From Latin prolixus (extended, poured), from liquere (to flow),
TIP OF THE WEEK
Prolix profligate promulgations proliferate over variable interest rates.
A SBA 7(a) loan with a variable rate tied to prime should adjust on a calendar quarterly basis. That benefits both the borrower and the lender.
Because 7(a) loans are fully amortizing over long terms, increases in interest rates do not dramatically increase the monthly payment.
For example, a $100,000 SBA loan with a variable rate of PRIME plus 2.75 resulting in an interest rate of 6.75 amortized over 10 years would have a monthly payment of $1,148.
If interest rates rise another 1% resulting in a rate of 7.75% the monthly payment is $1,200, an increase of $52.
Another 1% rise in rates would cause the monthly payment to now be $1,253, an increase of roughly $53.
A 2% increase in interest rates is a 30% jump but payments only went up 9%.
The impact is more pronounced with 7(a) loans with 25 year terms since more of the monthly payment goes towards interest and not principal.
In the above examples, if the loan had a 25 year amortization, payments would have increased by almost 20%.
PRIME RATE= 4.00%
SBA 504 Loan Debenture Rate for May
For 20 year debentures, the debenture rate is only 3.82% but note rate is 3.88% and the effective yield is 5.061%.
For 25 year debentures, the debenture rate is only 3.94% but note rate is 3.98% and the effective yield is 5.119%.
AHEAD OF THE YIELD CURVE
With no prolixity, the Federal Reserve Open Market Committee announced that it raised its key short-term interest rate by a half percentage point Wednesday, its largest hike since 2000.
Its official statement came in at 366 words. The January statement after its prior meeting was at a prolix 420 words.
Most prospicient was its prognostication that “ that ongoing increases in the target range will be appropriate.”
Nobel Prize winning economist Milton Freidman had promulgated that “inflation is always and everywhere a monetary phenomenon,” and said central bankers should prevent the supply of money from growing faster than economic output.
The growth rate of all the dollars in circulation (“M2 Money Supply”) soared a historic record 27% in 2020.
To put that in perspective, this increase in M2 Money Supply is the biggest jump in America’s history. That is bigger than the Financial Crisis of 2007-2008 (10%), bigger than World War II (18%), and bigger than FDR’s stimulus to fight the Great Depression (10%).
Most of the damage occurred in the spring and summer of 2020.
Here is a new chart reflecting the M2 Money Supply percent change quarterly:
To put that into perspective, here is another chart reflecting monthly change in M2 in billions of dollars:
In March, April and May of 2020, the supply of money increased roughly $2.4 trillion.
It is not all the Federal Reserve’s fault.
Most of the increase came from fiscal stimulus, not Federal Reserve policy moves.
The Treasury Department pitched in by borrowing trillions to send stimulus checks to most Americans. Stimulus spending sent both the FY 2020 deficit and the national debt to all-time highs. Spending represented a jump of more than $2 trillion from the previous year, a 47% increase. The increased government spending combined with declining revenue resulted in more than $3.1 trillion added to the national debt.
So what does this all mean?
How much higher will interest rates go?
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 plus years.
The December 2022 implied rate is now at 3.22% up from 3.00% just last month and up from only 0.17% in October. The December 2023 implied rate is at 3.45%
Keep your eyes and ears open for this week’s auction of 30 year Treasury bonds. Last month’s auction was considered average, with demand for the debt at 2.3 times the bonds on sale even with the average of the past 12 months but well short of the 2.46 in the March auction. The yield on the 30-year Treasury bond was down 2.7 basis points to 2.800%. As of last Friday, the 30 year yield was 3.23%.
The yield curve is not close to inverting. According to the Federal Reserve Bank of Cleveland, using past values of the slope of the yield curve and GDP growth to predict future growth and the probability of recession, the odds of a recession have actually decreased. The probability of a recession in 1 year is at only 2.7%.
There's no way to talk about prolix without being redundant, verbose, and wordy. That's because the word is a synonym of all of those long-winded terms. Of those words, prolix is the one most likely to suggest unreasonable and tedious dwelling on details. It derives from prolixus, a Latin term meaning "extended" or "copious." Prolixus originated from a combination of the prefix pro- (which means "forward") and the past participle of liquēre, a verb meaning "to be fluid." True to that history, something that is prolix flows on and on.
Liquere is also the source of words such as liquid, liquor, licorice. Now you see the connection -- why consuming liquor makes people prolix.
All this brings to mind the proverb that even fools are thought wise if they keep silent.
Maybe I should shut up.