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New York | This week we return to our friend Dale Hemmerdinger, a New York real estate executive and active public citizen, to talk about the new rent control laws in New York. Dale oversees the properties and service subsidiaries of his family real estate company, ATCO , as well as its parent company, The Hemmerdinger Corporation and The Hemmerdinger Foundation. He served as Chairman of New York’s Metropolitan Transportation Authority. Dale formerly served as Commissioner of the New York City Conciliation and Appeals Board during the Administration of Mayor Ed Koch. Dale is active in many public and private organizations in New York and is known for his honest and incisive perspective on the New York political economy. The IRA: Dale, thanks for taking the time. Let’s pick up from our discussion last year. How is the state of the real estate market in New York, particularly the City and suburbs? Over the past several years, we’ve been watching the implosion of the Westchester and Connecticut single family market as sellers slowly capitulate. Hemmerdinger: The City has leveled off as we’ve discussed. Too much supply. Westchester is still a disaster. We have years of inventory of unsold homes and it is getting worse. And they just increased the sales tax in Westchester. We’re in a very bad spot in New York. All we see is self-destructive policies. Most of the New York State political system is controlled by Democrats and they, in turn, are controlled by people who are unreasonable. Reasonable people are being pushed out of politics in New York. There will be unintended consequences to this trend that we cannot yet imagine. The IRA: Sounds strangely like Washington and especially the world of residential mortgages. We presume that you did not support the recent changes to the New York rent control laws? Are changes like this going to increase the exodus of wealthy residents from New York? Hemmerdinger: That’s the problem. The rich people can leave, the poor people can’t. The agencies in Albany responsible for housing are basically dysfunctional. They are populated by people who really are not focused on the big picture. The new rent control legislation has essentially killed rental housing in New York as an asset class. By limiting the ability to move rent-controlled apartments to market rates, you have taken away any hope for investors to make these properties grow in value. And you have damaged these assets in terms of financing. Who wants to finance a property that cannot recover costs and therefore must slowly deteriorate? The IRA: That will come as a rude shock to many community banks, insurers and institutional investors that operate in New York. Should you and other developers be selling New York assets and moving to other markets where developers are not demonized? Hemmerdinger: Our new projects are in markets like Charlotte, NC, and Austin, TX. We have more coming down the pike. In these markets, we are welcomed for bringing capital and financial know-how to growing communities. We are considered friends and often partner with local developers. In New York, by comparison, we are the enemy. The Democrats in Albany couldn’t go after the big private equity funds, so instead they attacked the local developers and small business owners, the very people who invest in New York and make it livable. These are very self-destructive policies. The IRA: Austin is a very hot market. How long have you been involved in TX? Hemmerdinger: We’ve done five deals in that market and are developing two more. Each of these markets have special characteristics and requirements, but the big difference is that they don’t see us as enemies. The IRA: How does the deteriorating political climate and the aggressive New York rent control laws affect the bigger players who have thrown billions into this market? Hemmerdinger: It’s hard to say how this will impact the biggest developers and investors. My general take on things is that the larger developers think that they can get their way until they can’t. That’s where we are now. We had a boom of residential construction in New York, but that is over. We probably have enough office space and residential space to last for some time. The big concern I have is that rent control is going to hurt the local economy. Landlords will have to take cost out of buildings. This means that people will lose jobs. Everybody who works in one of these new building make five or six figures a year. People making union wages in older buildings will also be impacted severely. Those jobs will disappear. We also won’t have construction jobs because nobody paying attention to the numbers will want to put money into new projects in New York. The IRA: How will this change impact tenants in New York? Hemmerdinger: The quality of life for tenants in New York will slowly erode. The new law makes it impossible for landlords to recover the cost of improvements or even invest in buildings to maintain existing amenities. Over time, landlords will slowly reduce spending on these properties. Eventually, if the law is not changed, you will see properties being abandoned, as we did in the 1970s. The dream of getting rent controlled apartments out of the system is gone. For many developers, this was the only reason to hold onto some of these older properties – the hope that one day the apartments would escape rent control and be let at market rates. The new legislation even eliminates the 20% vacancy allowance that allowed owners to increase rents somewhat. The vacancy allowance helped owners to fund upgrades for units and maybe get the rent somewhere near market levels. That is gone now. All of this undercuts the value of these properties. The IRA: Bottom line is that costs will go up faster than revenue from rents. If I am a bank that holds a mortgage on an older multifamily property in New York, am I worried? Should I be looking to get out of mortgage financing on New York multifamily properties? What happens to all of the small and mid-size businesses in New York that have invested in multi-family assets for their personal portfolios? Hemmerdinger: The banks are screwed first and foremost. As I said, the new rent control law in New York takes away any hope of seeing rents increase to market levels so that the owner can keep up with rising operating costs. How do you sell that asset? How do you finance that asset – or not roll that existing loan -- if you are a bank? What I have been wondering is what happens to all of the really significant investments made by big private equity funds in the larger multifamily rental properties in New York City? My guess is that they will minimize cost as we said and then simply let the property diminish in value over time. There is no longer any upside for an investor. The banks will be forced to roll these mortgages or else foreclose and take ownership of a property that cannot be sold. The IRA: That is a sobering assessment, but also amusing. Nationally loss given default on bank owned multifamily loans is just barely positive, suggesting that credit has no cost. You are suggesting that New York assets ought to be considered impaired now as a result of the legislation. If you are an investor in New York rental properties do you take the hit now and sell for whatever you can get? Source: FDIC/Whalen Global Advisors Hemmerdinger: That is a tough question. Albany took away hope for these multifamily rental properties. How much of a loss do you have to take to sell an asset that has no future, that will cost you money as time goes on? Legitimate investors will flee, but others not. Also, consumers will be hurt by this new law because the supply of new apartments and renovated units will slow to a crawl. That supply of new or refurbished units kept overall rental prices down. Now rental rates for new and renovated market apartments will rise. How does this help consumers? Who is going to spend a couple hundred thousand dollars to renovate a rent-controlled apartment after somebody has lived there for 30 or 40 years? These units will stay in the rent control system, they will be let “as is,” and they will deteriorate. The cost of housing will go up and quality of life, job opportunities will fall for all New Yorkers. The IRA: What you are saying is truly scary for banks and bond investors. Right now, multifamily properties in metro areas like New York are the favorite asset of community banks and hard money investors. What you are basically saying is that the banks and bond investors will own these assets indefinitely and may even need to take an impairment charge to cover the declining value of the collateral. Is that correct? Hemmerdinger: Yes. Banks, insurance companies and other big lenders are caught first and foremost. Lenders are victims of this law along with the developers and local investors in these properties, they just don’t know it yet. Lenders will be forced to roll these loans or take possession of the property. That’s it. No legitimate investor will want to even look at these assets. And as landlords and institutional investors come to realize that New York multifamily rental properties have a declining value, political pressure will build for a change. That process could take years or even decades. But by then most legitimate investors will have exited the market. As I said, the worst part of the new law is that is takes away hope for getting thousands of rental properties in New York to market rates. Without that promise, that hope, there is no reason to own these properties. The IRA: Thanks Dale. https://www.theinstitutionalriskanalyst.com/single-post/2018/06/11/The-Interview-Dale-Hemmerdinger-on-the-Outlook-for-New-York-Real-Estate

New York | With the end of Q2 2019 earnings in sight, there is good news and bad news. The good news is that the rate of change in US bank funding costs is slowing, from 50-60% year-over-year rates of increase to 30-40% or so this past quarter. Indeed, even though the middle of the Treasury yield curve has essentially collapsed, there is no indication that funding costs are following suit. Interest rates in the US remain buoyant outside of the government bond market. Across the Atlantic, the European Central Bank is preparing to make another futile round of asset purchase operations as Britain prepares to crash out of the European Union. For those of you who missed the spectacle, former Goldman Sachs banker Mario "Whatever it Takes" Draghi, who is leaving the ECB in October, wants to provide more stimulus to Europe’s flagging economy. “The European Central Bank on Thursday made clear it stands ready to cut rates and deliver “highly accommodative” monetary policy,” reports Market Watch , “including additional asset purchases, in its effort to push stubbornly low inflation back toward its target amid signs of deteriorating economic conditions in the eurozone.” Despite growing evidence that negative interest rates are injurious to economic growth, housing affordability and employment, among other things, economists at the various central banks persist in calling for more of the same bad medicine. How many times must we hear central bankers express “surprise” that inflation remains low when they are busily transferring resources from private savers to public sector debtors? The only people who seem to be in favor of a resumption of asset purchases (aka quantitative easing or “QE”) are increasingly worried equity managers. Writing in the Financial Times over the weekend, Merryn Somerset Webb, editor in chief of MoneyWeek , boldly chastises BlackRock (BLK) executives for suggesting that the ECB should start to buy equities. She writes: “Our senses have been dulled by increasingly extreme monetary policy over the past decade, so we must try to look afresh. What is being suggested here is that the ECB, a publicly owned institution, prints money and uses it to buy equity stakes in private companies. In other words, the only way to save capitalism is to begin to nationalize it.” Well, yes. The global equity manager community is positively soiling its nappies at the thought that the central banks will stop buying assets. An end to QE means an end to constantly rising asset prices. Once asset prices start to fall, as is the case with the top half of the real estate market in the US, credit will return as an issue. But can we actually deflate the various asset bubbles including global equities without causing an equally global liquidity crisis? We tend to think that the cheering for rate cuts and resumption of asset purchases is a function of the Buy Side managers talking their shrinking liquidity book. The suggestion of equity market purchases is apparently to prevent a larger, nastier repeat of the H2O investor run. But isn’t that the point? Now that the FOMC has set up the global equity markets for a sharp come down, does not that imply a whole series of new Maiden Lane type vehicles to buy illiquid crap and thereby provide ready cash to investors? Short-term market liquidity aside, we suspect that the true motive of central bankers with respect to negative rates has nothing to do with growth or jobs and everything to do with the imminent insolvency of large industrial nations. Italy, Japan and even that darling of the Buy Side equity manager, mainland China, belong on this list. Only the fact of $14 trillion in government debt trading at negative yields keeps the grim reaper of sovereign debt restructuring from its work. Yet even with negative rates, so much of the debt markets is visibly mispriced, to us begging the question as to when the great reset will commence. CLO: Falling Volumes and Loan Quality Speaking of falling liquidity and bad ratings, ponder the world of leverage loans and collateralized debt obligations (CLOs). Since the start of the year, the performance of CLOs and leveraged loans has been stellar, but on falling volumes of new issuance. Investors are quietly running away from the once popular asset class. Two interesting trends have appeared in recent weeks, according to the astute folks at TCW: Increased dispersion in terms of the spreads among different sectors of issuers and a flow of decidedly lower rated assets into new deals. This situation reminds us of 2007, when the Street tried to issue just a few more private mortgage securities deals containing the worst production from the subprime sausage factory. Funny thing about CLOs is that they tend to trade way below the prices suggested by the usual suspects in the rating agency world. Just for a bit of context, let's have a look at the old corporate ratings scale from S&P which is shown below: AAA: 1 bp AA: 4 bp A: 12 bp BBB: 50 bp BB: 300 bp B: 1,100 bp CCC: 2,800 bp Default: 10,000 bp So a “AAA” corporate rating is about 1bp of default risk or 1/100th of 1% of probability of default P(D). An actual default is 10,000bp or 100%. This is an interesting point because if you look at the yield spreads for CLOs, the “AAA” rated paper trades about 100-130bp over the Treasury yield curve or the spread for a "BBB" rating. The “BBB” paper trades about 300-400bp over the curve, which maps to a "B" rating. And the “B” paper trades about 1,000bp over or about the same spread as the corporate ratings breakpoints above. So why the discount on the investment grade rated CLO tranches? Could it be that investors don’t believe those “AAA” CLO ratings from Moody’s, S&P et al, this even though the CLO market has rallied since January? Maybe that’s why investors continue to flee the sector. TCW notes that asset under management (AUM) dedicated to CLOs among mutual funds have been cut by a third since the FOMC’s December’s massacre. Yet loan fund outflows have apparently been offset by high-yield investors grazing on new, lower rated CLO issuance, albeit at greatly reduced volumes vs a year ago. Maybe a new asset class? “Junk CLOs.” As we told our friends at CNBC last week , the biggest risk in the market today is not credit – that comes later – but rather liquidity risk. When investors head for the exits after an extended, central bank fueled asset bubble, bad things happen. When you see BLK executives openly asking the ECB to come to the rescue, sure makes you wonder. Truth is that all of the Buy Side managers want and need to be “too big to fail” since nobody can surf the waves of volatility being created by the lunatics on the FOMC. Ditech, Bank America and the NY AG To that point about central bank induced volatility, do make sure that you listen to the earnings call for the Fortress Investment (FIG) managed REIT, New Residential Investment Corp (NRZ) on Tuesday before the open. Pay attention to the negative mark on the mortgage servicing assets. The chart below from Mountain View Financial gives a frightening example of how higher coupon asset values have collapsed since Chairman Jay Powell changed the FOMC’s posture on interest rates last December. Caution: Mortgage bankers may feel an involuntary sense of nausea upon viewing the chart below. Source: MountainView Financial As we noted in the column for National Mortgage News referenced last week , the Fed has wreaked havoc on the world of mortgage finance since 2008. Positive duration loans and securities have soared since December, but negative duration assets like mortgage servicing rights have fallen sharply from record multiples. Meanwhile lenders are barely making money and lending volumes are falling again after a spurt of refinance activity in Q2 2019. From December 2018 through June, we saw the 4.75% coupons in conventional mortgage servicing fall from 3.8x annual cash flow to 2.3x annual cash flow. So as you listen to the NRZ earnings call early Tuesday morning, pay close attention to the markdown on servicing. And also ponder the fact that the State of New York has decided to get involved with the bankruptcy of Dietech, a troubled residential loan servicer with close ties to NRZ. You see, NRZ was the only viable bidder for the Ditech forward loan book, in part because the giant residential mortgage REIT had acquired servicing assets from Ditech over a year ago. But these sale transactions have not yet closed, owing to the years of delay sometimes required by risk-averse trustees and the highly politicized state regulators that now control servicing transfers. Did we mention that Ditech’s predecessor, Walter Investment Management Corp., in 2013 bought a fetid Bank of America (BAC) portfolio of more than 650,000 loans? A decade later, the cleanup of BAC continues and still consumes value. Now you know why we waned to put BAC through bankruptcy a decade ago. Finality. The State of New York and, ironically, Bank of America, have objected to the sale of Ditech’s reverse mortgage book to an affiliate of another REIT manager, Waterfall Asset Management LLC, according to Josh Saul and Jeremy Hill of Bloomberg News . They write: “The objection from BofA comes on top of separate complaints and objections from borrowers who oppose the bankruptcy plan; they say Ditech is trying to sell its business to a new owner free-and-clear of their claims against the company for mishandling their mortgages. The U.S. Trustee this week voiced similar concerns.” Will the State of New York put the kibosh on the entire Ditech sale transaction? If the Ditech sale transaction pending in the Bankruptcy Court is delayed, will the New York AG attack the earlier, as yet unperfected sales of servicing from Ditech to NRZ? One wonders if the State of New York AGs office understands just how little it would take to make this entire situation go sideways. It’s all about liquidity. Have a good week. #CLO #Draghi #QE #AUM #FIG #NRZ #BLK #BAC

Avalon | We caused a bit of a fuss last week on CNBC by suggesting that the Federal Open Market Committee will not cut the target for Fed funds this month. We suggested instead that the Federal Reserve Board will first end the runoff of the System Open Market Account (SOMA) and then “wait and see” about any change in the rate target. Readers of The Institutional Risk Analyst know that we tend not to follow the crowd, especially when the data suggests that the narrative is at odds with actual market conditions. To us, any sudden and poorly considered change in policy by the Fed could create even more structural problems than we already face. The basic problem facing the FOMC is that the combination of shrinking the Fed SOMA balance sheet, Basel III and the various other rules and regulations meant to “protect” banks has the effect of actually reducing liquidity. The quarter ended June, for example, saw a lot of liquidity exit the market as we wrote last week. With the short-term markets still clearly tightening, the FOMC is in the position of having to compensate for overly restrictive prudential regulations and the negative impact of a shrinking balance sheet. Our colleague Ralph Delguidice at Pavillion Global Markets summarized the situation nicely in a note last week. “The problem with repo continues to be that Basel 3 was designed to make balance sheet expensive, and the private money markets are growing increasingly illiquid as a result. In a recent post the NYFRB “Liberty Street” blog demonstrates the impact of the IOER cuts (to discourage reserves) as purely transitory; with repos and various other money market rates edging back towards—and even above—the top of the target range over and over. Once again, we see that if efforts to push private cash into GC repo flows by lowering the IOER does not incentivize capital constrained primary dealers to keep rates in the target zone, then efforts to steepen the curve from the front with fed-funds cuts may be equally futile. Even if they do get repo rates lower—perhaps by offering repo directly in the Standing Repo Facility (SRF), the problem will be keeping mid curve yields from falling even faster. The FX basis is driven primarily by short rate differentials, and lower LIBOR will reduce FX swap costs bringing hedged foreign buyers back into the US curve.” Whereas in past cycles the FOMC limited “fine tuning” to the adjustment of key interest rates, since 2008 the Fed has attempted the impossible by trying to manage the entire yield curve. The foray into quantitative easing or “QE” began this quixotic adventure, putting the Fed in the position of manipulating the entire term structure of interest rates via open market operations. We actually saw somebody suggest on Twitter last week that changing the rate of interest paid on excess reserves (IOER) actually “sterilizes” the runoff of the SOMA balance sheet. Really? Imagine the situation if the FOMC were to actually follow the advice of the howling mob of equity analysts and captive economists, cutting the FF target while continuing to run off the Fed balance sheet. The SOMA is currently shrinking at an 8% annual rate according to our friends at Grant’s Interest Rate Observer. How far would the FOMC need to reduce the Fed funds rate to compensate for this relentless tightening of liquidity in the US banking system? Try zero. We all are left to ponder the conflict between momentary policy, on the one hand, and prudential policy on the other. If the Fed were able to adjust Basel III and the other rules imposed upon banks since 2008 in order that they may prove their liquidity, there would be no need for an interest rate cut. Indeed, looking at the chart below from FRED showing the 10-year Treasury note and the 30-year fixed mortgage from Freddie Mac, interest rates are near the low end of the range going back five years. If we take the upward surge in US interest rates in 2016 following the election of Donald Trump and draw a line straight across to today, we have pretty much come full circle. The difference is that since that time, the Fed has withdrawn hundreds of billions in liquidity from the system via QT, shrinking the deposit base of US banks dollar for dollar as securities owned by the Fed are redeemed by the Treasury. Both the management of the Fed’s balance sheet and the liquidity rules that apply to US banks have actually been hurting economic growth. One hand in Washington is working against the other. Since 2008, the FOMC has been over-compensating with monetary policy to boost the economy and fight deflation. Bank regulators, on the other hand, have been turning large banks into islands of liquidity that periodically cut off their clients to prove their ability to fund themselves in times of stress. The market breakdown seen in December 2018 illustrates this conflict in rather graphic terms. The chart above show the $1.2 trillion decline in excess reserves since 2014. Will the Fed repeat the December fiasco again this Fall? The Fed was created a century ago to ensure a flexible currency system, yet the current conflict between monetary policy and prudential regulation of banks is a serious national problem. It’s as though we have wound back the clock to 1907, when the Treasury and J.P. Morgan & Co were the only sources of liquidity to the US financial system in times of financial crisis. Today’s toxic mix of radical money policy and retrograde prudential regulation of bank liquidity is the functional equivalent of being back on the gold standard a century ago. Jim Grant wrote in his classic 2014 book, “The Forgotten Depression: 1921: The Crash That Cured Itself,” of the Fed's conflict of visions. “The Federal Reserve Act was drafted in a world of peace and limited government. It was implemented in a world of war and statism. It was as if a central bank designed to function on Earth were somehow relocated to Mars. Fixed exchange rates and free gold movement were the hallmarks of prewar monetary arrangements; the Federal Reserve had to adapt on the fly to untethered exchange rates and immobilized gold stocks.” A century later, the US government is still struggling to get it right when it comes to providing a flexible currency to fuel the American dream. Ask not whether we should cut the target for Fed funds. Ask instead why liquidity is not moving through the US financial system in a prudent and reasonable fashion. More Reading “Deutsche Bank among the near-dead? No, but watch for Plan C” John Dizard | Financial Times https://www.ft.com/content/67ae6a49-6ff7-3a4f-bb68-d5a49dbe933b “The Great Crypto Heist” Nouriel Roubini | Project Syndicate https://www.project-syndicate.org/commentary/cryptocurrency-exchanges-are-financial-scams-by-nouriel-roubini-2019-07 "Affordability, the FOMC, and the broken link between rates and housing credit" RC Whalen | National Mortgage News https://www.nationalmortgagenews.com/opinion/affordability-the-fomc-and-the-broken-link-between-rates-and-housing-credit #FOMC #IOER #JimGrant

Chicago | The Institutional Risk Analyst travels to Chicago this week to participate in the annual conference hosted by Fay Financial, LLC. In addition to agency and non-QM lending, Fay offers mortgage loan acquisition, liquidation, and restructuring services. Click here to download our presentation for the event on Tuesday, which includes another version of the striking chart below. We call it “How the FOMC Failed Housing” under Chairmen Ben Bernanke and Janet Yellen. Sources: Mortgage Bankers Association & Federal Reserve Board The chart above compares outstanding mortgage debt as tracked by the Mortgage Bankers Association vs the change in value of residential home equity. Simply stated, the Federal Open Market Committee did manage to cause home prices to rise by double digit annual rates since 2008, getting home-owners well above the previous 2005 peak and then some in terms of home equity. But the dollar amount of credit deployed in housing finance actually contracted during the years of “extraordinary policy” by the FOMC under Bernanke and Yellen. Those of you who recall your high school economics know that expanding credit is the Fed’s chief tool in boosting consumption and economic growth -- at least in theory. In the case of housing finance post 2008, the FOMC's policies failed when it comes to boosting mortgage credit as measured by outstanding debt. Indeed, even as the US economy grew and along with it the footings of the US banking system (up 25% since 2008), the amount of capital allocated to housing remained stable or even declined. The chart below shows the landscape of mortgage servicing including bank portfolios of 1-4s, which smaller banks tend to retain. Sources: FDIC & WGA LLC Not only did the total outstanding stock of mortgage debt fall from 2008 until 2016, but the amount of balance sheet allocated to 1-4 family mortgage credit by US banks also declined even as the servicing book also ran off. Assets serviced for others (AFSO) by banks fell by $2 trillion or 25% from 2008 through the end of last year. Readers of The IRA will recall that sales of 1-4s by banks into the secondary loan market also have fallen 30% during the same period, evidencing an even larger overall decline of bank support for mortgage finance. Where’s the Liquidity Jay? Meanwhile Federal Reserve Board Chairman Jerome Powell delivered two days of upbeat economic assessment to members of Congress in Washington last week. Powell declared that the economy had received a severe “confidence shock” at the end of 2018 and that full recovery had not yet occurred. Short version: Only by executing a skillful pirouette and promising an interest rate cut if needed was our hero Chairman Powell able to save the day. Measuring something as ephemeral as investor “confidence” is the functional equivalent of herding cats. Even when measuring liquidity, an equally mystical quantity, at least there are market indicators that resemble hard data. When Chairman Powell and his colleagues on the FOMC talk about “confidence,” they do so in the context of “surveys” and other anecdotal reports. Is a survey or luncheon discussion really data? The late great composer Frank Zappa perhaps said it best: “Information is not knowledge. Knowledge is not wisdom. Wisdom is not truth. Truth is not beauty. Beauty is not love. Love is not music. Music is THE BEST.” No, sad to say surveys are not data. They are like measuring “confidence,” complete with biases and error rates a mile wide. So if you are a data dependent Fed chairman or governor and you justify your actions (or inaction) based upon surveys, are you still data dependent? Or should we conclude, when you waffle about confidence, that you have no idea what you are saying or doing when it comes to monetary policy? Since the entire policy discussion is about “easing” Fed policy or not, we think it is particularly notable that the “data,” shows that markets continue to tighten. Cast your eyes to the link below and consider the two charts from the Depository Trust and Clearing Corp (DTCC). The charts suggest that the rate paid for repurchase agreements on Treasury and agency mortgage collateral in bilateral transactions is climbing while volumes financed are falling sharply: http://www.dtcc.com/charts/dtcc-gcf-repo-index In fact, the bilateral REPO rate on Treasury and agency collateral is up 50bp over the past year, but particularly since the end of June 2019. This is when a significant amount of liquidity appears to have exited the market and has yet to return. H/T to Scott Skyrm, who notes on Twitter that REPO rates spiked to 3% at the end of June vs the low 2s in the weeks before. Yet as of Friday, REPO rates were still 50bp above early June levels, with rates again climbing on falling volumes, more evidence that the markets continue to tighten as the FOMC runs off its balance sheet. David Kotok, Chairman of Cumberland Advisors, opined to us last week: “I’ve encountered several folks who see the intraday liquidity pinch which never appears in spreads using markets closing price,” The big NYC folks are complaining about REPO collateral shortage intraday. The hourly metric is a penalty for failure so it is driving portfolio behavior. Treasury responds by issuing more and more bills. Austria sells a 100-year bond. Lunatics at Treasury could sell 100-year tips. Instead they sell bills. This ends badly. It becomes visible in credit spreads way too late. Watch when IOER is not the cap. Watch when a big bank pays above IOER intraday and you know that bank seeks to avoid stigma by paying up.” We continue to be concerned about how tightening money market conditions are affecting financial institutions and particularly non-banks. Let’s make a short list of the non-bank default events that have occurred since June, when we had a great conversation with Mike Mayo , bank analyst at Wells Fargo & Co (WFC) and our friends at CNBC’s “Fast Money.” Reverse mortgage lender Live Well Financial shut down abruptly in May and subsequently filed bankruptcy, reportedly leaving behind a double-digit loss for warehouse lender Flagstar Bank (FBC) on a “secured” credit line. A Live Well official blamed the “reduction in credit availability combined with challenging conditions in the markets for mortgage loans” for the event of default, reports Housing Wire . French investment bank Natixis was forced to suspend redemptions from its $35 billion open-ended H2O fund. After Morningstar put one of the funds under review, citing concerns over liquidity and governance, demands for redemptions surged. Here an adverse rating actions caused a cascade of market and liquidity risk to hit the H2O fund. The £3.5 billion Woodford Equity Income Fund in the UK suspended redemptions at the start of June when it could not meet requests from several large customers. An equally large chunk of its assets cannot be sold quickly, leaving thousands of investors trapped in this illiquid investment scheme, Reuters reports. Lazlo Hollo at MSCI asks: “Is there another Woodford waiting to happen?” Yes indeed. Just thank the folks on the FOMC for shifting the risk curve. “ Stearns Holdings , the parent company of residential mortgage lender Stearns Lending, filed for Chapter 11 protection [in early July] after agreeing on a debt-restructuring plan with majority owner Blackstone Group (BX) ,” reports The Real Deal . Stearns previously sold its servicing portfolio to Freedom Mortgage to raise cash. Blackstone is trying to wipe out almost $200 million in bond debt in the bankruptcy but preserve its equity control. PIMCO owns most of the Stearns debt, making it unclear who is going to end up with the assets and the Stearns lending business. Note that PIMCO owns First Guarantee Mortgage and could easily merge what’s left of Stearns into its portfolio company in a liquidation. These default events are relatively small and have certainly not yet bothered participants in the equity markets as the S&P 500 and other indices hit new all-time highs. But we feel obliged to remind our readers that the crisis of 2008 began in 2005, with the decline in home prices, a drop in lending volumes and the accumulation of small defaults by non-bank lenders such as New Century, Longbeach and eventually a hedge fund sponsored by a firm formerly known as Bear, Stearns & Co. Is the exodus of liquidity from sectors such as collateralized loan obligations (CLOs) and even risk-free assets such as Treasury and agency REPO a sign of approaching systemic risk? We noted last week that the credit fundamentals in CLOs remain quite solid, but what about confidence? The CEO of a large non-bank said last week after the Stearns bankruptcy filing: “One bad event will send the lemmings off the cliff.” Case in point: Will Tesla CEO Elon Musk default on the Solar City convertible senior notes due later this year? The lemming off the cliff metaphor is apt since the biggest share of investment grade debt is just barely investment grade. But the vast amount of non-investment grade, illiquid paper currently held by global investment funds is perhaps an even bigger worry. We're scheduled on CNBC later this week to talk about future credit risks to the financial markets. Look for updates on Twitter at @rcwhalen . More Reading When the Fed Became a Socialist Job Creator The American Conservative July 9, 2019 In business, is it better to be lucky or smart? #DavidKotok

