Corporate Loan Charge-Offs and Delinquencies Vs. Fed Funds Rate

Corporate loan charge-offs are bad debts on the balance sheet that will be written off and will negatively affect earnings.

Delinquencies are obligations that have missed payment beyond their due date. If these delays keep on going for too long, the corporation is declared bankrupt.

What we see below is that the Fed Funds Rate is a leading indicator for these charge-offs and delinquencies. Every time the Fed Funds Rate is increased, charge-offs and delinquencies surge with a 6 month delay.

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=2S4y

As delinquencies were already surging in 2015, it will be nearly impossible for the Federal Reserve to increase interest rates in 2016. The Federal Reserve is trapped.

The Consequences of a Fed Rate Hike

The Federal Reserve will have its next FOMC meeting on 15-16 December 2015. The financial markets are speculating that Janet Yellen will finally allow a rate hike to take place. This is based on good employment data, especially the ADP jobs report that came out this week. Firms contributed a better than expected 217,000 positions for the month of November 2015. Also, with the unemployment rate at 5%, the Federal Reserve would lose credibility if it didn’t raise rates now. I think the Federal Reserve won’t increase rates (or just a small increase) because a multitude of other macro indicators (ISM manufacturing PMI, Junk bonds, commodities, Baltic Dry Index, …) are deteriorating. But let’s analyze what the consequences would be for the global economy when the Federal Reserve were to increase interest rates significantly.

Go here to read the analysis.

Negative Interest Rates: First ECB, now SNB

First the ECB lowered interest rates on deposits to -0.1% in June 2014. Now the SNB lowered interest rates on its deposits to -0.25%. Commercial bank deposits will follow soon and what would you do when you are charged for depositing money in your bank?

All of this is because the yield curves are flattening, and yields cannot be too close to each other, or we get a recession.

The effect of this drop in deposit rates should be that eventually investors remove their money from those banks and invest it in something else. Lending and spending will increase and the bubble becomes an even bigger bubble.

I do not need to tell you this is good for gold. In fact, denying the Swiss gold referendum is actually bullish for gold as the SNB can do whatever it wants now…

1) Yields go down due to lower interest rates.
2) CPI goes up through inflating the bubble.

U.S. Bond Yield Curve Vs. Fed Funds Rate

There is a correlation between the yield curve and the Fed funds rate.

The yield curve plots the yield on Y-axis and maturity on X-axis. A flattening yield curve means that the yield of the different maturities are coming together and a recession starts.

On the following graph, the flattening yield curve can be witnessed by a drop to zero on the blue chart. Whenever this drop happens, a recession starts and the Federal Reserve comes to the rescue by decreasing the Fed funds rate. The problem today is that in the next recession in 2015, the Fed funds rate cannot be lowered anymore (red chart is already at 0%). The Fed is out of bullets.

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=Ugt

Gold lease rate spikes

Where have we seen gold lease rates spike up like this before?

Right, during the July 2013 bottom.

This is why interest rates can’t be raised

Janet Yellen may be telling us that she will increase interest rates next year (and the market believes that). But here is why it can’t happen.

Because when we arrive at 2015, the long term bond yields (red and blue chart) will have almost intersected with the short term treasury bills (purple chart). We call this flattening of the yield curve.

If Janet Yellen even increases its interest rates half a percent, the 2 year treasury yields will skyrocket. The yield curves will flatten out and a recession will start, just like in 2008 where the yield curves were flat.

Note: A flattened yield curve means that all maturities (3 month, 2 year, 5 year, 10 year, 30 year bonds) have the same yield. This is typically a recessionary indicator.

Look how the 2 year bond yields go up because of Janet Yellen’s talk about increasing interest rates.

2 year U.S. bond yields

LBMA Might Stop Reporting GOFO Rates

In a shocking report on Reuters, LBMA Chairman David Gornall said last month that the 150-member trade body could stop providing GOFO rates if stiffer new regulation makes it too expensive to run.

The Gold Forward Offered Rate (GOFO), the equivalent of LIBOR for the gold market, is used as a benchmark for dealers, central banks and others to swap gold for U.S. dollars with miners who may need gold to meet contracts or investors for short-selling and other purposes.
The LBMA already stopped reporting silver forward rates in November 2012 and are now contemplating if they shouldn’t stop reporting the gold forward rates. You can see on the chart below from Kitco what happened to the silver lease rates at that time. The same outcome is expected now for the GOFO rates which are now reported on a daily basis at the LBMA here. The LBMA currently sets GOFO each day by polling its eight major bank dealers on the rates at which they are prepared to lend gold. This could be ending and will make the obvious gold manipulation less transparent for us to spot out.

Continue to read here.

Bank Deposit Vs. Interest Rate

There is a very interesting correlation between bank deposits and the deposit interest rates that I haven’t noticed yet.

Whenever yields are low, be it that the government lowers interest rates or imposes taxes on deposits. The result is that people will flee out of bank deposits and move their money either into equities or gold. Or anything else for that matter. This is because investors are searching for yield on investment. If interest rates are low, they will find a better use for their money than putting it in a bank.

Take Spain for example. Ever since the treasury yields peaked out in 2012, the same happened in the bank deposits in Spain.

Spain 10 Year Yield

As you can see here, the peak in Spain deposits (green chart) can also be found in 2012.

Eurozone deposits

Negative ECB Deposit Rates

As predicted here, the ECB finally did it. Now we enter the twilight zone, keep your eyes on the bank deposit outflows to higher yielding assets.

The effect of ECB negative deposit rate

The recent news about the ECB imposing a negative deposit rate in June 2014 has spurred a new trend. The deposits at the European banks is seeing outflows.

Who would want to hold deposits with negative rates? They will of course take their money out and hunt for higher yielding assets.

See what happens to the deposits of the periphery in Europe on this chart: