Risk specialist John Breit cites this immutable law of capital markets:
You can’t make money without taking risk.
Breit reminds us that if a trade seems both profitable and low-risk, it’s because you don’t understand the risks.
From Why Risk Managers Should Be Spymasters | Jesse Eisinger | Pro Publica
Jesse Eisinger’s interview with risk specialist John Breit highlights an issue facing Australian banks. Residential mortgages are allocated a low risk weighting — 15% to 17% because of historic performance — compared to 50% for US banks. The big four banks piled into this area because of the perceived low risk, leveraging up to 50 times capital. Risk-weighted capital ratios (around 10%) still appear healthy, but they conceal a hidden danger from the resulting housing bubble.
[Breit] despises the concept of “risk-weighted assets,” where banks put up capital based on the perceived riskiness of the assets. Inevitably, he argues, banks will “pile into” the same types of supposedly safe investments, creating bubbles that make the risks far more severe than the initial perceptions. Paradoxically, risk-weighting can leave banks setting aside the least capital to cover the biggest dangers.
“I could not be more disappointed,” he said. “The cynic in me thinks this is all in the interests of senior management and regulators to avoid blame. They may not think they can prevent the next crisis, but they then can blame the statistics.”
Read more at Why Risk Managers Should Be Spymasters – ProPublica.
Professor Minxin Pei analyzes the options facing the Chinese Communist Party:
…it appears that what informs the political thinking of China’s new leadership is the experience of the late-Soviet regime. In particular, three different leaders and their policies apparently weigh heavily on the minds of the new occupants of Zhongnanhai. Having endured a decade of political stagnation amid rapid economic growth, China’s new leaders are obviously not in a mood to try another version of the Brezhnev model, the essence of which is pretending to govern while doing nothing in reality. Yet, aware of the enormous risks of introducing democratic reforms into a sclerotic political system, they abhor the radical Gorbachev model even more.
Read more at One Soviet Leader China Could Emulate…and it’s not Gorbachev | The Diplomat.
Their problem is that the other roads lead to nowhere and eventually they will be forced to embrace democratic reform. Rather than rejecting the Gorbachev option, the CCP should analyze the process and look for ways to minimize the disruption. Gradual transition to a central governing council of 7 to 9 elected officials representing all major political parties, with the CCP initially holding the majority of seats, seems the lowest risk alternative.
The ASX 200 broke medium-term support at 4950, signaling the start of a correction for Australian stocks. Reversal of 21-day Twiggs Money Flow below zero confirms medium-term selling pressure.
Initial target for a correction is the rising trendline around 4700. Even correction back to 4500 does not disrupt the primary up-trend and would present buying opportunities for investors.
* Target calculation: 5000 + ( 5000 – 4500 ) = 5500
Spot gold is testing primary support at $1500 to $1550. Declining 13-week Twiggs Momentum below zero warns of a primary trend reversal. Failure of support at $1500 would confirm.
The daily chart shows penetration of support at $1550. Recovery above the support level would warn of a bear trap — confirmed if there is a breakout above the February high at $1620 — but follow-through below $1500 would signal the start of a bear market.
I don’t like the look of this:
Probability of gold entering a primary down-trend is rising. Watch out for bear traps, but failure of primary support at $1500 would confirm a primary down-trend.
The stronger dollar contributes to weaker gold prices. Breakout of the Dollar Index above 84.00 would signal an advance to 89.00/90.00. Rising momentum suggests continuation of the primary up-trend.
Brent Crude respected support at $106/barrel, while Nymex Crude breakout above $98/$99 would confirm a primary up-trend. Rising crude prices would inhibit the global recovery.
Commodity prices continue to diverge from stocks, with the Dow Jones-UBS Commodity Index headed for a test of support at 126. Weaker commodities suggest that the S&P 500 advance is unsustainable.
The yield on 10-year Treasury Notes retreated below 2.00%. Falling bond yields indicate the expected time horizon for low short-term interest rates is lengthening — a negative reflection on the economy.
The first line of support for $TNX is 1.70%; breach would signal another attempt at 1.40%. Bullish divergence on 13-week Twiggs Momentum indicates that a base is forming and primary support is unlikely to be broken.
The S&P 500 retreated from its 2007 high at 1575.
* Target calculation: 1530 + ( 1530 – 1485 ) = 1575
Bearish divergence on 21-day Twiggs Money Flow continues to warn of mild selling pressure. Breach of support at 1530 — and the rising trendline — would warn of a correction.
The Russell 2000 Index is stronger, having broken clear of its 2007 high at 860. A correction that respects the new support level (860) would confirm a strong primary up-trend.
While there are structural flaws in the US economy, QE from the Fed has forced investors to increase risk in search of yield. The current advance shows no signs of ending.
Mercedes Whie reports on a lecture by developmental economist Lant Pritchett:
One common belief among people working in international development is that a poor country can be changed by improving its education system, but Pritchett’s research suggests otherwise. The problem in poor countries is that they cannot make effective use of their people’s skills, Pritchett said, so giving them more skills does lead to development. Counter-intuitively, his research has shown that countries whose education system improves actually grow slower on average. He suggests that one reason for this may be that putting more educated people into a corrupt bureaucracy may result in more sophisticated corruption.
Read more at Everything you think you know about poverty is wrong | Deseret News.
Gideon Rachman points out in Financial Times that the doctrine of mutually assured destruction (MAD), employed by the West in nuclear confrontations, assumes a rational adversary:
In many respects, North Korea has replicated some of the very worst features of Maoist China: the isolation from the outside world, the labour camps, the cult of personality and the willingness to tolerate mass starvation at home. The latter is particularly chilling, when one remembers that nuclear deterrence is meant to rely on an unwillingness to accept the death of millions of your compatriots.
Read more at North Korea tests the limits of a MAD world | Business Spectator.
Ralph Benko shares an insight on US healthcare from columnist Warren Brookes on Forbes:
Brookes shared an indelible insight. He observed that it was possible to provide good health care at an affordable cost through the free market, rationing it by price. And it was possible to provide good health care at an affordable cost by the government through state agencies, rationing it by thoughtful policy. And that America had managed to create a monstrous hybrid of the two, the worst possible system: lousy care at unaffordable prices.
Read more at Mitch McConnell Prepares To Give Barack Obama The Political Shellacking Of A Lifetime – Forbes.
Izabella Kaminska made a strong argument on FT Alphaville last year for the RBA to lower interest rates and weaken the Australian Dollar to protect manufacturing and export industries:
Australia’s current account deficit coupled with a deeply negative net external debt position both provide strong fundamental impetus for currency weakening. Should the RBA want to engineer currency depreciation, lower interest rates are likely to be more than enough. Indeed, even if interest rates decline only gradually to reflect a structurally slowing economy there are plenty of fundamental reasons for the Australian dollar to weaken.
The case for lower interest rates still holds true but the RBA is obviously concerned by signs of recovery in housing prices that could exacerbate the existing property bubble. Robert Gottliebsen at Business Spectator reports:
In less than three months the market price of a bottom of the range Meriton inner-Sydney apartment has risen 6 per cent from about $500,000 to around $530,000……According to Meriton’s Harry Triguboff, local buyers have jumped from 15 to 40 per cent of the market.
There is a solution. The RBA can lower interest rates provided it simultaneously introduces macroprudential steps similar to those being considered by the RBNZ: increase the amount of capital banks must set aside to cover potential losses from high loan to valuation ratio (LVR) home loans. That would make high LVR loans more expensive and discourage property speculation, taking some of the heat out of the housing market.