New York | This week in The Institutional Risk Analyst , we return to the activities of funds operating in the world of distressed real estate and corporate debt. We noted a few months back that some of the biggest players in the distressed debt industry were preparing for a comeuppance in the market for collateralized loan obligations or “CLOs.” New funds were be created to absorb and profit by busted CLOs and distressed financial institutions such as Deutsche Bank AG (DB). But the anticipated selloff has not happened as yet, in large part due to the rally in the bond market. Indeed, the decline in bond yields since year-end 2018 has caused a surge in new CLO issuance, including the remaining backlog from the Q4 2018 fiasco. It's almost like the Fed wanted to refi CLOs just one more time. Just as the entropy of global finance seemed to be heading from temporary stability to chaos, the Fed goosed asset prices once again and bought the equity markets a little more time. en·tro·py /ˈentrəpē/ noun PHYSICS 1. a thermodynamic quantity representing the unavailability of a system's thermal energy for conversion into mechanical work, often interpreted as the degree of disorder or randomness in the system. 2. lack of order or predictability; gradual decline into disorder. "a marketplace where entropy reigns supreme" “Issuance in the US Collateralized Loan Obligation (CLO) market is just behind the record- setting pace of 2018 despite criticism of the asset class and higher spreads eating into returns,” writes Kristen Haunss. “There has been US$63.84bn of US CLOs arranged this year through June 26, just behind the US$65.62bn arranged during the same period in 2018, according to LPC Collateral data . A record US$128.1bn was issued last year.” The chart below from SIFMA shows the most recent data for new securities issuance in the US markets. Notice that issuance of mortgage bonds and corporate debt have accelerated with the decline in bond yields. Indeed, we still seem to be in a seller’s market for securities, real estate and any other assets that investors can identify. The driver for this secular tidal wave of demand for assets is the action of global central banks, which are encouraging deflation in many economies around the world because of the fact of now $13 trillion in government debt with negative yields. Despite their education and intellect, many economists do not seem to grasp that reducing global income and economic activity, and increasing debt, via negative interest rates accelerates deflation. At some point we believe that economists as a group will need to admit that negative interest rates have only delayed the day of reckoning for the global economy as the stock of public and private debt has exploded. Entropy. Economies may not be closed systems as posited in the three laws of thermodynamics, but the comparison remains apt. David Kotok of Cumberland Advisors notes rightly that the gift of lower debt service via negative rates can only be given once to indebted governments. But in the meantime, we see little indication that the vast demand for yield or more accurately duration will abate, meaning that we see continued support for asset prices at current crazy levels -- for now. Yet growing numbers of economists are criticizing the use of negative interest rates to paper over a mounting global debt crisis. Agustín Guillermo Carstens, general manager of the Bank for International Settlements and former head of the Banco de Mexico, last week rebuked global central banks for pursuing negative interest rates . He said little would be achieved by another round of loosening by central banks in countries with interest rates already at rock-bottom levels. “I mean how much more stimulus will you get if interest rates are reduced in the margin another 25 basis points? It is difficult to see how that will generate a lot of bang for the buck,” Carstens warned. “This has to be balanced out with the potential risks in terms of asset misallocation and mispricing, and financial stability,” he said. The BIS chief also noted the ratings cliff that has developed in the EU, with roughly half of all corporate credits just barely at investment grade or “BBB” rated. “Credit standards have been declining as investors have searched for yield. Should the leveraged loans sector deteriorate, the economic impact could be amplified through the banking system and other parts of the financial system. There could be sharp price adjustments and funding tensions,” said the BIS. As we observe in The IRA Bank Book for Q2 2019 , net loss rates for all manner of real estate loans owned by banks are just barely positive after quarters spent in negative territory. News reports of private equity funds raising cash for distressed real estate strategies are certainly of interest, but the timing of the opportunity still seems obscure. We continue to believe that policies such a quantitative easing or “QE” have embedded significant future credit losses in financial assets, but just when this risk will be recognized by the markets is an open question. Thus our use of the entropy metaphor. Source: FDIC/WGA LLC As we wrote this quarter in The IRA Bank Book : “The credit quality of the US banking industry remains pristine – at least by appearances. The bank regulatory data still suggests that credit has no cost in most real estate related asset classes, including residential and multifamily first lien mortgages, HELOCs and construction loans. But the key question asked by more astute analysts is whether the asset price inflation engineered by the FOMC is masking a lurking problem in terms of future credit losses. Default activity for all loan categories was unchanged at 0.5% in Q1 2019, while loss given default (LGD) for all loans and leases rose slightly to 76% in Q1 2019.” Source: FDIC/WGA LLC Even as we wait for the day or reckoning in the world of CLOs, there are growing reports of a slump in US housing prices after six years of rising valuations. The charts below from Weiss Analytics (WGA LLC is an advisor to and shareholder in WA), show that while home price appreciation has certainly slowed or even stopped entirely in some markets, there is as yet no broad-based decline in asset prices for single family homes in either the New York or San Francisco MSAs. Just as in the case of the global bond market, too few housing assets chased by oceans of global fiat capital means asset price inflation well about the Fed's two percent inflation goal. Source: Weiss Analytics Source: Weiss Analytics While excesses are clearly building up in the global system, we think the bad news is that central bankers have gotten it wrong when it comes to deflation. In sworn testimony before Congress, both former Fed Chairs Ben Bernanke and Janet Yellen stated that fighting deflation today is more important than the asset price volatility that comes tomorrow. But do either Bernanke or Yellen truly understand what they have done to financial markets? The Fed's fight against deflation has been a dismal failure. Now the global financial system sits perched atop a cliff, with asset prices and credit loss rates entirely correlated and the only place to go, it seems, is lower in terms of prices and higher in terms of realized loss rates. The only question that remains is when and how quickly will the much anticipated repricing occur? Again, entropy. Judging by the volatility observed in the financial markets over the past year, the answer seems clearly that change will occur faster and on a larger scale than in the past. Economists and central bankers in their arrogance suppose that they can control the forces of markets and economies, and even direct these systems toward stable states of "equilibrium." Anyone who works in the physical sciences, however, will tell you that in fact just the opposite is true; that absolute zero where entropy occurs is the limit of the natural world's ability to measure a lack of heat. When central banks armed with the idea of negative interest rates tinker overmuch with the workings of global finance, the massive forces that accumulate can wreck terrible destruction. Thus we suggest that our readers ponder the third law of thermodynamics and how the concept of entropy relates to the global phenomenon of deflation. As we move from the apparent but transient appearance of stability to chaos and disorder in a global economy with grotesque levels of debt, the mistaken judgments made by Bernanke and Yellen when it comes to fighting deflation with hyperinflation of the US economy during the past decade may govern the fate of the global economy for many years to come. #AgustínCarstens #entropy #SIFMA #Bernanke #Yellen

