March 20, 2017

LIBOR (London Interbank Offered Rate) is calculated each day by averaging the posted borrowing and lending rates of 15 major London banks (that day) and is internationally used as THE benchmark for determining short term interest rates.

IMPORTANTLY, changes in LIBOR are determined by nothing more than the actual supply and demand for money in the marketplace…and are NOT based on the latest vote by the United States Federal Reserve Board…the point being, as I have repeatedly stated, when the Fed moves, much more often than not, they are just confirming what has already happened in the interest rate markets…which is precisely what we saw on Wednesday when rates were raised by 1/4%...

To wit…Here is what LIBOR has been doing…and when the Fed has reacted by making it official…

And I think it is worth noting that LIBOR has recently gone up for 16 consecutive business days…which IS a bit different from what we have been seeing…and does include the two days since the Fed moved on Wednesday…In other words, the increase in rates hasn’t “stopped” since the announcement.

To give you an idea as to how ABNORMALLY low rates are…and I firmly believe we WILL revert to the norm…Here is the long term picture,

I CONTINUE TO THINK THAT 2.5 TO 3.0 PERCENT HERE IS ALMOST A GIVEN…2.5 WOULD PUT EURODOLLARS AT 97.50…AND 3.0 WOULD MEAN 97.00.

To give you an idea of how rates have moved up in the past, here is the long term Eurodollar chart…And please, do NOT suppose that “things are different now.”

 Why I think rates are in the process of moving SHARPLY HIGHER

To start with, Trump will not back off on his intention to rebuild every nook and cranny in the USA…Building is what he does…And Congress WILL accommodate him…And ALL  OF THE BUILDING WILL BE DONE WITH BORROWED MONEY…Put that together with what the Stock Market is already telling you regarding the next 6-9 months in the economy, and it then becomes EASY, I believe, to see what we’ve seen over and over for decades…THAT RATES DON’T GO UP SLOWLY…OR JUST A LITTLE…AND I ABSOLUTELY BELIEVE THE CHART LIBOR AND EURODOLLAR RATES CHART ABOVE IS NOW BEGINNING TO ACCELERATE HIGHER.

Part of this business is trying to anticipate what news will be driving the markets…And so far this year, everything has been about Russia, Immigration and Health Care…At some point, however, and relatively soon I expect, Trump is going to enthusiastically crank it up on a subject that will be FAR less controversial than those three current flashpoints…and that will be the whole thing about creating jobs and rebuilding any and everything that can remotely be classified as “infrastructure.”

In a document put together by his economic team back in January, titled “Emergency and National Security Projects - Initial 50 Projects”, with a 137 BILLION DOLLAR PRICE TAG (and do note, this is just the initial 50 projects), they listed Schools, Roads, Bridges, Dams, Airports, Railways, Sewer Systems, Power Plants, Seaports, etc…This report, which kind of died in the news with everything else that’s going on, was followed by the Democratic leadership presenting a long term plan to spend 1 TRILLION DOLLARS doing the same…

 So, regarding the future news…and how it will move various markets?

Although there will be lots of talk about “cuts”, or “limiting spending”, when you get down to it, BOTH parties are going to be TOTALLY on board with this “rebuilding of America”, and you can bet that the OVERWHELMING majority of Senators and Congressmen will be SURE to take their share of the pie back home to their states and districts…to the extent, I say, that there will be a veritable “orgy” of spending coming out of Washington…and ALL of it will enthusiastically be done with the idea that “jobs and growth will pay for it down the road.” And, as relates to interest rates, AS I HAVE WRITTEN FOR MONTHS, YOU’D BETTER  BELIEVE THAT EVERY CONTRACT AND EVERY PROJECT WILL BE FINANCED IN THE PRIVATE SECTOR WITH BORROWED MONEY…AND PLAIN AND SIMPLE, WHEN THERE IS A LOT OF BORROWING BEING DONE, INTEREST RATES DO GO UP...AND LET’S GET REAL---WE ARE PROBABLY TALKING ABOUT MORE “STIMULUS”, AND THEREFORE MORE BORROWING, THAN THE USA HAS SEEN SINCE SOMEWHERE AROUND THE END OF WORLD WAR II…AND IN MY MIND, RATES CAN ONLY BE GOING UP GUYS…AND I THINK THEY ARE GOING UP FAST.

I would also note that this is not something that is going to be happening in slow-mo until 2018…To begin with, with all of the economic activity I see EVERYWHERE, we are already definitely not in an environment of decreasing loan demand…quite the opposite…and now we are going throw all of the above into the mix? And not to forget, I think all of this “Build it” talk is ALSO going to be accompanied by stronger and stronger…and stronger…growth, jobs, and inflation numbers…that NOTHING I can see out there is slowing down…INCLUDING the Stock Market by the way…all of which leads me to expect ongoing, any-day-now headlines that will emphatically “scream”  that rates should continue moving higher, with some of those stats occasionally being the sort of eye popping surprises that absolutely TANK the Eurodollar market…and ANY ideas of “rates gradually moving higher.”

Since last week’s meeting, the perception has once again grown among Wall Street’s geniuses that we will only see one more 1/4 % increase between now and September…in spite of the fact that those same guys weren’t expecting a move in December, nor were they expecting a move in March (until a few weeks before it occurred)…I personally think that the idea of sitting here all through March, May, June, July, August and September…with all sorts of “Let’s build it” news AND strong economic growth statistics hitting the airwaves…and just seeing rates basically do nothing is just ludicrous.

I CONTINUE TO RECOMMEND BUYING PUTS IN THE SEPTEMBER EURODOLLAR CONTRACT. I MAY BE DEAD WRONG BUT I THINK THESE OPTIONS ARE JUST DIRT, DIRT CHEAP…

The WORLD, not just the USA, is on the move. Stocks markets all over the planet are pushing and making NEW highs…The last vestiges of the dark economic days from the Great Recession are well behind us and businesses everywhere are ramping up…and LOAN DEMAND IS ON THE RISE AND WILL KEEP RISING…

Give me a call if you are interested… and please do definitely give me a call if you think I am wrong…I would love to hear your reasoning.

Thanks,

Bill

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The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars