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Money Matters Update May 13, 2015
Marc’s Notes:
Among the many monetary tools used by the Federal Reserve, of which most people don’t understand, a new version of one rising from the minds of the Feds minions is called the Reverse Repurchase Agreement or “Reverse Repo”.
The Feds are threatening to raise interest rates shortly, but at the same time they want to insure their medicine of higher rates don’t drive rates even higher or too quickly.
I know, it sounds complicated and it is but just know that most of it is hocus pocus to save the banking cartels from eroding profits due to these same rising rates.
When the Feds raise interest rates they will likely do it very gradually but even a slight uptick in rates might spook interest rates everywhere even higher. They don’t want rates to climb on their own or in an uncontrolled manner so they are going to do perform this new trick to try and hold rates where and when they want them.
The Feds have something called a discount window where qualified banks can borrow and lend money overnight back and forth to the Fed, sort of like a gas pedal for the economy. They exchange debt instruments like Treasuries or even mortgage packages for the cash and this back and forth overnight flow supposedly helps control inflation or its opposite (and dreaded) deflation (falling prices).
But a lot of favored institutions are not qualified window banks and therefore can’t participate in this daily auction so the Feds invented this reverse repo thing to gain even more control over a greater number of financial institutions (and therefore their money). The theory is the more control they have, the less likely rates will go out of control.
There are about 170 other institutions in this new program which don’t qualify for the normal Fed window so these companies will be allowed to give the Feds their debts and get paid in cash for them and then buy them back the very next day for a little less than what they sold them for.
In other words, instant Wall Street profits courtesy of your Federal Reserve, using your money and of course all without your permission.
Anyway, this back and forth lending and borrowing pads the coffers of these Wall Street firms and even some Government mortgage entities will profit under the new plan.
Keep in mind the whole caveat here is that the Fed will pay these institutions a risk free and instant profit on each and every transaction.
The thought is these institutions won’t lend out money to you and me for less than the Fed will pay them in the overnight transaction so in essence the Feds can maintain a floor where rates will go no lower. If rates spike too high or too fast the process is reversed or halted to temper the upward rise. In both cases the financial institutions turn a profit.
Nice business if you can get it.
The whole process is like a secondary control room for interest rates should things start to get out of control.
No matter what they call it however, the bottom line is it’s just another shell game on a massive scale using your money with all the profits going to, you guessed it, the banking sectors.
Of course, this is all done for our own good don’t you know, or so they tell us.
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The stock market continues to flirt with record highs but we have to look at why these markets are pushing higher. Is it sound earnings, a strengthening economy or investor hope and hype?
To be sure earnings are fairly good but many companies are pushing them there by massive share buybacks. Companies are using their money not to expand and build new facilities but instead using their funds to buy back their own stock shares.
This takes stock off the market and since earnings are a function of earnings divided by the shares out there, removing shares from the public market increases earnings per share.
For example suppose a company has ten public shares out and earns ten dollars. Its earnings is therefore one dollar a share. Ten shares = ten dollars earned.
Now suppose a company buys back five shares with its own money. Those shares come off the public market and now there are only five shares remaining. The company still reports ten dollars in earnings but now there are only five shares out. Its reported earnings per share is now two dollars per share. Ten dollars earned with five public shares.
Stock buybacks boost earnings immediately when no additional money is actually earned. Remember its earnings per share, not overall earnings that investors regard as important guideline when evaluating stocks.
Also pushing earnings up is the lack of wage growth which has been anemic.
When wages grow, that increases cost to business and their earnings fall. Because wages are for the most part not growing, costs are minimized and companies earn more. Although lack of wage growth is good for a company’s bottom line, it’s not good for workers, and since people make up the largest part of any economy, lack of wage growth means an economy is stagnant.
Couple that with many companies buying back stock rather than use that money to expand, its gives us reason to believe the business environment and hence our economy is still in the doldrums despite the stock market pushing to new highs.
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