In this morning’s The Gartman Letter, analyst Dennis Gartman makes a humorous, yet completely true comparison of bankers and the Federal Reserve to Kevin Bacon and his famous line from Animal House:
The Gartman Letter: “THANK YOU SIR, MAY I HAVE ANOTHER:” These were amongst Kevin Bacon’s first words in movie land, uttered when he appeared in that critically acclaimed movie, Animal House, as he was being paddled by an upper-classman in his fraternity for a minor infraction of fraternity rules. “Thank you Sir, may I have another” launched a career. American bankers may be saying the same thing to the Federal Reserve Bank these days as they are the beneficiaries of that greatest of all stimulus programs specific to banks: the positively sloped yield curve.
As we have said many times in the past, nothing turns banking idiots into banking geniuses more resolutely than does a positively sloped curve, for when borrowing short and lending long when the curve is positive, every minute, every hour, every day, every week, every month the banks “earn” the carry. Bad lending decision in, and bad lending decision out, all are bailed out by the relentless accretion of this positive carry. It is a joy and a wonder to behold, and it has bailed out more bankers from ignominy and bad decisions than any other economic force we know of.
Just to put the numbers to it to show how the curve has steepened in the past year, allowing us to consider that o/n funding costs were effectively zero a year ago and remain zero now, one year ago the o/n-5 year “carry” was approximately 175 bps, and now it remains there now; but the o/n-10 year “carry” has widened from 300 bps to approximately 325, and the o/n-30 year “carry” has gone out from 350 bps to 425 and is widening.