Tag Archives: US Treasury Bond

Basel III Liquidity Ratios

4/18/2014 Portland, Oregon – Pop in your mints…

Up until the financial crisis of 2008 and beyond, most Americans who were not alive during the early 1930’s had grown up in a world where choosing a bank was largely a matter of preference.  Once the FDIC insurance program was instituted on January 1, 1934, depositors had little to worry about.

The financial crisis that the world just experienced was a wake up call on many levels.  The first alarm rang for many Americans, members of congress included, when the Troubled Asset Relief Program (TARP) was sent on a freight train through the House and Senate under the threat of an imminent global financial meltdown.  Meanwhile, in Europe, the European Central Bank and European Union take a series of measures to shore up both their banking system as well as the finances of their member nations.

Giving away trillions of dollars to businesses who made bad decisions, while ultimately the chief function of government, is, paradoxically, politically unpopular.  As such, the governments of the world, who found themselves on the hook for losses in the financial system of a nature that many of them could not hope to understand in terms of nature and scope, began to devise a series of rules that would ensure that this sort of thing would never happen again.

So it was that, sometime in 2009, the word Basel, which until that time was a typo on a recipe card, became prevalent in the world of banking.

Basel is a city in Switzerland where the world’s banking regulators chose to meet to put their minds together as to what types of rules were needed so that the financial crisis would never happen again.  Today, five years later, the rules that they took so much time to tailor are indeed perfect for a world that existed five years ago.  As it stands today, the rules could very well be the cause of the next financial crisis.

The Basel accords and, more specifically, the Basel III Liquidity ratio, which is our focus today, are generally aimed at ensuring that large banks (those with $50 billion USD or more in assets, “too big to fail”, if you will) will always have enough liquid assets to meet the demands made on it each day.

The Basel III liquidity ratio is a simple ratio which places a banks Liquid Assets, meaning cash, Treasuries, and Agencies) over its Stressed Cash Outflows (meaning maximum foreseen withdrawals during a liquidity crisis).  The banks must report this ratio at a set time every business day.  If the ratio is over 100%, all is well.  If not, not, meaning the bank could be forced by regulators to initiate a strategy to unwind its operations.

Serious stuff.

While the numerator of the liquidity ratio is extremely simple to calculate, it is driven by the denominator, which is infinitely more complex.  This is where you and I, fellow taxpayer, come in.

Banks will be required to stratify their deposit customers well beyond the simple consumer and business account denominations that have sufficed to some degree until now.  They are now required to carefully monitor customers to better understand their daily inflows and outflows from their accounts in order to arrive at a maximum Stressed Cash Outflow number for each category of account.

As a practical matter, the bank will assign each category of customer and account a “run-off” factor, which is expressed as a % of the account’s balance on any given day that may “run” out of the bank.  Again, this number is critical for the bank, as it ultimately determines its reinvestment strategy and, by extension, how profitable a deposit customer is.

The good news is that consumer and small business accounts which are FDIC insured are, as of the most recent comment period, assigned a 3% run-off factor.  Meaning that for every $100 on deposit, the bank must buy $3 worth of Treasuries as an offset, and it is free to invest the remaining 97% in loans or other more profitable investments.

This means that competition for deposits from consumers and small businesses just got more intense, which should generally be good news for customers.  They should expect to see increased savings rates and incentives to hold both more cash and conduct more business at a specific bank, as it will be in the bank’s best interests to retain them and understand their spending habits.

The bad news begins outside of the realm of FDIC insured accounts.  For all balances over the FDIC limits for the same customers, the run-off factor, which, all things being equal, has an inverse relationship with a bank’s profitability, jumps to 10%.

For larger Corporate customers, who tend to have operating (daily transaction) and non-operating (reserve) accounts, the run-off factor jumps to 25% on operating accounts and 40% on non-operating accounts.  This makes large corporate customers somewhat less attractive.

The people that no one will want to bank with, from a run-off factor standpoint, are financial companies (think Insurance companies, small banks, etc.) who are presumed to have a run-off factor of 100%, meaning these companies, under Basel III liquidity rules, must be seen as ready to walk into the bank on any given day and withdraw all of their accounts.

