by Karl Denninger, Market Ticker:
Oh, so-called independent ratings agencies eh?
Just like the so-called “independent and wise” regulator called the OCC?
Or the so-called “independent, unbiased” auditor KPMG that passed on SVB’s books just shortly before they blew up?
TRUTH LIVES on at https://sgtreport.tv/
I’ll be fair on the latter — their job is to verify that what was presented is true; that is, there’s no indication of fraud. That doesn’t mean what they looked at doesn’t smell like crap, provided the crap is disclosed accurately in the financials presented. So far nobody has said it wasn’t.
But as I’ve pointed out since the inflation specter reared its head and was clearly not going to be “transitory” the very thing that made banks 10x more valuable in their stock price — that is, a portfolio written at 4% interest where the prevailing rate is now 3% and there is time remaining on the bonds so you are (difference in rate * remaining duration) to the good.
But when rates rise and you hold the lower interest bonds the exact opposite happens.
This doesn’t mean the bonds are not “money good” at maturity, but it does mean this, for say, a bond of $10,000, where there is 10 years left:
- The 2% one will pay $200 in interest per year for the ten years remaining or a total of $2,000 in interest plus the $10,000 principal, or $12,000.
- The 4% one will pay $400 in interest per year for the ten years remaining or a total of $4,000 in interest plus the $10,000 principal, or $14,000.
If you hold the 2% one and want to sell it to me you’re going to have to discount the price so that on a percentage basis I make the exact same amount as the 4% bond or I’ll buy that one instead of yours.
For those who say “well, but the Fed has eliminated the forced sale with the latest action” that’s true, and fair too — but what it hasn’t done, because it can’t do so, is eliminate the fact that over the next ten years your bond returns $2,000 less in cash flow.
Remember the basic principle of why you always make money buying things instead of selling them: If we both have overhead of rental for our office, but mine is $8,000 a month and yours is $30,000 a month then I have a $22,000 jump on you each and every month which means I can pay for a higher-quality staff or simply more of them, I can sell cheaper than you, I can buy better-quality inputs and out-compete you on quality, pocket some of that in additional profit, or some combination of all of those.
This is why you want recessions, bankruptcies and other similar dislocation events where those who do stupid things go out of business.
Yes, if you’re the dumb one that’s sad. Same for your employees; they lose their jobs.
But the economy as a whole benefits and in particular the consumer benefits wildly because they get better products and services, lower prices or both and in addition the owners of the companies that don’t do stupid things make more money with which they then go into the economy and spend on that nice evening out including a $100 steak and a few $20 cocktails.
