Author: George Yacik

If It Ain't Broke, Don't Fix It

Posted on by George Yacik

As loyal readers of this column may have noticed by now, I've been pretty supportive of the Trump Administration. However, I do part ways with it when it comes to financial regulation and the dismantling of the Consumer Financial Protection Bureau.

Some of the reforms enacted by the Obama Administration after the global financial crisis, namely the Dodd-Frank Act, may have overdone it a bit in terms of increased bank regulation. And certainly, the CFPB under its former director, Richard Cordray, grossly overreached in how it regulates and punishes lenders, often unfairly. Still, that doesn't mean we need to go back to the days before the financial crisis and plant the seeds for another one in the future.

Senator Elizabeth Warren, despite her recklessly pandering and unworkable ideas like wealth taxes and Medicare for All has been right on reining in the banks. While Dodd-Frank did impose some needed restrictions on what banks do, it clearly hasn't done enough in some areas – like curbing criminal behavior – and the rollbacks enacted by the Trump Administration go in the wrong direction. Besides, the banks have managed to make plenty of money under these restrictions.

Right now, two banks, JP Morgan Chase and Bank of America have well over $2 trillion in assets, while two others, Wells Fargo and Citigroup, are just below that mark. Wells Fargo would have gone over that level except for the fact that it is restrained from growing its assets by an unprecedented Federal Reserve order due to its many scandals over the past several years. Those are pretty dangerous levels if you ask me – certainly Too Big to Fail dangerous.

But one of the worst ideas the Trump Administration is pushing now is returning Fannie Mae and Freddie Mac to the private sector. Essentially, it would re-establish the status quo ante the 2008 financial crisis. Continue reading "If It Ain't Broke, Don't Fix It" →

Good News Is… Good News

Posted on by George Yacik

If you're a bond investor, maybe you should be praying for impeachment after last Friday's November jobs report.

Granted, based on other indicators, including GDP, leading indicators, and others, the economy is not as strong as it was at the beginning of this year. But it’s still in pretty good shape, as witnessed by the 266,000 jobs that were added to the economy last month.

The immediate reaction in the bond market was a sharp drop in prices and a concomitant rise in bond yields. In other words, good economic news is bad for bonds. By the same token, a strong economy pretty much squashes the idea of the Federal Reserve lowering interest rates anytime soon, which is also negative for bond prices. If anything, if this keeps up, the Fed’s next move may be to raise interest rates again, not lower them, which is the prevailing view in the financial markets at the moment.

So that would indicate that the bond investors’ best hope is for the Democrats to be successful in impeaching Trump and as quickly as possible and push the economy in the other direction.

Of course, as some of us might remember from our junior high civics or American government class (do they still teach that in schools?), impeachment is not the same thing as removal from office. President Clinton and President Andrew Johnson were both impeached, but neither was removed from office, having prevailed in the subsequent trial in the Senate. (That’s the part most giddy news stories about the current impeachment drama leave out). But then again, the entire Democrat strategy is really about generating as many headlines as possible with the words “Trump” and “impeachment” close together, as if that’s good enough.

So impeachment isn’t such a great political or electoral strategy. Neither is it a good bond investment strategy.

Let's get back to the jobs reports, which was described variously as a “blowout” or “blockbuster” or words close to that. Continue reading "Good News Is… Good News" →

Ignorance Is Bliss

Posted on by George Yacik

Are the financial markets not paying attention? Or is that a good thing?

I keep asking myself those questions while I watch the major U.S. stock market indexes soar to new heights on a regular basis, while bond prices retreat – and yields rise – after hitting crisis levels early in the year.

The markets are saying: everything is just fine. The economy is humming along, consumers are spending, everyone who wants one can get a job, but just in case, the Federal Reserve is keeping interest rates low and monetary policy accommodative. How can things possibly get any better?

But are we getting a little too comfortable?

Stock prices are rising, and bond prices are falling even as the main Democrat presidential hopefuls try to top one another with the most profligate government giveaways they can think up – Medicare for All, free college tuition, student loan forgiveness, free health care for illegal aliens, reparations for slavery, you name it – while their peers in the House are trying desperately to drive President Trump from the White House, so they don’t have to face him on Election Day next year.

To say that there is a huge disconnect between the political world and the financial world is a huge understatement.

At some point, will investors look over this depressing – and rather scary – landscape and take their chips off the table? Or do they really believe that all of this silliness will eventually blow over and Trump – whom the financial markets seem to like, or at least are comfortable with – will arise victorious after the impeachment witch hunt plays itself out and the current field of Democrat presidential wannabes thins out? Continue reading "Ignorance Is Bliss" →

The Times They Are A' Changin'

Posted on by George Yacik

Talk about charter creep. This is more like a charter leap.

As we know well by now, the Federal Reserve’s famous “dual mandate” is to promote price stability and maximum sustainable employment. But as we also know, the Fed really has a third mandate, maintaining moderate long-term interest rates (don’t ask me why they still call it a dual mandate).

So it should be no surprise, then, that the Fed has now gone way beyond that dual (or treble) mandate by wholeheartedly injecting itself into what is really a political debate, namely climate change. And how ironic it is that it rose to the forefront during the same week that the U.S. withdrew from the Paris Climate Agreement.

Last week Fed officials were out in force, declaring that climate change would now be a major factor in not only how it regulates federally chartered commercial banks but also how it conducts U.S. monetary policy.

On Thursday, in a speech at the GARP Global Risk Forum, Kevin Stiroh, an executive vice president responsible for regulating banks at the New York Fed, said financial firms need to take the dangers and costs of climate change into their risk-management decisions.

“Climate change has significant consequences for the U.S. economy and financial sector through slowing productivity growth, asset revaluations, and sectoral reallocations of business activity,” he said. “The U.S. economy has experienced more than $500 billion in direct losses over the last five years due to climate and weather-related events.” Continue reading "The Times They Are A' Changin'" →

Happy Halloween

Posted on by George Yacik

The last week of October is likely to be an eventful one. Halloween is on Thursday, the last day of the month, and Major League Baseball will crown a new World Series champion. And, oh yes, the Federal Reserve will hold its next-to-last monetary policy meeting this year, at which it is expected to continue on its path of easing monetary policy in the face of not-so-terrible economic news that doesn’t appear to warrant another interest rate cut.

The Fed meeting begins on Tuesday and culminates on Wednesday afternoon at 2:00 EST, with a likely announcement that it is cutting its federal funds rate by 25 basis points for the third time in as many meetings. The Fed hasn’t cut rates this often since the financial crisis when the world economy and financial markets looked like the world was coming to an end. Now we’re looking at the U.S. economy weakening from about a 3% annual growth rate to about 2%, and the Fed is acting like its 2008 again.

Of course, the Fed may not be looking to do another rate cut for economic reasons, but because it has pretty much painted itself into a corner by practically promising the markets that yet another rate cut is coming. What would the market’s reaction be if the Fed decides on Wednesday to leave rates unchanged? No doubt it would be ugly, which is why I’m siding with the consensus market view that the Fed will indeed lower rates this week, whether it’s “data-driven” or not.

Speaking of data, Continue reading "Happy Halloween" →