In a way, the 100% run-off factor on financials makes sense, as it requires all large banks to hold Treasuries to backstop the accounts of financial companies.  It is a “regulatory” guarantee that these companies will always be liquid.

The way around the 100% run-off factor for financials and other large institutions are accounts with covenants to provide the bank with at least 30 days notice before withdrawal.  This type of notice requirement, in theory, gives the bank time to arrange its investments to be able to meet the cash outflow without impacting overall stressed cash outflows.

As one can imagine, Basel III will lead to a number of new banking products in terms of accounts and credit lines.  Briefly, this is what consumers and companies can expect to see as January 1, 2015 approaches:

1.  A dogfight for small, FDIC insured deposits.

2.  Decreased access to business lines of credit, as the Treasuries will be the default reinvestment vehicle for banks as they attempt to sort out their daily Liquidity ratio.

3.  Point 2 above means that low-interest rates on Treasuries are likely to be embedded for quite some time.

4.  Deposit products which cannot be withdrawn with less than 30 days notice without steep penalties.  One idea we have heard is a “perpetual 31 day time deposit,” meaning that the 30 day withdrawal notice requirement is embedded in the covenant, it is like an operating account that the customer has to give 30 days notice, like they would a landlord, to the bank before withdrawing.

As the Affordable Care Act has fundamentally changed the healthcare industry, Basel III will fundamentally change the banking industry.  While its aim is to forever stabilize financial markets, its implementation may be the biggest threat that financial markets have seen since late 2008.  Beyond that, it places the bedrock of finance firmly on the shoulders of sovereign bonds, which, despite being seen as completely liquid, hold a myriad of unknown risks.

Basel III, coming January 1, 2015.  The time to prepare is running out, and the time for action is upon us.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for April 18, 2014

Copper Price per Lb: $3.03
Oil Price per Barrel:  $104.30

Corn Price per Bushel:  $4.94
10 Yr US Treasury Bond:  2.72%
Bitcoin price in US:  $475.00
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,294

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  6.7%
Inflation Rate (CPI):   0.2%
Dow Jones Industrial Average:  16,409
M1 Monetary Base:  $2,704,700,000,000

M2 Monetary Base:  $11,330,600,000,000

The Three Ring Circus Begins

10/25/2011 Portland, Oregon – Pop in your mints…

What a difference a day makes.  Yesterday, it appeared that the authorities had most of the problems that ail the world’s economy resolved.  All they needed was a little more time, money and cooperation to implement their plans and the good times would be rolling once again!  Today, instead of coordinated, determined action, it appears that a three ring circus of sorts is beginning.

In Ring 1, we have the European Clown Car:  Yesterday, Europe looked ready to announce a plan to simultaneously solve the sovereign debt, banking, and resultant currency crises in one fell swoop.  Today, it appears that Italy is balking at implementing a growth plan on moment’s notice and Germany and France will need a miracle to announce a credible Pan-European rescue package by tomorrow, their self imposed deadline.  What a difference a day makes!

It should be clear by now to most sober persons that regardless of what is announced tomorrow, the Euro as a currency in its present form is not viable.  It should also be clear that the countries who have adopted the Euro will give away what is left of their sovereignty in a vain attempt to preserve it.

Step Right Up! The Three Ring Economic Circus Begins

In Ring 2, we have the American Elephants:  The US is quietly completing three Bond auctions that will cause the national debt higher than the national GDP.  The official total should eclipse GDP by the end of October.  100% of GDP is when the debt of a mere mortal nation (Greece, for example) has traditionally harkened national bankruptcy.

The only exception to this rule is in Ring 3, the Japanese Tight Rope Walker: Japan, where national debt is north of 200% of GDP.  How do they avoid bankruptcy?  Simple, they print money to pay the debt.  As if to prove our point, today, the Bank of Japan decided that they have seen enough Yen appreciation and announced another five trillion Yen currency printing campaign.

When money doesn’t exist, the sky is the limit, which is why commodities and certain equities are set to explode to the upside.  Bonds, while they may not fall in nominal value, will fall in relative value as they are repaid in severely depreciated currencies.

As if on cue, commodities took off today.  How high and far they will fly this time is anyone’s guess.

As the circus gets underway, the sober amongst us are beginning to wonder, sometimes aloud, “if the Governments, banks, and monetary authorities cannot solve these problems, then who can?”

The answer, fellow taxpayer, is right under our fingertips.  We, the People of the earth can solve it.  The tool we have been given is our own wit and ingenuity.  The only requirement is that we embrace True Capitalism, for better or for worse, for richer or poorer, until death do us part.

What is True Capitalism?  It may be summed up as a deep, radical respect for life, liberty, and private property.  It is an understanding that mutual cooperation is more often than not in our rightly understood interests (to use a Mises term).  It is not simply a choice, it is the only choice.  More to come.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for October 25, 2011

Copper Price per Lb: $3.41
Oil Price per Barrel:  $93.17

Corn Price per Bushel:  $6.51  
10 Yr US Treasury Bond:  2.13%

FED Target Rate:  0.07%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,705 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.3%
Dow Jones Industrial Average:  11,707  

M1 Monetary Base:  $2,056,000,000,000 RED ALERT!!!
M2 Monetary Base:  $9,570,500,000,000 YIKES UP $1 Trillion in one year!!!!!!!

S&P Prepares to pass Judgment on US Debt, Unemployed for the long haul

8/5/2011 Portland, Oregon – Pop in your mints…
Mercifully, today we have time for a brief Mint.  It appears that the people at S&P are finally going to give the US Government a well deserved, long overdue, courtesy downgrade on their sovereign debt rating.
This will cause havoc with any investment policy, rule, code, law, etc. that relies on the US Government to maintain an untarnished reputation as the safest investment in the world.  Ironically, an S&P downgrade will probably trigger a rally in US Treasuries.  However, this phenomenon is more a testament to the ineptitude of the debt raters at S&P rather than any firming up of the nation’s finances.
But what if tax revenues began to increase?  They almost have to, even if by accident, given all of the cash that is flying out of stock, bond, and money market funds and on to the streets.  Word has it that over $66 BILLION left money market funds for parts unknown last week, mostly due to the debt ceiling debacle, which last week threatened to wreak the same havoc that a downgrade will likely cause on corporate short term cash investment policies across the globe.
For perspective, $144 BILLION ran out of money market funds the week that Lehman Bros declared bankruptcy.  But that, by most counts, was a surprise.
As food for thought, we submit this scary chart for your perusal, courtesy of the Money Game:
Unemployed for the long haul!

Stay tuned and Trust Jesus.

Stay Fresh!
P.S.  For more ideas and commentary please check out The Mint at www.davidmint.com
Key Indicators for August 5, 2011
Gold Price Per Ounce:  $1,663 PERMANENT UNCERTAINTY

Back from the Corn, Congress None the Wiser

7/27/2011 Portland, Oregon – Pop in your mints…

We are back from the corn fields and rest assured that despite the flooding on the Missouri, the corn and soy harvests look promising. 

Much to our surprise, the US Congress has not yet resolved its debt cieling standoff.  We have nothing to add other than this is either insanity in action or a blatant attempt to force money out of Treasuries and spark hyperinflation.  Given June’s negative CPI reading (which no thinking person should take seriously), we are beginning to think the latter is true.

We offer today’s Key Indicators for your perusal and enjoyment.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for July 27, 2011

Copper Price per Lb: $4.41
Oil Price per Barrel:  $97.23

Corn Price per Bushel:  $6.91  
10 Yr US Treasury Bond:  2.98%

FED Target Rate:  0.06%  JAPAN HERE WE COME!

Gold Price Per Ounce:  $1,614 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.2%
Inflation Rate (CPI):  -0.2%!!!  PULL OUT THE HELICOPTERS!!!
Dow Jones Industrial Average:  12,302  TO THE MOON!!!
M1 Monetary Base:  $1,944,400,000,000
RED ALERT!!!
M2 Monetary Base:  $9,092,700,000,000 YIKES!!!!!!!

 

*See the MINT Perceived target Rate Chart.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.

Waiting on Armageddon in the Bond Markets, A Freaky Chart form the BIS

7/18/2011 Portland, Oregon – Pop in your mints…

We are taking the week off here at The Mint.  As the world observes the pitched battle between default and inflation, we will be roaming the cornfields of Northeastern Nebraska waiting to attend a cousin’s wedding.

To default or not to default, that is the question.  The financial world is on the edge of its seats waiting for the answer.  What will congress do?

Regular Mint readers know that once QE started, the US essentially defaulted.  Everything that is happening now is a mere attempt to avoid openly admitting it.

There has been a startling graph from Bank of International Settlements that has been circling the internet and is worth a look.  You may want to ask the children to leave the room, it is downright scary.

"AAA" Government dominates the market and it is beginning to smell funny!

Do you now understand why what happens in Greece, Ireland, Portugal, Spain, Italy and the US in the coming weeks is of the utmost importance for the bond markets?  In a very short period of time, sovereign debt issues have become predominant.  The scary part of the chart is that any sane person can tell you that there simply ain’t that much AAA rated paper out there, no matter who issues it or who rates is.

With what is sure to be an action packed week as the financial world braces for the next of its many brushes with Armageddon.  Not matter what happens, the only clear winner promises to be the volatility index (which you can conveniently trade as VIX).  If there truly is the threat of a default, try TBT, the Ultrashort US Treasuries EFT.

Better yet, head down to your local coin shop, load up on physical Gold and Silver, and come roam the cornfields with us, worry free!

Stay Fresh,

David Mint

Email: davidminteconomics@gmail.com

P.S. If you enjoy or at least tolerate The Mint, please share us using the buttons at the top of this post. If you feel that you can’t go another day and risk missing The Mint, please register by clicking here. Thank you!

Key Indicators for July 18, 2011

Copper Price per Lb: $4.39
Oil Price per Barrel: $97.12
Corn Price per Bushel: $7.01
10 Yr US Treasury Bond: 2.91%
FED Target Rate: 0.06% JAPAN HERE WE COME!
Gold Price Per Ounce: $1,594 PERMANENT UNCERTAINTY
MINT Perceived Target Rate*: 2.00%
Unemployment Rate: 9.2%
Inflation Rate (CPI): 0.2%
Dow Jones Industrial Average: 12,479 TO THE MOON!!!
M1 Monetary Base: $2,027,500,000,000 RED ALERT!!!
M2 Monetary Base: $9,265,600,000,000 YIKES!!!!!!!

*See the MINT Perceived target Rate Chart. This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy. This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.

Bernanke fires up the Helicopters and Precious Metals Blast off!

7/13/2011 Portland, Oregon – Pop in your mints…

Today Bernanke went before the US Congress and gently laid down the gauntlet.  If Congress fails to raise the debt ceiling soon (by August 2nd, we are told), it could have catastrophic effects on the economy

Given that nearly the entire banking system on the planet depends upon the US Treasury being Grade A debt, Mr. Bernanke may again be credited with the understatement of the year!

We pity Mr. Bernanke.  He is like a pilot flying an Airbus aircraft that is stalling at extremely high altitute.  We don’t know much about aircraft but we understand that Airbus aircraft, with their European design slant, do not give a pilot much freedom to override the plane’s automated systems.  It assumes that all of the necessary corrective actions can be pre-programmed and, if the plane begins to stall, the computers take over to attempt to correct the problem.

Actual Airbus pilots are free to dispute the merits of our oversimplification.  We just needed a metaphor.

Back to Bernanke, with the autopilot mechanism failing, the pilot does not know what to do.  If the US Congress had dutifully raised the debt ceiling as it had 94 times in the past, as the Airbus autopilot manual said it would, Bernanke’s reaction to the most recent US jobs report would have been to simply propose a third round of quantitative easing (read: money printing or counterfeiting of currency).

On the Airbus, he would get on the intercom and say “please fasten your seatbelts until we pass through this patch of rough air.”

However, the failure of the US Congress to reach a deal to raise the debt ceiling has thrown a wrench in his plans.  What is his plan now?  Think helicopters, Zimbabwe, Gideon Gono.

Mr. Bernanke is going on a safari!

Yes, fellow taxpayer, with each day that passes, it is becoming clearer to the majority that Mr. Bernanke is unwittingly following in the footsteps of none other than Gideon Gono.  Some may recall that Mr. Gono, the Governor of the Reserve Bank of Zimbabwe, was forced to “do extraordinary things that aren’t in the textbooks,” meaning that he oversaw the printing of large amounts of his country’s currency which produced an amazing modern example of hyperinflation.  

