Economy Archives - Page 86 of 133 - the patient investor

March 30, 2013

When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives « naked capitalism

Yves Smith reports on attempts to undermine the Volcker Rule and why the rule is so important:

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.

March 30, 2013

‘Most of the banks are zombie banks’ | Het Financieele Dagblad

Translation from an interview by Marcel de Boer & Martin Visser with Willem Buiter, chief economist at Citgroup:

Is Europe creating zombie banks?

These already exist. Most of the banks are zombie banks. There is little new lending to businesses and households. Zombie banks will not offer credit even on good projects — that is already evident on a large scale.

Full article (in Dutch) at ‘De meeste banken zijn zombiebanken’ | Het Financieele Dagblad.

March 28, 2013

S&P 500: Any gas left in the tank?

The S&P 500 managed to close at a new high, with most fund managers reporting good results for the quarter, but does this signal a new bull market or a last-gasp effort to lock in performance bonuses before the market subsides into a correction?

While markets may be rising, there is strong risk aversion.

“@bespokeinvest: Utilities P/E now up to 16.75, higher than the P/Es of Tech, Financials, Industrials, Health Care, Energy and Materials.”

— Downtown Josh Brown (@ReformedBroker) March 28, 2013

This is definitely not a classic bull market.

One also needs to be wary of September and March quarter-ends. They often represent significant turning points, with new highs (red arrows) and new lows (green arrows) frequently proving unsustainable.

S&P 500 Index

* Target calculation: 1530 + ( 1530 – 1485 ) = 1575

While there is no sign of divergence on 13-week Twiggs Money Flow, which would indicate unusual selling pressure, it is important to remain vigilant over the next quarter rather than blindly follow the herd. Bearish (TMF) divergence or reversal of the S&P 500 below 1500 would warn of a correction.

March 27, 2013

Forget too-big-to-fail: Kill the fractional reserve banking system

Interesting discussion on Bloomberg about currency-backed deposits and equity-funded loans.

The fractional reserve banking system is the primary cause of instability and asset bubbles in the global economy, allowing banks to create money out of thin air. Credit expansion above the rate of real GDP growth has only two possible consequences: inflation or asset bubbles. Both do serious long-term damage to the economy.

Under the current system, banks create new money by making loans where they don’t have deposits. The recipient of the loan generally deposits the money back in the banking system, allowing banks to fund newly-created loans with newly-created deposits. The fractional reserve system enables banks to rapidly expand credit as demand grows, but at the risk of creating a bubble.

Requiring banks to hold 100% reserves against deposits — either government bonds and short-term bills or central bank deposits — would remove the risk of bank runs and the need for deposit insurance. It would also eliminate bank bailouts and the subsidy of too-big-to-fail banks by the taxpayer. Volcker rule restrictions on proprietary trading would become unnecessary, with banks no longer able to bet with their customers’ money.

Credit would be equity-funded rather than deposit funded. While this model may seem strange to the reader, it was successfully used by German banks to fund Germany’s industrial expansion in the early 20th century and is still employed by investment banks and private equity funds to finance major ventures today. Islamic banks follow similar principles.

It would be a fairly simple exercise to structure different tiers of equity — with commensurate returns — that participate in different levels of risk. Banks would not be restricted from issuing bonds, but the ratio of debt to equity and access to the retail market could be strictly controlled by regulators.

Fractional reserve banking is not an essential component of capitalism. All that we need is an efficient financial intermediary to channel savings into capital investment. When one considers the costs of the present system — especially the massive wealth destruction wrought by an unstable banking system — the alternative is a lot more appealing.

March 26, 2013

The Dijsselbloem Principle | Felix Salmon

Felix Salmon makes this succinct observation:

If a gaffe is what happens when a politician accidentally tells the truth, what’s the word for when a politician deliberately tells the truth? Dutch finance minister Jeroen Dijsselbloem, the current head of the Eurogroup, held a formal, on-the-record joint interview with Reuters and the FT today, saying that the messy and chaotic Cyprus solution is a model for future bailouts.

Those comments are now being walked back, because it’s generally not a good idea for high-ranking policymakers to say the kind of things which could precipitate bank runs across much of the Eurozone. But that doesn’t mean Dijsselbloem’s initial comments weren’t true; indeed, it’s notable that no one’s denying them outright…..