In this issue of The Institutional Risk Analyst, we feature a comment by Robert Eisenbeis, Ph.D., Vice Chairman & Chief Monetary Economist at Cumberland Advisors . We continue to believe that the Federal Open Market Committee (FOMC) will not change the target for Fed funds during 2019. When will the equity markets connect the proverbial dots? In the commentary leading up to the June meeting, I argued that some relaxation of the tariff issues with Mexico, combined with relatively good data for the US economy, would make the FOMC’s decision to hold pat on rates relatively easier. While the FOMC did decide at its June meeting to hold rates constant for the moment, the dot charts and dissent by President Bullard suggest that a number of participants were closer to cutting rates than they may have been previously or than observers might have expected leading up to the meeting. The statement itself, as many have noted, deleted the word patient,and the FOMC also dropped its characterization of ongoing economic activity from “solid” to rising at a “moderate rate.”[1] We need to remember that the minutes of the March meeting indicated that the staff forecast had included a markdown of growth after Q1, so the change in language validates that forecast and aligns with the districts’ characterization of growth in their regions. The deletion of the word patience really reflects two considerations. First, the Committee expressed concerns that downside risks had increased, and Chairman Powell made it clear in the press conference that those concerns were driven by uncertainty about US tariff policies and global growth. The FOMC statement did note that inflation expectations for the near term had declined, but longer-term expectations remain well anchored. Clearly, the failure to achieve its inflation objectives was not a determining factor in the FOMC’s decision to maintain current rates. Second, while the word patience was missing, it was also the case that policy would be dependent on incoming data, and that view hadn’t changed one bit. Instead, the deletion of patience indicated the FOMC’s concern about the risks to the expansion and reflected the Committee’s shift from a “steady as you go” policy stance to “on your mark.” How far are we from “get set, go!” is now the critical question; and at this point, as former Federal Reserve Bank of Philadelphia President Charles Plosser noted on Bloomberg Asia after the meeting, we are rather in the dark as to what the FOMC’s reaction is likely to be to the incoming data. The key incoming data for the FOMC’s July 29–30 meeting will the June jobs report on July 5 and the first look at the advance estimate for Q2 2019 GDP on July 26. We can also glean some useful information on how the FOMC participants’ views on policy have changed from a comparison of the dot plots from March to June. First, looking at the December projections, we see a significant shift and difference of opinion as to whether rates should be raised or lowered. While six people favored at least one or two rate increases in March, all but one had significantly lowered their rate recommendations in the June SEP. Eight people continued to favor holding rates between 2.25–2.5%, while all the remaining participants favored at least one rate cut by the end of 2019. Similarly, for 2020, of the 10 participants who saw rates above 2.5% in March only three now saw rates that high, while nine saw rates below 2.25%, and seven saw rates between 1.75–2.0%. Finally, for 2021, views have further diverged, probably reflecting the uncertainties that participants now feel may exist after the 2020 election. These projections appear quite bearish, given the fact the interest rates have come down in the near term from where they were in March. Mortgage rates are now hovering at about 3.9%, more than a percentage point below where they were at the end of 2018. [1] It is now clear in Fed-speak that solid means that growth is faster than “moderate,” which usually means growth at about 2.2–2.4%. More generally, the Chicago Fed’s National Financial Conditions Index is almost as low as it was in 2007 before the Fed started to raise rates. Given the state of the labor market and general health of the economy, it remains a puzzle as to why the FOMC has now changed its view regarding the appropriate path for interest rates going forward. #RobertEisenbeis #CumberlandAdvisors #FOMC #dots #rates

New York | In this issue of The Institutional Risk Analyst , we ponder how the actions or inaction of policy makers can create systemic events. In the next issue, we’ll dive into Q2 2019 earnings for banks and non-banks. Of interest, the Q2 edition of The IRA Bank Book is now on sale at our online store. News last week that the leadership of Deutsche Bank AG (DB) is planning to cut one out of six jobs at the bank, this in an effort to regain financial health, drew some positive attention from investors last week. The stock closed up 7% while the SPX was essentially flat for the week. Does this mean that the troubles at DB are behind us? Only if you believe that the bank can cut its way to profitability. That physical trembling observed afflicting German Chancellor Angela Merkel is, we surmise, a direct result of the prospect of state aid for DB. While it is certainly good to see the management of DB finally moving to address investor concerns about profitability, the job cuts that impend in the bank’s German retail arm and the US investment bank raise questions in our mind as to whether the $1.3 trillion asset institution is viable as a going concern. When you cut deep enough you get to bone. When the bone is cut, then the patient often dies or is crippled. That seems to be the fate of DB, which is effectively untouchable by all but the most optimistic of hedge fund managers. Though it is pretty clear that EU political leaders and bank regulators are incapable of winding up the bank, in the US regulators face the possible disruption or even failure of a key part of the world of housing finance. The focal points of the risk are two small, federally insured depository institutions known collectively as Deutsche Bank Trust Corp, the name of the top tier bank holding company of DB in the US. The table below shows the affiliates of Deutsche Bank Trust Corp as reported to the Federal Reserve Board. This obscure, $42 billion asset bank is a key part of the world of housing and real estate finance in the US, acting as administrator, trustee and custodian for residential and commercial mortgage loans and asset backed securities (ABS) . Part of DB’s global back office business, Deutsche Bank Trust Corp provides corporate clients, financial institutions, hedge funds and supranational agencies around the world with trustee, agency, escrow and related services. Three quarters of the bank’s revenue comes from fee income and the risk-adjusted assets are a fraction of the bank's nominal balance sheet. Are US regulators focusing on finding a new owner for DB’s US trust and custodian business? Were this collection of small, modestly capitalized trust companies and non-bank SPVs to be disturbed, the impact on the world of residential and commercial housing finance and related ABS would be severe. There are obvious suitors, but few banks can or would actually buy the US assets with the tainted European bank. Years of inadequate disclosure and obfuscation have destroyed the credibility of DB with investors and institutional credit professionals. Top of the list of potential buyers for the DB banking business in the US is Wells Fargo & Co (WFC) , the largest commercial servicer in the US and the dominant player in the world of residential and commercial mortgages. But WFC is in the regulatory penalty box due to self-inflicted wounds of various kinds. We don’t expect to see WFC acquiring any significant businesses for years to come and may even sell assets. Next is $475 billion U.S. Bancorp (USB) , one of our favorites (we own the common and preferred stock), which is also a big player in the world of commercial and residential real estate lending and servicing. Our guess is that risk averse USB would not care to take a piece of the DB fiasco and all of the attendant unknowns that accompany “the German bank.” Next on the list is KeyCorp (KEY) , another big player in commercial real estate lending and servicing. The bank certainly has the operational smarts to acquire the DB business. But again, the long list of unknowns probably makes the acquisition impossible for the $141 billion asset KEY, even though the DB US business is relatively small in terms of capital and balance sheet. Notice that we have not even mentioned JPMorgan Chase (JPM) , Bank of America (BAC) or Citigroup . Then there is Goldman Sachs (GS) , which is also heavily involved in commercial real estate finance. We like the idea of GS because of all the US banks, CEO David Solomon and his bankers could likely fashion a transaction that would insulate the US firm from the unknown risks that probably lurk inside DB, including the non-bank broker dealer business in the US. The Asian analog to DB and GS as “narrow” universal banks is Nomura (NMR) of Japan, which has a substantial focus on residential mortgage lending and securitization. But with NMR trading below 50% of book value (compared with 20% for DB after last week’s rebound), acquisitions seem ruled out. The studied inaction by regulators in the EU and the US with respect to DB is creating a problem and the possibility of a systemic financial event. Alex Pollock notes in his wonderful new book “ Finance and Philosophy: Why We’re Always Surprised ,” that “the financial future is marked by fundamental uncertainty. This means that we not only do not know the future, but we cannot know it…” But one thing we have learned in the world of bank supervision, is that forbearance by prudential regulators leads to moral hazard and eventual insolvency for the bank in question. GSE Reform or Release? Meanwhile in another corner of the world of mortgage finance, we continue to hear rumors of the impending "release" of the government sponsored housing monopolies, Fannie Mae and Freddie Mac, from government conservatorship. We told Charlie Gasparino and Lydia Moynihan at Fox Business last week, “ Possible Fannie, Freddie IPO whets Wall Street's appetite ,” we still see the chances of anything actually happening in Congress as small to none given the conceptual gap between the two sides. “What Republicans will accept and what Democrats want is very different and there is no way to bridge the gap,” we told Moynihan after a revealing trip to Washington last week. “I can see a scenario where Fannie and Freddie will stay in conservatorship forever.” There is also a fantasy land quality to the GSE debate, as illustrated by the comments of Senator Mike Crapo (R-ID) back in March: “It has now been a full decade since the government asserted control of the government-sponsored enterprises, or GSEs, Fannie Mae and Freddie Mac. After ten years of market recovery, these mortgage giants remain stuck in conservatorship, with taxpayers still on the hook in the event of a housing market downturn. It appears that the old, failed status quo is slowly beginning to take hold again, with the government in some ways expanding its reach even further, entering new markets where it has never been before. Today, Fannie and Freddie, along with government-insured mortgages, dominate the mortgage market." Republicans pretend that the GSE's are a "threat" to taxpayers instead of conduits for middle class subsidies for home ownership. Yet despite this fact, Republicans probably want to see both GSEs just go away, with the responsibility for the guarantee of existing mortgage bonds going to Ginnie Mae. The new unified securitization platform would likely go to the Federal Home Loan Banks and the GSEs would be liquidated. But none of this matters because bridging the conceptual and ideological gap between progressives and conservatives when it comes to housing is pretty nigh impossible. The increased giveaways and subsidies that Democrats want as the quid pro quo for any housing reform legislation, for example, would make the GSEs barely profitable, even before they emerged from government control. Could a moderate majority come together in the House on GSE reform and ignore the irrational objections of House Financial Services Committee Chair Maxine Waters (D-CA)? Perhaps, but the more important point is that as the law stands today, the Trump Administration cannot release the GSEs from conservatorship. No matter how much private equity they raise, the GSEs lose their crucial “AAA” credit rating the moment they leave government control. The good news is that the debt markets are already noticing the discussion of change with the GSEs and have widened