Monday, March 18, 2019

The SBA and PROfligate

PROF-li-git, -gayt
1. Recklessly extravagant; wasteful.
2. Given over to dissipation; dissolute.
From Latin profligatus, past participle of profligare (to strike down, to ruin), from pro- (forth, down) + fligere (to strike).


The profligate government shutdown had a frangible impact as political cunctation caused an allision of SBA 7A) loan approvals.

They declined over 8% compared to SBA 7(a) loan approvals for the same period a year ago.

Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function.  It came out to a statistically significant 0.86.




SBA 504 Loan Debenture Rate for March

For 20 year debentures, the debenture rate is only 3.20% but note rate is 3.25325% and the effective yield is 4.586%.

For 25 year debentures, the debenture rate is only 3.42% but note rate is 3.46% and the effective yield is 4.741%.


Profligacy has  spread like procumbent pearlwort.*

The economy added just 20,000 new jobs last month, the smallest gain since September 2017.  The biggest drop-off in hiring in February took place in construction, where employment fell 31,000 after a 53,000 increase in January. The sharp swing in construction employment is likely evidence that government statisticians had trouble with seasonal adjustments.  That’s what happens when you have to take time off because of a government shutdown.

The jump in construction jobs in January was fueled by construction on new homes, known as housing starts, which leapt nearly 19% in January, rebounding from a big drop at the end of 2018. Housing starts rose to an annual pace of 1.23 million, according to a Commerce Department report delayed by the partial government shutdown earlier this year.

The increase in housing starts is being driven by an increase in the cost of housing.  Consumer inflation was a touch slower than expected in February. Looking through core components, Owner's Equivalent Rent (the largest metric used to gauge the cost of shelter) was up 0.35% on the month, now 3.63% annualized over the last three months vs. 3.22% over the last six months.

One of the Fed’s favorite leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.  Capacity utilization fell slightly to 78.2% in February from 78.3% in the prior month.   The month before capacity utilization had plunged over ½ percent to the lowest level since last July.

Keep your eyes and ears open for this week’s meeting by the Federal Reserve on monetary policy.

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years.

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:
DEC19- 2.59
DEC21- 2.35
DEC22- 2.43
DEC23- 2.56
DEC24- 2.72

What does all this mean?

I don’t know.

At the first meeting of the year on monetary policy, the Fed did not change interest rates.  They did however remove language in their statement on the expectation for “further gradual increases” to the fed funds rate.  No more further gradual increases.

At their second meeting of the year, it still looks like there will be no further gradual increases and an enervation of any splenetic presentiment of a bigly recrudescence in interest rates.


*If you don’t remember what procumbent pearlwort is see my prolegomenon from September 10th.

If you don’t remember what a prolegomenon is, go back to January 14th.

I don’t really use these words in real life because I can’t pronounce them.

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