March 25, 2013

RBNZ steps closer to macroprudential | MacroBusiness

Houses & Holes at Macrobusiness reports on macroprudential steps being considered by the RBNZ. Macroprudential regulation are measures aimed to mitigate the risk of the financial system as a whole, or systemic risk, as opposed to the risk to individual participants.

The [Reserve Bank of New Zealand] says it wants to increase the amount of capital the country’s big four banks must set aside to cover potential losses from high loan to valuation ratio (LVR) home loans. Such a move would, in theory at least, make such lending more expensive for the banks.

March 25, 2013

S&P 500 tests 2007 high

The S&P 500 continues to find support above 1540 on the daily chart. Breakout above 1565 would signal another advance. A higher trough on 21-day Twiggs Money Flow would indicate medium-term buying pressure. Breach of the rising trendline is unlikely at present but would warn of a correction. Target for the current advance is 1600*.

S&P 500 Index

* Target calculation: 1530 + ( 1530 – 1485 ) = 1575

VIX Volatility Index remains near its 2005 lows at 0.10. This does not offer much reassurance as volatility can rapidly spike. Breakout above the quarterly high at 0.20 would be a warning sign.
VIX Index
Bellwether transport stock Fedex dipped below $100 after an earnings disappointment. Reversal below the rising trendline at $85 would warn that the broader economy is slowing.
Fedex
The Nasdaq 100 continues to struggle with resistance at 2800. Declining relative strength against the S&P 500 illustrates how blue chips are being favored over tech stocks. Bearish divergences on both 13-week Twiggs Momentum and 13-week Twiggs Money Flow warn of another correction. Reversal below the latest rising trendline would strengthen the signal. Follow-through above 2900 is unlikely at present, but would signal an advance to 3300*. Only breach of primary support at 2500 would signal a reversal.
Nasdaq 100 Index

* Target calculation: 2900 + ( 2900 – 2500 ) = 3300

While there are structural flaws in the US economy, the market is gaining momentum and the current advance shows no signs of ending.

March 24, 2013

Cyprus: The Operation Was a Success. Shame the Patient Died. | Some of it was true…

Pawelmorski (pseudonym for a london-based fund manager) gives this opinion of the EU ‘rescue’ of Cyprus :

How bad is the damage?

Bloody appalling…… Take a moment to realise the scale of what’s been done here. No human agency has achieved so much economic destruction in such a short time without the use of weapons. The combination of laying waste to the financial sector and tearing up the savings of thousands of residents means that Cyprus won’t return to current levels of output for a decade, a funeral pyre which bears comparison only with Greece. There are four shocks happening at once; the bog-standard austerity shock; the trauma of bank withdrawal controls; the wealth shock; and the structural shock of wiping out the financial sector. The bailout bill is certainly going to get a lot higher too, as a larger amount of debt is piled onto a smaller economy.

March 21, 2013

ALP has spread Europe’s disease | The Australian

Greg Sheridan writes:

Europe’s present distress is our future. Everyone knows that part of Europe’s problem is excessive welfare. As Germany’s Chancellor Angela Merkel has remarked, Europe has 7 per cent of the world’s population, 25 per cent of global gross domestic product and 50 per cent of the world’s welfare payments.

March 20, 2013

Unintended consequences: Rewarding failure

Robert Shiller summarizes the arguments for raising taxes and increasing government spending at Project Syndicate:

……while that [austerity] approach to debt works well for a single household in trouble, it does not work well for an entire economy, for the spending cuts only worsen the problem. This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls.

There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion. That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.

What he does not consider, however, is the message we are sending to government. In much the same way as bailouts increase moral hazard — with too-big-to-fail institutions taking on bigger risks secure in the knowledge that the taxpayer will bail them out if the bets don’t pay off — we encourage bad behavior from politicians if we allow them to raise taxes and increase government spending every time they screw up the economy. Federal government spending in the US economy has grown from 12.5% of GDP in 1950 to nearly 25% of GDP today. Seems like they are getting the wrong message.

Federal Spending as % of GDP

That is like giving someone a promotion or a raise every time they mess up. When politicians fail, they need to get the right message — and not only at the next election. Cutting budgets when the economy is in recession is the right response, but how can we achieve this while saving the economy from a deflationary spiral?

The only way I can think of is to cut taxes and government expenditure, but encourage private investment in productive infrastructure through Treasury-backed low-interest or even interest-free development loans. These could be administered by an independently-elected infrastructure body with representatives from all parties. There are dangers, and the process would have to be closely monitored, but the risks are minor compared to rewarding failure.