the spreads over Ginnie Mae RMBS and US Treasury debt accordingly. Andrew Ackerman of The Wall Street Journal reported last week (“ Push to Overhaul Fannie, Freddie Nudges Up Mortgage Costs ”), that the mere suggestion of changes in the credit status of the GSEs has investors changing asset allocations. We gave kudos to Dianna Olick at CNBC in National Mortgage News for reporting on this ominous trend. Just imagine what happens as and when warehouse lenders and REPO dealers must impose larger haircuts on GSE loans and debt when they are no longer “obligations of the United States.” The lack of understanding by members of Congress and also the Treasury and White House as to the fragile nature of the GSE’s credit profile is shocking, even for The IRA . Once the Treasury and the Federal Housing Finance Agency start to even move towards release from conservatorship, spreads on GSE debt will widen and the likelihood of completing an offering of new equity securities will plummet. Let’s add a little market context. The equity securities of mortgage finance companies, like "narrow" universal banks such as DB and NMR and GS, tend to trade at a discount to book value because of the poor risk/return characteristics. Without an explicit guarantee from the US Treasury, the GSEs and their outstanding debt and equity securities will quickly trade at a discount as well. The comparable credits for the GSEs will not longer be “AAA” Ginnie Mae and the Federal Home Loan Banks, but Penny Mac (PMT)(1x book), New Residential (NRZ)(0.9x book) and Mr. Cooper (COOP)(50% of book), three names which are among the stronger public issuers in mortgage finance ghetto. Best rating in the housing finance group is “BBB” for PMT. And with Fannie Mae trading on a 4 beta on the OTC bulletin board, as and when it trades, pricing an equity offering on a stand alone basis would be a challenge to say the least. Under the “catch and release” model being considered by the Mnuchin Treasury, both of the GSEs would quickly collapse. Imagine the disaster if Moody’s, Kroll, Fitch and S&P had to downgrade Fannie Mae and Freddie Mac from “AAA” to say “A” or even “BBB” under the relevant finance company methodology. This would represent a systemic event equal to the failure of the GSEs and Lehman Brothers a decade ago. And once the act of release is done, regaining market confidence in the GSEs as sovereign credits will be impossible -- even were they returned to conservatorship. Of course, when the GSEs are downgraded the credit agencies would also downgrade $4 trillion in GSE corporate debt securities and RMBS. The whole point of putting the GSEs into conservatorship in the first place was to protect the outstanding bonds, let us recall. The GSEs as corporations themselves don't matter. Just imagine the fiasco of reversing the conservatorship process and downgrading $4 trillion in existing securities. But just this eventuality is being seriously considered in Washington. Ponder that. More Reading "With interest rate volatility, servicing assets suffer" National Mortgage News (June 25, 2019) #maxinewaters #GSE #FannieMae #FHFA #GinnieMae #WFC #USB #GS #KEY

Grand Lake Stream | One of the great things about fishing is that it provides an opportunity to reset perspectives, both through conversation with new friends and inspection of the surrounding terrain. We talk, we listen, we learn. Ponder the large mouth bass (image below), which is considered an invasive species in Maine. Some knucklehead threw some large mouths into a lake a few years back and now they are embedded into the Maine wildlife system. The small mouth bass is considered the home town fish, a sacred native species, but in truth the small mouth was also introduced to Maine by humans a century and more ago. Which fish is the illegal immigrant, which the native? Of note, we can testify that small mouth bass have been citizens of the State of Virginia for many years. micropterus salmoides One topic of conversation this past week was the troubling evolution of the US financial markets, where artificially interest rate floors and federal REPO programs have replaced investors and markets. Risk is now a function of the whims and caprices of the Federal Open Market Committee. The dysfunction in financial markets, in turn, colors our perspective on deteriorating credits – like the "AAA/AA" rated sovereign known as the United States of America. During Camp Kotok in August of 2011, S&P decided to downgrade the credit of the US to "AA," causing great consternation in the credit markets. Without a "AAA" rated exemplar at the top of the post-WWII financial global credit food chain, things get messy in the world of sovereign credit. The approaching fiscal train wreck of Social Security provides a case in point and may be complemented by a default by at least one large state, which could essentially hold Washington hostage in order to extract a bailout. One manager offers that the major public sector unions in states like Illinois, for example, are playing for precisely that outcome, as evidenced in the legislation passed to restructure Puerto Rico. The pressures building for a fiscal surprise in the US a few years hence – maybe just five years -- are massive and provide us with an excuse to revisit the earlier discussion of “quantitative tightening” or QT. As we noted in a previous issue of The IRA , when the US Treasury redeems a bond held by its alter-ego at the Federal Reserve Board, the effect is to reduce liquidity because the government is running a deficit. Treasury must immediately raise a new dollar for every dollar in net redemption. Thus the final effect of “quantitative easing,” which involves purchases of Treasury securities by the FOMC, is a tightening of policy via QT, as we can see even today unless the Fed reinvests the Treasury bond repayments indefinitely. The economists who fashion the narrative in the investment world got it badly wrong when they suggested a cut in target rates in 2019. Last week, we pondered the number of economists who’s reputations may lie in tatters when not one rate cut materializes this year. We even started to make a list, assisted by, wait for it, artificial intelligence. Pardon us, but is there enough plain vanilla human smarts such that we need unnatural augmentation? Chairman Jerome Powell, we believe, will first end the runoff of the Fed’s balance sheet, known as the System Open Market Account or SOMA. This is what Chairman Powell has said several times. Then the Fed will assess the situation and relevant data. One thing we can say, however, is that the FOMC better pay a little more attention to credit spreads and related market dynamics, a lapse that almost cause a credit market collapse last December. The volatility seen in the market for fixed income securities reflects a level of unease in the world of credit that begs the question, our colleagues commented. The chart below shows the yield spread on Fannie Mae 4s (aka FNMA residential mortgage pass through securities with average coupons ~ 4%) vs the 10 year Treasury note. Spreads on Fannie Mae securities and the Treasury 10-year note have migrated steadily higher since 2017, when Fannie 4.5% coupons were almost even yield with government debt. But since January agency spreads have compressed by nearly 25bp, back well-inside of a point over the Treasury curve. The bad news is that as investors have bid-up the price of agency paper, the rate of loan prepayments on these premium securities has accelerated, increasing cash losses to investors and shortening the effective average lives of this “risk free” asset. The price differential between premium and discount coupons in residential mortgage assets is vast. Agency securities are not the only source of market and interest rate risk emanating from the Fed’s radical policy of QE. You could say that the US economy, like the banks, is entirely rate dependent and correlated, only the moves in rates seem to be causing more harm than good. We noted last week that the sharp downward move in interest rates has set up Q2 2019 earnings to be a bit of a downer in terms of losses on negative-duration positions like mortgage servicing assets. Hopefully the interest rate hedge was effective. Some tickers to ponder when it comes to falling interest rates: NRZ, PMT, ANLY, WFC, BAC. Those kind souls that actually believed at the end of 2018 that interest rates would continue higher were not paying attention to the shift in spreads for agency securities and mortgage servicing rights or MSRs last Fall. Now however, with spreads headed lower for government, investment grade and high-yield debt, the proverbial roller coaster lurches the other direction. But for how long? After peaking in early June, spreads have rallied with the fall in interest rates. And the growing market volatility, as former Fed Chairs Ben Bernanke and Janet Yellen predicted, is the end result of QE. Q: Will credit spreads continue to tighten once the markets realize that no Fed rate cut impends in 2019? With little prospect of improvement in the fiscal posture of Washington prior to the 2020 election, Treasury is approaching the day of reckoning with respect to Social Security. On that day several years hence, when the $2.8 trillion of non-marketable Treasury debt held by the Social Security trust funds starts to be redeemed, Treasury will be forced to raise $2 for every dollar in payments to beneficiaries . One dollar to make the payment and another to refinance the past spending that was financed with the Social Security surplus when Bill Clinton occupied the White House. This will be QT on steroids. The FOMC will be compelled to employ hyperinflation via QE in response to Treasury's bid for new funds. As with QT, when the Treasury redeems the debt held by the Social Security trust fund the net effect on the market will be to tighten liquidity and bank deposits. Thus this past week at Camp Kotok we discussed the fact that the Fed must eventually start to inflate its balance sheet to keep up with Treasury debt issuance and offset this negative monetary effect on the US economy. The Treasury is the dog in the world of monetary affairs, the Fed is merely the tail. Today the markets seems to be able to absorb endless amounts of new Treasury debt, but that may not always be the case. As we bid farewell to our friends in Grand Lake Stream, we wonder how the world will look five years hence. We assume that the second term of President Donald Trump will be ending and the US fiscal situation will be rapidly deteriorating. Will we have seen another credit downgrade of the United States, as happened in August 2011 when a lot of economists and financial media were very literally caught in their canoes? Or will President Trump and Congress get serious and begin to raise some revenue to quench the massive spending and, more, cash flow gap that faces the Treasury over the next decade? Only time will tell. Tight lines. David Kotok on West Grand Lake June 2019 #CampKotok