In an interview with Newsweek in early 2009, Gono offered an explanation for his actions and predicted that the US would do the same, as it has:

“I’ve been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.”

The hyperinflation in Zimbabwe led to shortages of real goods and destroyed the economy.  Why would Mr. Bernanke’s experiment end any differently?

Meanwhile, over in the Eurozone, the Airbus is in rapid descent and everybody on the plane is offering ideas as to what went wrong and how to fix it.  Its auto-pilot has not been programmed to deal with the failures the plane is experiencing and as the pilots and passengers engage in a heated debate, none are able to grab the controls much less safely land the aircraft.

 it will not be long before impact and the smarter passengers are starting to grab for the parachutes made of Gold and Silver.  Gold closed up almost 1% to a record of $1,583 and Silver gained nearly 6% on the day.

Back in the US, whether or not Congress passes legislation to raise the debt ceiling is irrelevant.  The US Treasury will borrow and the FED will print even without Congressional approval.  That is what makes modern Government fun, if you don’t like a rule, just ignore it and claim that you were exercising “Leadership.”

All of the countries in the Eurozone will soon surrender their sovereignty to Germany and the IMF in exchange for the “privilege” of using Euro as currency.  The ideological divide that is being exposed in the US may eventually lead to civil war.

But these events may be small compared to what is occurring in the Middle East.  Iran opened its own international Crude Oil exchange today which is akin to declaring war on the western governments and banking interests.

And keep your eyes on Palestine.  The UN vote on Palestinian statehood in September is eerily similar to the vote 62 years ago when the UN accepted Israel as an independent state.  Our guess is that this vote will spark events there that will capture the attention of the whole world.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S. 

P.S.  If you enjoy or at least tolerate The Mint, please share us using the buttons at the bottom of this post.  If you feel that you can’t go another day and risk missing The Mint, please register by clicking here.  Thank you!

Key Indicators for July 13, 2011

Copper Price per Lb: $4.35
Oil Price per Barrel:  $97.83

Corn Price per Bushel:  $7.26  
10 Yr US Treasury Bond:  2.89%
FED Target Rate:  0.07%  JAPAN HERE WE COME!

Gold Price Per Ounce:  $1,582 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.2%
Inflation Rate (CPI):  0.2%
Dow Jones Industrial Average:  12,492  TO THE MOON!!!
M1 Monetary Base:  $2,020,000,000,000 RED ALERT!!!
M2 Monetary Base:  $9,112,300,000,000 YIKES!!!!!!!

*See the MINT Perceived target Rate Chart.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.

72 Hour Call for June 29, 2011

Today’s Call:  Euro to fall vs US DollarCurrently $1.4311:1€.

Rationale:  With the Greeks passing austerity measures in the face of widespread protests, the Euro got a temporary boost today.  These types of jumps usually pull back in the short term.  The Euro just double peaked on a triple top vs. the USD and is generally in a bear trend which should be reinforced post June 30th.

Result of Call for June 24, 2011:  10 year US Treasury Bond yield to fall (price to rise). Was 2.87%, Currently 3.108%.  Bad Call.

Calls to Date:  Good Calls: 32, Bad Calls: 28, Batting .543

Daily Default:  PMI Group, Inc., third largest guarantor of US Mortgages.

Key Indicators for Wednesday, June 29, 2011

Copper Price per Lb: $4.20
Oil Price per Barrel:  $94.93 A FAILURE TO INFLATE, WILL TREND LOWER

Corn Price per Bushel:  $6.98   MONETARY POLICY IS NOT WORKING
10 Yr US Treasury Bond:  3.11%
FED Target Rate:  0.08%  UH OH!

Gold Price Per Ounce:  $1,511 BENEFITING FROM PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.25%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.2%
Dow Jones Industrial Average:  12,261
M1 Monetary Base:  $1,895,400,000,000 RED ALERT!!!
M2 Monetary Base:  $9,086,900,000,000 YIKES!!!

*See the MINT Perceived target Rate Chart.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.