Industrial production across the 17 countries that share the euro increased at an unexpectedly strong pace in August and for the second straight month.The increase is partly a result of big output increases in Ireland and Portugal, two countries that received bailouts from the European Union and the International Monetary Fund.The European Union’s official statistics agency Eurostat said Wednesday industrial production rose by 1.2% from a month earlier and was up 5.3% from a year earlier.
Too-big-to-fail is here to stay
Lehman Brothers’ collapse in 2008 was intended to intended to teach financial markets that they could not rely on an implicit government guarantee for too-big-to-fail (TBTF) banks. What bondholders learned was the opposite: never again would an institution of that size be allowed to collapse because of the de-stabilizing effect on the entire financial system.
Rescue of Dexia by French, Belgium and Luxembourg governments is the latest example. Bond-holders received 100 cents in the dollar/euro. Markets are just too fragile to consider giving bondholders a haircut. Denmark earlier had to back down from forcing haircuts on bondholders when Danish banks found themselves shut out of funding markets. [WSJ]
Frequent calls for TBTF institutions to be broken up have proved ineffective. Instead the problem has grown even larger with post 2008 rescue/take-overs of Countrywide and Merrill Lynch (BofA), Bear Stearns and WaMu (JPM), Lehman (Barclays), and Wachovia (Wells Fargo) reinforcing Willem Buiters’ survival of the fattest observation.
Proposals to reduce systemic risk through adoption of the Volcker Rule, which would prevent banks form trading for their own account, are proving difficult to implement. The 298-page first draft offers few clear definitions of restricted activities, instead calling for suggestions or feedback.[Bloomberg] Drafters should consider turning the rule around, offering a list of approved activities that banks can pursue, rather than attempting to define what they cannot. I have great respect for banks’ ability to find loopholes in any restrictive list.
The Rule on its own, however, cannot protect taxpayers from future bailouts. It does not prevent banks from over-lending if there is another bubble. There is only one solution: increase capital ratios — and apply similar ratios to securitized assets. Increases would have to be gradual, as some banks could respond by shrinking assets rather than raising capital — which would have a deflationary effect on the economy. Changes would also have to be sensitive to the economic cycle. The easiest way may be to set a long-term target (e.g. 20% Tier 1 + 2 capital by 2030) and leave implementation to the central bank as part of its monetary policy.
Together with the Volcker Rule, increased capital ratios are our best defense against a recurrence of the GFC.
The Next Shoes to Drop | Steve Saville | Safehaven.com
China is experiencing an “Austrian” boom-bust cycle writ large, with the boom phase possibly nearing its demise. The extent of mal-investment is unprecedented in modern times. The most obvious signs of this mal-investment are new cities with almost no inhabitants and massive newly-constructed shopping malls with almost no tenanted shops, but the problem runs much deeper than the unoccupied buildings. The core of the problem is that the banking industry is completely dedicated to serving the State, and as a consequence a lot of bank lending is done with total disregard for economics.
Considering that most analysts and investors believe that China is making rapid REAL economic progress and that China’s economy will continue to strengthen, one of the next shoes to drop could be the general realisation that China’s economy is structurally unsound.
Has The Stock Market “Thrusted” Off A Bottom? | The Big Picture
We decided to take a further look at the highlighted statement above to see if we have hit a ‘significant bottom’ in the stock market after 3 consecutive daily rallies of 1.75% or more last week.
……A lot of people have been talking about this pattern. The implication is this represents a thrust off a low and the start of a significant move higher. History shows this has only been the case when this pattern results in a breakout of the previous range (see 1984). When this thrust results in a move back into a defined range (see 2002), it has little meaning. When the market only barely broke out (see 1974), the market churned sideways for months before moving higher.
Has the market’s trend changed? For now, the answer appears to be “no.” Until a breakout is established, we would not get that excited about the three consecutive daily rallies of 1.75% or more.
Source:
Bianco Research, LLC.