New York | Last week The Institutional Risk Analyst participated the Ginnie Mae Summit in Washington. The event was packed and featured some important discussions about the state of the residential mortgage market. We received applause from the audience for suggesting that FHA resolution costs for defaulted loans should be the same as the GSEs. But hold that thought. And there were lighter moments. Federal Housing Finance Administration head Mark Calabria continued to backpedal skillfully regarding the prospects for taking Fannie Mae and Freddie Mac out of conservatorship. In a matter of weeks we’ve progressed from the status quo is “unacceptable” to a plea for power to create more GSEs to a concession at the GNMA event that Congress needs to get involved. Odds of seeing a roadmap for GSE reform from the Trump Administration in 2019 are fading fast. Hit the bid. One of the more important topics of discussion at the event was the high level of prepayments experienced by holders of GNMA mortgage backed securities (MBS), particularly from loans guaranteed by the Veterans Administration. Investors in MBS are getting killed by prepayments, but lenders are cheering because cheap refinance volumes are a welcome relief after years of declining profits. And this is a problem that affects GNMA and the GSEs Fannie Mae and Freddie Mac equally. After all, if you are the Bank of Japan and you’re paying 105 for a GNMA MBS, receiving prepayments at par when a mortgage loan is refinanced is painful. We recall years ago having similar discussions with Japanese banks and insurance companies. And we were always sympathetic. Mindful of the stress felt by its precious global investor base, the folks at GNMA and the Federal Housing Administration have sought to shift the blame for high prepayments to lenders and servicers. In January, GNMA imposed restrictions on loanDepot for allegedly “churning” loans to veterans. Previously, similar restrictions were imposed on Freedom Mortgage and GoldenWest. “Ginnie Mae cracked down on what it believes is unnecessary loan churning in its VA pools. Said actions are understood to be the result of those efforts,” Housing Wire reported. Like Freedom, loanDepot will see the removal of such restrictions “based on the Issuer having demonstrated to Ginnie Mae’s satisfaction that (a) its prepayment speeds are substantially in-line with those of equivalent multi-Issuer cohorts, and (b) such improved performance is sustainable,” GNMA said in a statement. The actions of GNMA against specific issuers is more politics than substance. Members of Congress like the idea of getting tough on “VA churning,” even though the problem may not actually exist to a significant degree. Black Knight, for example, reports that there are now 7 million households who could likely qualify for a refi and save at least 75bps on their mortgage coupon. This situation kind of reminds us of the Congressional hearings on CIA waterboarding of Al-Qaeda , which featured several terrorists who were never actually tortured. In Washington, fake news is only exceeded by imaginary policy. It’s high time that GNMA realized that persecuting issuers for supposed "churning" of VA loans is not going to solve the far broader problem of higher prepayment speeds. Just watch the earnings bloodbath in mortgage servicing rights (MSRs) this quarter by banks and non-banks alike. Does GNMA actually think that owners of MSRs among its issuer community want to push prepayment speeds higher? Really? But lenders do understand that when mortgage rates are cut by 1/3 in six months, somebody somewhere is going to make a new loan. When our friends in the third-party MSR valuation channel show constant prepayment rates (CPRs) surging over 20% of the remaining value of loan pools given a 50bp decline in rates, what more needs to be said? The 10-year Treasury note is down over a point in yield since December 2018. More important, the shape of the yield curve and the volatility surface have also shifted since December. New production pricing for conventional loan servicing assets is down by a third since October. First, our friends at GNMA have forgotten (or perhaps never knew) that you should listen sympathetically to investors who are experiencing prepayment risk and related convexity – but that’s all. Express concern, then put the phone down and go back to work. This is one of the first lessons you learn on the Street. Given that the problem of prepayments has to do with interest rates, which are controlled to some degree by the Federal Open Market Committee, there seems to be little real utility to GNMA in beating on its shrinking pool of issuers. Since Fed Chairman Jerome Powell did his first pirouette in December, as deft a political repositioning as you’ll ever see, the rate of prepayments across the mortgage industry has soared. Powell has continued the policy shift with some striking fouettés , but medium to long-term interest rates continue to fall. Good for lending, bad for MSRs. Second, GNMA and the GSEs need to recognize that loan servicers do not control prepayment rates. The fact that they know the address of the obligor is helpful, but the pitiful, sub-25% refinance retention rate in the mortgage industry suggests that servicing the loan does not necessarily lead to future business. Fact is that with rates falling precipitously, refinance loans are going to be made. Of note, modeled prepay speeds for 4 percent coupon conventional loans across the country are into the mid to high teens and may go higher. That means the MSR will basically amortize and disappear in five years or less. The third key factor we’d offer up to the folks at GNMA regarding prepayments is the economy. When interest rates gyrate as they have for the past six months, an American family are faced with the prospect of saving hundreds of dollars a month on a mortgage deserves that opportunity. Why shouldn’t a young military family benefit from a lower mortgage? The logic of GNMA looks dangerously like the predatory actions of the GSEs after 2008, when increased loan level pricing adjustments were used by Fannie Mae and Freddie Mac to deliberately prevent refinancing of loans held in GSE portfolios. Given the fact that home owners have the legal right to refinance without penalty , we think it is appropriate to ask why GNMA has chosen to punish lenders and issuers who ultimately have little control over the rate of prepayments. We hear that the folks at Fannie Mae and Freddie Mac have similar concerns. Well, get used to it. Capitalization level assumptions for new production MSRs peaked last Fall and are falling dramatically due to falling interest rates and high levels of prepayments. Ponder conventional 4s that traded at over 4x cash flow in 2017 now trading below 3x cash flow as average lives tumble. GNMA discount coupons are heading towards 2x multiples. Requiring an appraisal on all VA mortgage refinance transactions fixes the VA churn problem immediately, we are told by several issuers. But the FHA is unwilling to provoke a political battle with the Veterans Administration, which views VA loans as a benefit for men and women in uniform. So as with most things in Washington, we talk about problems that don’t really exist to justify inaction on measures that would actually fix the true problem. All we can say is that rates are headed lower, perhaps sub 2% for the 10-year note for an extended period. And frankly the mortgage industry, which also talks to investors in mortgage backed securities, is already exercising considerable restraint in regard to prepayments. “The mortgage industry could double prepayments,” one prominent mortgage executive told The IRA last week at the Ginnie Mae Summit. If GNMA really wants to make a difference for investors and the issuers who comprise this $2 trillion asset market, they should focus on how to streamline the loan resolution process and eliminate bottlenecks that can cost GNMA servicers thousands of dollars on a foreclosure. And specific to GNMA concerns about maintaining market liquidity of MSRs, when the resolution costs are level with the GSEs, then GNMA mortgage servicing assets should trade at a premium to GSE assets instead of a discount as today. Now that would be something to celebrate for investors and issuers alike. . #GinnieMae #MSR #FHA #VA

New York | This week we announce the release of The IRA Bank Book for Q2 2019 , a publication of The Institutional Risk Analyst . In this issue we ask some important questions, including: ** Why is Capital One Financial (COF) a better comp for Citigroup (C) than JPMorganChase (JPM)? ** Why are loss rates for real estate exposures of US banks moving back into positive territory? ** Will funding costs for banks continue to rise even as long-term Treasury yields fall dramatically? ** And just when is Fed Chair Jay Powell going to admit that the past eight years of "extraordinary" FOMC policy did nothing for inflation but did embed future credit risk in financials? Read and learn. Oh and we see no rate cut by the FOMC in 2019. One chart we did not use this quarter in The IRA Bank Book bears inspection, namely the rate of change in growth rates for various types of bank deposits. We note that “the high rates of deposit growth seen in the 2010-2016 period during the Fed’s “quantitative easing” operations have now been replaced by low or even negative growth rates.” Source: FDIC We write in The IRA Bank Book Q2 2019 : “As Q2 2019 comes to an end, short-term money markets remain tight due to the fact that the FOMC continues to shrink the Fed’s holdings of securities. Because the US government is running a fiscal deficit, for every dollar of Treasury securities on the Fed’s System Open Market Account that is redeemed, a dollar of bank deposits disappears when the Treasury refinances the bond in the private markets. The deceleration in deposit growth is a matter of concern because new lending is ultimately a function of the availability and cost of deposits. In particular, the decline in non-interest bearing deposits has negative implications for bank net interest income and overall profitability.” As we discussed on CNBC last week, the FOMC is still tightening policy. We believe that there is growing risk in the non-bank financial sector due to erratic moves in interest rates, the flat Treasury yield curve and the decline of carry in loans and financial assets. The culprit here is the shrinking balance sheet, which represents continued policy tightening by the FOMC. As rates have fallen towards zero, the behavior of loan and securities markets reflects a level of volatility and demand caused by the lack of cash flow or "carry" on financial assets. We do not expect a rate cut by the FOMC this year, contrary to conventional thinking on Wall Street, but we do anticipate an end to the shrinkage of the System portfolio by September and with it a resumption of reinvestment of all bond redemptions. We believe that it should be obvious to policy makers, regulators and investors that operating in a flat yield curve environment near the zero rate boundary is not the same as 20 or 30 years ago, when the cash flow off of financial assets was far more significant to asset returns and inflation expectations, one of the explicit policy goals of the FOMC. Banks have different default rate targets for customers. The Fed has skewed these risk measures via QE. As credit metrics return to normal, so will loss rates. The growing stress we see in non-bank finance today, however, is nothing compared to the pressures that will be unleashed in 12-18 months when visible default rates start to rise. The inflation of asset prices in stocks, bonds and loans has concealed a great many sins in the world of credit over the past decade. Eventually these hidden default events will surface and reflect their true economic value. And ground zero for the next crisis in mortgage finance will be, ironically enough, the the market for government guaranteed loans issued into the Ginnie Mae securities market.

