switzerland and India are doing in addressing paying off their debt. Continue reading “High (or hyper) inflation or long term zero (or negative) interest rates – how might the world pay its debt?”

The looming pension crisis

An aging world: Babies born in 2018 can expect to live to over 100. In 2015, there were around 600 million people aged 65 or over and that number is expected to rise to over 2 billion by 2050.

Changing demographics: There are currently 8 workers in employment for every retiree today, that number is likely to reduce to 4 workers in employment for every retiree by 2050.

Underfunding: The UK currently has $6.2 trillion in underfunded government and public-sector employee pensions. For the US that amount is over $25 trillion.

Lower bond yields: Previous funding assumed 7% bond yields, the number has been much closer to 2.5% since 2009 which has caused major deficits. Continue reading “The looming pension crisis”