☀️☕ Banks making big money off your money!

8 February 2023

Happy Wed🐪esday!

US large-cap S&P 500 closed 1.29% UP ▲ Tech-heavy Nasdaq Composite closed 1.9% UP ▲ Pan European STOXX Europe 600 closed 0.3% UP ▲ HK’s Hang Seng Index closed 0.36% UP ▲ Japan’s Nikkei 225 closed 0.03% DOWN 🔻

📝 Focus

Banks making big money off your money!

📊 In the Markets

US Rates could be Higher for Longer! Breaking (old) news (US economy)The (old) Bing is dead. Long live the Bing! (Microsoft, Google)Softbank Vision Funds blow another US$5.5 billion

📖   MoneyFitt Explains

🎓The Fed (and its DUAL MANDATE) 

📝 Focus

Banks making big money off your money (and your pain)!

In the UK, CEOs of the UK arms of the four leading High Street banks (Barclays, HSBC, Lloyds and NatWest) were grilled about the effect of rising rates on their customers by the House of Commons Treasury select committee and the banks’ rising net interest margins (the difference between what they make in loans and what they pay out to depositors.)

The average five-year fixed-rate mortgage interest rate almost doubled to 5.34% from a year earlier, according to Moneyfacts, while most easy-access savings accounts currently pay less than 1% in the UK, according to finance website Moneyfacts.

“All of you as bank CEOs seem to be much better at putting up interest rates on borrowers on mortgages than giving back some money to those who are savers”

When asked if their customers didn’t shop around for better savings rates due to “inertia”, the bankers fumbled with some painful verbal gymnastics (“I think they ​​don’t necessarily have the confidence to figure out what the right option for them is”) but the underlying answer was basically: Yup, which is super lucky for us bankers.

UK interest rates were hiked for the 10th time in a row last week, a 0.50% hike bringing rates up to 4.0%, a 15-year high, though possibly peaking given the dire economic outlook for the UK. 

Politicians from the UK and elsewhere will rightly call attention to what are likely to be storming results that their commercial banks will report in a rising rate environment, but the reality for the banking sector is more nuanced:

The Interest Rate Trade-off for Banks (a mini-explainer)

There is a trade-off for commercial banks when interest rates go up. The effect can be bad for them because

New loans can fall (higher interest rates mean a higher cost for borrowers)An economic slowdown can lead to losses from some existing borrowers, with more unable to make either interest payments or repay the principal borrowed. Banks will also usually deduct “provisions” against future loan losses from their revenues. Fees, including those on investment banking deals (if any), also tends to be lower in a slowing economy.

The positive side, however, is on pricing:

Spreads, the interest rate it lends at (in loans to customers) vs the amount it borrows at (from its depositors), tend to be wider. This increases net interest margins and, therefore, net interest revenue, the difference in dollar terms between how much a bank earns on its loan book and what it pays out for deposits.When rates go down, banks benefit because more deposits are short-term and go down quickly, compared to loans which take longer to change their rates. But when rates go up, banks can often take their own sweet time to raise deposit rates, so they don’t lag the higher loan rates by much, if at all. (Especially large banks with deposit franchises).

📊 In the Markets

US Rates could be Higher for Longer! Breaking (old) news

In a highly anticipated speech, Fed Chair Jay “Softish Landing” Powell spoke to the Economics Club of Washington and said the Fed 🎓 might have to raise interest rates more than investors are expecting because the still blazing red-hot labour market, as seen in last Friday’s blowout non-farm payroll data, will probably mean taming inflation will take a “significant period of time… The reality is we’re going to react to the data.” 

“I think there has been an expectation that (inflation) will go away quickly and painlessly, and I don’t think that’s at all guaranteed. That’s not the base case… The base case, for me, is that it will take some time. And we will have to do more rate increases and then we’ll have to look around and see whether we’ve done enough.”

This would normally be a cue for markets to collapse in tears, but in the mysterious and sometimes baffling way of Wall Street, this “hawkish” tone of a continued aggressive “higher for longer” interest rate policy was not as “hawkish” as traders had been fretting about since last Friday.

Apparently, *the sky isn’t falling after all*, so traders bought markets aggressively into the close, especially rate-sensitive growth names (see last Friday’s MFM on interest rates and tech.) There’s got to be a joke somewhere about Chicken Little and hawks, or something.

Actually, Powell has been singing the same tune for several months, as has most of his colleagues at the Fed. Why? Repeat after me: The Federal Reserve has a DUAL mandate. This means, in the words of the St. Louis Fed: “pursuing the economic goals of MAXIMUM EMPLOYMENT and PRICE STABILITY. It does this by using various policy tools to manage financial conditions that encourage progress toward its dual mandate objectives—in other words, conducting monetary policy.” In other words, it will deal with inflation in any way it can and doesn’t directly care about what happens to economic growth, provided unemployment doesn’t shoot through the roof as a result. 

