The Aussie Dollar is testing its major support level at $0.95/$0.96. Declining 13-week Twiggs Momentum warns of a long-term down-trend. Breach of $0.95 would offer a target of $0.80.
* Target calculation: 0.95 – ( 1.10 – 0.95 ) = 0.80
Bearish signs for stocks
10-Year Treasury yields respected support at 2.05/2.10% with a key reversal (or outside reversal) on Friday, signaling a primary up-trend and possible test of 4.00% in the next few years. The tall shadow on Friday’s candle, however, warns of another test of the new support level before the trend gets under way. Only breakout above 4.00% would end the 31-year secular bear-trend.
The S&P 500 is headed for a test of the lower trend channel at 1600, declining 21-day Twiggs Money Flow indicating medium-term selling pressure. Breach of support at 1600 would warn of a correction.
The VIX is rising, but only breakout above 20 would indicate something is amiss.
Japan’s Nikkei 225 Index ran into huge selling pressure, falling to 13400 by midday Monday. Expect a test of support at 11500, but the primary trend remains upward. Rising industrial production indicates that Abenomics is starting to take effect.
The UK’s FTSE 100 also ran into selling pressure — at its 2007 high of 6750 — with bearish divergence on 13-week Twiggs Money Flow. Expect a correction to test 6000, but the primary trend remains upward.
Bearish divergence on the Shanghai Composite Index (21-day Twiggs Money Flow) indicates medium-term selling pressure. Expect another test of primary support at 2170. Penetration of the rising trendline would confirm. Breakout above 2460 would complete an inverted head and shoulders reversal (as indicated by orange + green arrows), signaling a primary up-trend, but that appears some way off.
Impact of QE (or lack thereof) is reflected by excess reserves
JKH at Monetary Realism writes:
….there is a systematic tendency in the blogosphere and elsewhere to misrepresent the impact of QE in a particular way in terms of the related macroeconomic flow of funds…… Most descriptions will erroneously treat the macro flow as if banks were the original portfolio source of the bonds that are being sold to the Fed, obtaining reserves in exchange. This is not the case. A cursory scan of Fed flow of funds statistics will confirm that commercial banks are relatively small holders of bonds in their portfolios, especially Treasury bonds. The vast proportion of bonds that are sold to the Fed in QE originate from non-bank portfolios……. Many descriptions of QE instead erroneously suggest the strong presence of a bank principal function in which bonds from bank portfolios are simply exchanged for reserves. In fact, for the most part, while the banking system has received reserve credit for bonds sold to the Fed, it has also passed on credits to the accounts of non-bank customers who have sold their bonds to the banks. This is integral to the overall QE flow of bonds.
There is a simpler explanation of what happens when the Fed purchases bonds under QE. Bank balance sheets expand as sellers deposit the sale proceeds with their bank. In addition to the deposit liability the bank also receives an asset, being a credit to its account with the Fed. Unless the bank is able to make better use of its asset by making loans to credit-worthy borrowers, the funds are likely to remain on deposit at the Fed as excess reserves — earning interest at 0.25% per year. Excess reserves on deposit at the Fed currently stand at close to $1.8 trillion, reflecting the dearth of (reasonably secure) lending/investment opportunities in the broader economy.
Read more at The Accounting Quest of Steve Keen | Monetary Realism.
Half a million investors have walked away from stocks, ASX finds | The Australian
Andrew Main at The Australian writes (May 21st) that the number of Australians who own stocks decreased by more than half a million between 2010 and 2012. According to an ASX survey, total share ownership (including managed funds) peaked at 55 per cent in 2004 before dropping to 38 per cent by 2012.
One of the biggest losers in the survey was the managed funds industry, which copped a shellacking through the GFC for the fact that its charges were in many cases out of line with the indifferent performance provided by fund managers. The percentage of investors who had equities exposure through managed funds fell from 32 per cent in 2004 to only 12 per cent in 2012. The survey concluded that a lot of investors had decided that they may be able to do better as investors by going direct and not paying a manager.
Read more at Half a million investors have walked away from stocks, ASX finds | The Australian.
Sir Mervyn King: Public are right to be angry at banks | BBC News
From BBC News:
People have “every right to be angry” with banks for the UK’s financial crisis, the outgoing Bank of England (BoE) governor Sir Mervyn King says…..”But this crisis wasn’t caused by a few individuals, it was a crisis of the system of banking we had allowed to grow up. “It’s very important we don’t demonise the individuals but we do keep cracking on with changing the system.”
Read more at BBC News – Sir Mervyn King: Public are right to be angry at banks.
Scott Sumner: “It’s Complicated: The Great Depression in the US” | The Market Monetarist
Lars Christensen writes of a 2010 lecture by Scott Sumner did at Oxford Hayek Society on the causes of the Great Depression.
Scott does a great job showing that policy failure – both in the terms of monetary policy and labour market regulation – caused and prolonged the Great Depression. Hence, the Great Depression was not a result of an inherent instability of the capitalist system.
Unfortunately policy makers today seems to have learned little from history and as a result they are repeating many of the mistakes of the 1930s. Luckily we have not seen the same kind of mistakes on the supply side of the economy as in the 1930s, but in terms of monetary policy many policy makers seems to have learned very little.
Click to open video on separate page 1:06:12
Read more at Scott Sumner: “It’s Complicated: The Great Depression in the US” | The Market Monetarist.
Clarke and Dawe – Stand Up the Boy Who Did That [video]
“A Voter” Originally aired on ABC TV’s 7.30: 22 Jun 2011
Tweets by mrjohnclarke
Clarke and Dawe – What went wrong? [video]
“Jeff Demisson, Political Scientist” Originally aired on ABC TV’s 7.30: 16 Aug 2012
http://www.mrjohnclarke.com
Clarke and Dawe: A Fresh (Economic) Perspective [video]
“Economics Lecturer Number 14,000,006” Originally aired on ABC TV: 30 May 2013
http://www.mrjohnclarke.com
Too-big-to-fail Q&A. Get the facts | Sober Look
Interesting pro-bank piece by Sober Look. I have added my comments in italics.
The debate around “too big to fail” of the US banking system is often infused with political rhetoric and media hype. Let’s go through some Q&A on the subject and discuss the facts.
Q: Did large banks take disproportionate amounts of real-estate related risk vs. smaller banks prior to the crisis?
A: No. That’s a myth. Smaller banks were much more exposed to real estate (see discussion).
The issue is not real estate lending, but risky lending.
Q: Who had their snouts in the sub-prime trough, big banks or small banks?
A: Big banks.
Q: Which “too big to fail” banks were directly bailed out by the US federal authorities during the 2008 crisis?
A: While hundreds of banks were forced to take TARP funds, only Citigroup (among US banks) received an explicit bailout to keep it afloat. Note that Bear Stearns (and Lehman), AIG, GM/GMAC, Chrysler, Fannie and Freddie were not banks. Neither was GE Capital and other corporations who relied on commercial paper funding and needed the Fed’s help to keep them afloat. Wachovia may have become the second such large bank if it wasn’t purchased by Wells.
Q: Which “too big to fail” banks were indirectly bailed out by the US federal authorities during the 2008 crisis?
A: All of them
Q: Why did Citi fail in 2008?
A: Citi ran into trouble because of a massive off-balance-sheet portfolio the firm funded with commercial paper. In late 2007, when the commercial paper market dried up, Citi was forced to take these assets onto its balance sheet. The bank was not sufficiently capitalized to absorb the losses resulting from these assets being written down.
Citi was not the only TBTF bank that was inadequately capitalized to deal with losses.
Q: What were the assets Citi was “warehousing” off-balance-sheet?
A: A great deal of that portfolio was the “AAA” and other senior tranches of CDOs that Citi often helped originate (including mortgage related assets). Rating agencies were instrumental in helping banks like Citi structure these assets and keep them off balance sheet in CP conduits.
Q: Who paid the rating agencies?
A: The TBTF banks.
Q: Why did Citi (as well as many other banks) hold so much off-balance sheet?
A: Because they received a significantly more favorable capital treatment by doing so (the so-called “regulatory capital arbitrage” – see discussion from 2009).
Q: Did Citi break any state or federal laws by doing what it did?
A: No. All of this was perfectly legal and federal authorities were aware of these structures.
We need to fix the law so this cannot happen again.
Q: Did derivatives positions play a major role in Citi’s failure? Were other large US banks at risk of failure due to derivatives positions?
A: No. That’s a myth. The bulk of structured credit positions (tranches) that brought down Citi were not derivatives (just to be clear, CDOs are not derivatives).
Q: What has been done since 2008 to make sure the Citi situation doesn’t happen again?
A: The US regulators now have the ability to take over and manage an orderly unwind of any large US chartered bank. Banks are required to create a “living will” to guide the regulators in the unwind process. The goal is to force losses on creditors in an orderly fashion without significant disruptions to the financial system and without utilizing taxpayer money.
Large banking institutions are now required to have more punitive capital ratios than smaller banks.
Capital loopholes related to off-balance-sheet positions have been closed.
Stress testing conducted by the Fed takes into account on- and off-balance sheet assets, forcing banks to maintain sufficient capital to be able to take a hit. US banks more than doubled the weighted average tier one common equity ratio since the crisis (see attached).
Dodd-Frank has been “nobbled” by Wall Street lobbyists. Stress tests by captive regulators are not to be trusted. Increase transparency by supporting the Brown-Vitter bill.
Q: Do large US banks have a funding advantage relative to small banks?
A: Not any longer. According to notes from the meeting of the Federal Advisory Council
and the Board of Governors (attached – h/t Colin Wiles @forteology), “Studies point to a significant decrease in any funding advantage that large U.S. financial institutions may have had in the past relative to smaller financial institutions and also relative to nonfinancial institutions at comparable ratings levels. Increased capital and liquidity, in addition to meeting the demands of many regulatory bodies, has largely, if not entirely, eroded any cost-of-funding advantage that large banks may have had.”
And we should believe them?
Q: Why do TBTF banks dominate the financial landscape?
A: Because of their taxpayer-subsidised funding advantage.
Q: What is the downside of breaking up banks like JPMorgan?
A: Large US corporations need large banks to provide credit and capital markets access/services (Boeing is not going to use Queens County Savings Bank). Without large US banks, US companies will turn to foreign banks and will be at the mercy of those institutions’ capital availability and regulatory frameworks. Foreign banks will also begin dominating US capital markets primary activities (bond issuance, IPOs, debt syndications, etc.) And in an event of a credit crisis foreign banks (who are to some extent controlled by foreign governments) will give priority to their domestic corporations, putting US firms at risk.
Agreed. Large corporations need large banks — or at least syndicates of mid-sized banks. Brown-Vitter does not propose breaking up any TBTF banks, merely requires them to clean up their balance sheets and carry adequate capital against risk exposure.
Q: How large are US largest banks relative to the US total economic output? How does it compare to other countries?
A: See chart below (the chart contrasts bank size as percentage of GDP of Swiss and UK banks to US banks)
Swiss and UK banks have global reach so rather compare absolute size rather than relative to GDP where the bank is headquartered.
So before jumping on the “too big to fail” bandwagon, get the facts.
via Sober Look: Too-big-to-fail Q&A. Get the facts.
I had to smile at the From our Sponsors Google ad at the end of the article, suggesting I open a business account with one of the major banks.