New York | Last week in The Institutional Risk Analyst, we gave you a taste of today’s interview with author and consultant Jim Rickards to talk about his latest book, “ Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos. ” As usual, Jim has a commanding view of the ebb and flow of the global political economy. His first chapter in which he describes the fateful role of former Fed Chairman Ben Bernanke in choosing the current monetary policy mix sets the stage for an important discussion of the future risks facing investors. Jim is a good friend, fellow member of The Lotos Club of New York and among the most prolific authors writing about global finance and economics today. The IRA: Thank you for taking the time Jim. In the beginning of your book, you use the metaphor of The Odyssey to describe the choices facing the Federal Reserve Board going back to Alan Greenspan, who we knew as “Uncle Alan” in Washington years ago. You talk about how the Fed went from deflating bubbles before Greenspan, as with the “taking away the punch bowl” image, then to trying to maintain bubbles, and now overtly using monetary policy to stoke inflation and huge asset bubbles. Where does that leave us today? Rickards: In the book I talk about how Greenspan defeated deflation in 2005 before he left office, but, this was a Pyrrhic victory. Low rates gave rise to the housing bubble and subprime debt crisis. Since 2008, we’ve had more of the same but a more extreme version of Greenspan’s anti-deflation medicine. If Greenspan’s three-year experiment with sub 2% rates gave rise to the Global Financial Crisis, what was the world to make of the Bernanke-Yellen policy of 0% for seven years? Bernanke’s Federal Reserve also engaged in a completely unprecedented money printing binge called quantitative easing. The IRA: Well said. In the book, you talk a good bit about how the US economy has experienced increasing difficulty achieving the perceived levels of potential growth. This leads to the FOMC “doing more” to boost employment and now inflation under its 50-year old mandate. Yet the Fed also seems to be making some of the very same mistakes that were made in the 1920s and 1930s. Rickards: Going back to the 1929-1937 period, the old rule was to prick bubbles to relieve speculative pressures. But, this ended up causing recessions rather than preventing them. By the 1998 - 2001 period, the conventional wisdom was to let bubbles run their course and then clean up the mess afterwards. But the Fed has failed to distinguish between credit driven bubbles and mania driven bubbles. The former are dangerous because they are connected with the credit system, the latter less so because people loose money but the crisis is not systemic. The 2000 dot.com bubble was speculative, but not credit driven so it did not turn into a systemic crisis when it popped. Of course 2008 was credit driven and it did metastasize throughout the system right up to the top of the food chain with large banks and the housing GSEs failing. When you are kicking around the idea of should I or should I not pop the bubble, this is a key distinction and the threshold question for policy. You should pop or defuse credit driven bubbles, but perhaps let speculative bubbles (most recently Bitcoin) run their course. The problem is that Fed policymakers do not seem to grasp this fundamental distinction. This leads to credit bubbles being allowed to spin out of control into systemic crises. The IRA: You clearly lay the authorship of the 2008 crisis on Greenspan. But how do you distinguish between a market bubble and a credit bubble when the latter is made to seem less problematic because the central bank is actively creating asset bubbles? Loss given default for most bank owned real estate loans has been negative for three years or more. When banks are profiting from loan defaults, is this not a red flag? The Fed has explicitly embraced a policy of stoking asset prices in stocks and real estate to fight deflation, even if it means market instability as a result. Rickards: That is a profound question you raise about the impact of monetary policy on visible credit metrics. The answer very simply is that you can’t get out. It's one thing when loose monetary policy results in private credit extremes. The Fed can reign that in. But, what happens when public credit from the Fed is the source of the problem? The Bernanke choice of stoking asset price inflation via zero rates and QE is not something that can be reversed without a great deal of pain. Once you make that trade-off between promoting inflation and future market instability, you have no way out. You’re much better off taking the pain and accepting a lower level of economic growth in the short-run rather than deferring the pain but creating far larger asset bubbles down the road. There is no way out of the Bernanke policy choice without bigger bubbles and much larger market crash that results. This is why I believe that we face a financial market crash as bad or worse than 1929 or 2008. The IRA: American politics over the past half century has not been very accepting of limitations on growth or spending or debt. Are you saying that we need to prepare the survival strategy for the coming Mad Max era of financial ruin? We are struck by the parallels between the 1920s and today that you highlight in the book, the lack of clarity from supposed political leaders on economic choices. Rickards: One of the points of “Aftermath” is that we have already made that choice of greater and greater swings in boom and bust. Now we’re stuck with it. How you navigate these treacherous waters and protect wealth is now a crucial question for investors and professional advisors. The key point of the book is that we made the choice, we ran out the tape for 10 years, but now we cannot get out of this cycle. The proverbial punch bowl is now glued to the table and the Fed is forced to keep refilling it. The IRA: Or as our friend Jim Grant has written, Fed Chairman Jay Powell is truly a prisoner of history and the choices made by his predecessors. Rickards: Precisely. In the beginning of the Reagan presidency, we had the worst recession since the 1930s. But by 1983 we were growing at over 5% annually. Ronald Reagan said get the recession over early and then won the biggest reelection landslide in the 20th Century. Looking at today, we’ve been in a depression since 2008, at least as defined by John Maynard Keynes. But going back to the question of actual vs. potential growth, it seems to me that we face three big headwinds. First is the issue of demographics. We have stagnant to down populations in major nations around the world. Second, debt is a major drag on economic growth today, including things like student debt. Young people with big debt loads have lower FICO scores, making it difficult to get a job or buy a house. This delays household formation, which is a major driver of consumption. And thirdly we have the negative interest rates, which is an explicit transfer of wealth from creditors to debtors, especially governments and other public sector debtors. The IRA: So would you agree that negative interest rates have actually been a drag on growth, essentially a regressive tax on all savers and investors? Rickards: Yes, absolutely. And this is why I spent so much time talking about Reinhart and Rogoff and the 90% rule. When a country’s debt rises above 90% of GDP, growth suffers and additional policy actions meant to boost growth loose their effectiveness. Once you get past 90%, all of the rules regarding economic policy change. Why is the 10-year note at 2.1% this morning? And this is only going to get worse by the way. Reagan got a huge bump up in growth because he increased spending and deficits, but the same policy actions 35 years later gets barely any uptick in growth. The White House today is ecstatic about 3.1% growth in the first quarter, but go back and look at the Obama years and the wide swings in GDP that we experienced. Low rates and stimulus had some effect in terms of boosting growth but it was not sustainable. There was no real difference between Trump and Obama in terms of growth. The tax cuts gave us a bump, but only just a bump. It was not a paradigm shift, just a bump that is not sustainable. We are back to that 2.2% trend growth of the past ten years that is lower than the post-war average and thus qualifies the past decade as a depression using Keynes’s measure. The IRA: Growth also seems to be below the rate where you can keep the politics under control, thus we have all sorts of manic responses from bitcoin to MMT and other new age “solutions” to the problem of low growth. How do you see the future given your views of the likelihood of greater market volatility? Rickards: When all of the solutions from Washington and all of the big ideas about economic growth fail, then we may need to fall back on a community based, semi-agrarian model that resembles austerity in today’s terms. Such a model is far more stable than the radical boom and bust model of Greenspan and Bernanke. Larry Kudlow is right to think that we can do better in terms of growth, but the headwinds we spoke about are daunting and the policies are not well-designed to achieve that kind of growth. The IRA: So what is the path back to some type of sanity regarding economic growth? Rickards: We need to move beyond ideology and towards a more pragmatic discussion about how we measure and describe growth. Let’s do what works. The great philosopher William James invented pragmatism and taught us not to get hung up on one school of ideas or another. I’ve always been an admirer of Keynes and a fierce critic of what we call “Keynesianism” today. As soon as Keynes was dead, the economist Robert Samuelson hijacked his legacy and created something completely new called Keynesianism. But what I admire about Keynes is that he was pragmatic, a man who understood the art of policy but also knew the workings of markets intimately. In 1914 at the start of WWI, Keynes was a gold bug because he saw it as a way to preserve Britain’s credit standing and let them win the war. By 1925, Keynes was opposed to gold because he saw it as a constraint on growth. But by the end of WWII, he supported a modified gold standard to underpin the global monetary system. He believed in what worked. That is the kind of thinking we need today. The IRA: Thanks Jim #JamesRickards #FOMC #BenBernanke #JayPowell #janetyellen #AlanGreenspan

New York | A year ago in The Institutional Risk Analyst , we predicted that net interest income for the US banking industry would flatten out and decline around Q1 2019. Sure enough, that is precisely what has happened. We wrote in The IRA Bank Book for Q1 2019 : "The cost of funds for US banks continues to grow at four times the rate of interest income, suggesting that the net-interest margin earned by banks may start to decline in 2019. Rising funding costs are being felt the most by smaller banks, driving the rate of change in interest expense over 70% year-over year 2017-2018. Quarterly funding costs for all US banks should be close to $60 billion by the end of 2019 vs $37 billion in Q4 2018, a mere 62% rate of change as shown in the chart below." Source: FDIC As short-term deposit costs normalize, the margin on loans and other assets that banks earn over funding is being squeezed. We notice that the 10-year Treasury note closed at a yield of 2.13% on Friday, more than a point below the November 2018 peak yield of 3.25%. So long as the Federal Open Market Committee persists in artificially propping up short-term interest rates, bank earnings will remain under pressure and many non-bank financial firms will be in jeopardy of outright failure. Markets are slowly coming to understand that the use of negative interest rates as a policy tool has more downside than benefit, especially when it comes to asset returns. We’ll be publishing a conversation with our friend Jim Rickards about his timely new book, “ Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos. ” In his latest work, Rickards notes: “It is understandable that the Fed wishes to resume what it regards as normal monetary policy after the better part of a decade of abnormal ease. The difficulty is that the Fed has painted itself into a corner from which there is no easy exit… Internally the Fed has congratulated itself on their fine-tuning and market finesse. They shouldn’t have. All the Fed proved in recent years was that they really couldn’t exit extraordinary policy intervention without disruption. The Fed has been storing up trouble for another day. That day is here.” It is important to note that Rickards joins a long list of economists and market observers who criticize the Fed’s reckless use of radical monetary policies to control markets. In an interview with The Financial Times , Dr. Judy Shelton calls on the Fed to “think about whether they are doing more harm than good”. If appointed to the Federal Reserve Board, the FT reports, she would be “asking tough questions” about its most basic mission. Maybe Dr. Shelton could also ask when Congress gave the Fed authority to nationalize the short-term money markets. “How can a dozen, slightly less than a dozen, people meeting eight times a year, decide what the cost of capital should be versus some kind of organically, market supply determined rate? The Fed is not omniscient. They don’t know what the right rate should be. How could anyone?” Ms Shelton argues. With the Fed holding up short-term interest rates and long-term yields falling under pressure from continued asset purchases by global central banks, the outlook for banks and other leveraged investors is decidedly negative. We’ll be discussing the growing threat to US banks and other interest rate dependent investors posed by the Fed’s unsafe and unsound monetary policies in the next edition of The IRA Bank Book for Q2 2019 . #Shelton #JamesRickards #NIM #FDIC