As Janet Yellen, his predecessor at the Fed and now US Treasury Secretary, just said, “You don’t have a recession when US unemployment is at a 53-year low of 3.4%.” Combined with an apparent easing of the rate of wage growth, Powell has an almost free hand to focus on just the tackling inflation part, with a sharp (even, er, hawkish?) eye on wage-price spiral pressures. Hence “higher for longer.” Still.

The (old) Bing is dead. Long live the Bing! 

“It’s a new day in search… Rapid innovation is going to come, in fact a race starts today.”

A day after Google’s apparently panicky release of Bard, its slightly sad response to Microsoft-backed OpenAI’s sensational ChatGPT, Microsoft announced the Generative Artificial Intelligence-led overhaul of Bing, its search engine launched in 2009, currently with a feeble 3% market share (vs 93% with incumbent Google, launched in 1998.)

The new Bing is available on desktops now, and is, at first glance, quite pleasing, with a big, friendly chat-like search box instead of a line to ask anything in, and then in the results page, search results running down the page as usual but with a box running down the right with ChatGPT running IF for things like shopping lists and travel itineraries. Otherwise, it looks the same (if anyone can actually remember what Bing results pages looked like yesterday). The hybrid look is to try and balance out the potential ground-breaking chat interface of ChatGPT with the need to generate search-based ad revenues (particularly the 7x higher processing cost in $-terms of generating AI results.) 

The “full experience” is something you’d need to join a waiting list for (we did!), and a mobile version will be out soon. It will reportedly let users “toggle” between a chat interface and a traditional search results page, like what search startup you.com (“The AI Search Engine You Control”) already does.

– Image credit: Bing
– Image credit: Bing

Meanwhile, China’s version of Google (created behind the Great Firewall of China, which blocks Google, Facebook and others) Baidu is also investing heavily in generative AI with a range of tools and technologies in this area, such as their ERNIE-ViLG language model and a chatbot service like ChatGPT, with natural conversations. (Is Baidu’s language model named after Google’s family of masked-language models known as Bidirectional Encoder Representations from Transformers, or BERT? The universal language of Nerd.)

No, the MFM hasn’t been taken over by robots intent on writing only about generative AI.

Softbank Vision Funds blow another US$5.5 billion

The cumulative performance of SoftBank’s Vision funds continued to plummet as of the end of last year, according to Softbank, one of the world’s biggest tech investors. CEO Masayoshi Son mysteriously (not really) decided to skip presenting the results this time around. SoftBank reported an investment loss of ¥731.94bn ($5.5bn) for the December quarter, compared with a ¥1.38tn loss in the previous quarter for its two Vision Funds and a Latin America fund. On a year-over-year basis, Vision Fund I was down 4.4% and Vision Fund II was down 6.2%. ​

– Image credit: Softbank

SoftBank Group was founded in 1981 by Masayoshi Son when he was just 24. Initially, the company focused on software distribution, but later expanded into various sectors, including telecommunications and technology, but the breakthrough was acquiring the Japanese arm of Vodafone in 2006, making it one of the largest mobile phone operators in Japan. In the following years, the company continued to make investments in technology companies, such as Yahoo Japan and Alibaba Group. In 2017, the company established the SoftBank Vision Fund, which has made significant investments in tech startups, including Uber and WeWork. The Vision Fund has also been a major player in the tech industry, making large investments in companies such as ARM Holdings (which it privatised, but will list again somewhere, sometime) and Nvidia. Despite (some massive) losses the Vision Fund has continued to invest in the tech sector and remains one of the largest technology-focused investment funds in the world.

📖 MoneyFitt Explains

🎓 The Fed 

The Federal Reserve System is the central bank of the United States. It is independent of the government even though the Chair is appointed by the President at the time and it is accountable to Congress. It’s made up of twelve individual banks, but the main thing you should watch out for is the policy of the FOMC or the Federal Open Markets Committee, which sets the interest rate.It meets eight times a year, regularly sending Wall Street into a speculative frenzy, because the decisions made regarding interest rates can have such large effects on the real economy and on asset markets.The main thing to remember is that, unlike most independent central banks around the world, the Fed has a “dual mandate”, meaning that not only does it have to keep inflation under control (meaning around 2%) through all means necessary, it is also has to seek “maximum sustainable employment”… not meaning zero unemployment, but a level that is neither a boom nor a bust rate of (un)employment.

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