October 10, 2011
via Has The Stock Market “Thrusted” Off A Bottom? | The Big Picture.
ASX 200 fails to respond to Dow surge
Dow Jones Industrial Average broke its declining trendline Monday, surging strongly, but light volume indicates hesitancy on the part of buyers.
* Target calculation: 11000 – ( 12000 – 11000 ) = 10000
Asian stocks reacted with enthusiasm but Shanghai, after gapping up at the open, fell sharply, giving up most of its gains. The ASX 200 response was muted, with a narrow range and low volume indicating hesitancy from buyers. Reversal below Monday’s low of 4150 would signal another test of 3850. Failure of support would offer a target of 3600*.
* Target calculation: 3900 – ( 4200 – 3900 ) = 3600
New Zealand
The NZX 50 Index broke through resistance at 3350 to signal an advance to 3450, with a long-term target of the 2011 high. 13-Week Twiggs Money Flow above zero indicates buying pressure.
* Target calculation: 3350 + ( 3350 – 3100 ) = 3600
China and South Korea
The Shanghai Composite Index is testing support at the 2010 low of 2350. 13-Week Twiggs Money Flow below zero warns of selling pressure. Failure of support is likely and would offer a long-term target of 1800*.
* Target calculation: 2400 – ( 3000 – 2400 ) = 1800
Hang Seng Index rallied off support at 16000 and 13-week Twiggs Money Flow above zero indicates short/medium-term buying pressure. Expect a rally to test 19000, but the primary trend remains down and respect of resistance would indicate another test of 16000*.
* Target calculation: 19 – ( 22 – 19 ) = 16
South Korea’s Seoul Composite Index is headed for a test of its upper trend channel. Bullish divergence on 13-week Twiggs Money Flow suggests a bear market rally. Expect another test of 1900. But the primary trend remains down and failure of support at 1650 would warn of a decline to 1500*.
* Target calculation: 1700 – ( 1900 – 1700 ) = 1500
China buys its banks – macrobusiness.com.au
Central Huijin Investment Ltd, an arm of China’s sovereign wealth fund, bought shares in four major Chinese State-owned banks on the secondary market on Monday, the company told Xinhua.
The four banks include the Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC) and China Construction Bank (CCB), according to the company.
The move is aimed at supporting the steady operation and development of major financial institutions and stabilizing their stock prices, the company said.
via China buys its banks – macrobusiness.com.au | macrobusiness.com.au.
Could be the first step in a bailout.
India Sensex and Singapore STI
Bullish divergence on India’s SENSEX 13-week Twiggs Money Flow suggests a double bottom reversal. Breakout above 17200 would confirm, signaling a bear market rally with a target of 18600*. Note that the primary down-trend would remain downward.
* Target calculation: 17200 + ( 17200 – 15800 ) = 18600
Singapore’s Straits Times Index recovered above short-term resistance at 2650 after a sharp fall over several weeks. We could see a bear market rally to 2900, but the primary trend, as signaled by declining 63-day Twiggs Momentum, remains in a strong down-trend.
* Target calculation: 2700 – ( 2900 – 2700 ) = 2500
Median U.S. Household Income Continues to Fall after the Recession – Financial News
Gordon W. Green Jr. and John F. Coder, former Census Bureau officials, wrote a report based on Census data that explored household incomes during and after the recession. They found that starting in June 2009, at the official end of the recession, up to June 2011, the inflation-adjusted median household income fell 6.7 percent to $49,909.
This is a significant drop from the 3.2 percent decrease experienced between Dec. 2007 and June 2009–the official period of the recession as determined by the National Bureau of Economic Research.
Researchers found a possible reason for this is a freeze in pay, which has remained stagnant or even dropped in many cases–a large number of people who lost their jobs during the middle or end of the recession remained out of work for months and took pay cuts in order to be hired again.
A separate study conducted by Henry S. Farber, an economics professor at Princeton, revealed that people who lost jobs in the recession and later found work earned an average of 17.5 percent less than they had in their old jobs.