Don’t Stop Now! (Part 1)

Every headline in the financial press this morning says the same thing. The Fed’s “Great Pause” has now commenced.

The Federal Reserve raised interest rates by a quarter point—and could be done.

Well, they might be done “raising” rates, but they shouldn’t be in the rate setting business—up, down or sideways— in the first place. That’s because market capitalism doesn’t work if financial asset prices are being pegged artificially and falsely by a 12-man monetary politburo rather than the vast throng of suppliers and users of funds in the global marketplace.

So to reprise yesterday’s graph, here is the madness that rate pegging has led to over the last 22 years.

To wit, the Fed has made overnight money so ungodly cheap that it has distorted, tortured and twisted the very warp and woof of the entire financial system. All financial asset prices have been drastically falsified because 221 months of negative carry costs in real terms have triggered reckless leveraged speculations, rampant options chasing and dangerous financial asset arbitrages like never before.

Inflation-Adjusted Fed Funds Rate Since October 2001

Alas, none of this is stable or sustainable. So here we are with another day in which the stock market is open, and like clockwork a new batch of regional banks are hitting the skids.

% Stock Price Change Today/From Recent Peak:

• PacWest: -50%/-93%;

• First Horizon: -33%/-55%;

• Western Alliance: -40%/-84%;

• Zions Bancorp: -12%/-73%

In all, this batch of plummeting regional banks posted a combined market cap of just $10.6 billion at today’s close, down from $40 billion at recent valuation peaks. And again, the collapse is not because trailing earnings have cratered.