Banks & Interest Rates Archives - Page 43 of 61

April 19, 2013

Fixing the Banking System for Good

I believe we have a crisis of values that is extremely deep…. because the regulations and legal structures need reform. I meet a lot of these people [from] Wall street on a regular basis. I’m going to put it very bluntly: I regard the moral environment as pathological…… I have never seen anything like it. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to ….counterparties in transactions. They are tough, greedy, aggressive and feel absolutely out of control…… They have gamed the system to a remarkable extent. And they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies……

Professor Jeffrey Sachs of Columbia University speaking at the “Fixing the Banking System for Good” conference on April 17, 2013.

http://youtu.be/7VOWnnEphjI

April 16, 2013

Pimco’s El-Erian: Markets Trading at ‘Very Artificial Levels’ | WSJ

Steven Russolillo at WSJ reports:

Actions by central bankers across the globe are propping up asset prices to artificial levels that are potentially putting investors at risk, Pimco CEO Mohamed El-Erian said in an interview with the Wall Street Journal.

“Investors should recognize that in virtually every single market segment, we are trading at very artificial levels,” El-Erian told WSJ’s Francesco Guerrera. “It’s true for bonds, it’s true for equities. It’s true across the board.”

This reinforces my long-term bullish outlook for gold. Central banks are unlikely to cease their easy money policies any time soon. What we are currently witnessing is the opposite, with the Bank of Japan going ‘nuclear’ in an attempt to kill persistent deflation that has dogged them for over two decades.

I strongly recommend that you watch the video interview at Pimco’s El-Erian: Markets Trading at ‘Very Artificial Levels’ – MoneyBeat – WSJ.

April 14, 2013

S&P 500 rising while gold and bond yields fall

The S&P 500 is set to break resistance at 1600, which would suggest an advance to 1700, but expect a correction to test the new support level before the quarter ends. Troughs above zero on 13-week Twiggs Momentum indicate a healthy primary up-trend.

S&P 500 Index

* Target calculation: 1350 + ( 1350 – 1100 ) = 1600

The red and green arrows above indicate previous turning points at March and September quarter ends. A correction that respects support at 1500 in the current quarter would confirm the breakout.

Falling 10-year Treasury yields suggest that inflation expectations are falling. Breach of 1.70% would indicate another test of primary support at 1.40%, but rising Twiggs Momentum indicates that a bottom is forming.

Reversal of gold below $1500/ounce confirms that demand for gold as a safe-haven and inflation-hedge is fading — a bullish sign for stocks.
Gold

Bellwether transport stock Fedex dipped below $100 after an earnings disappointment but remains in a primary up-trend. Recovery above $100 would suggest that the economic recovery is on track, while breach of the rising trendline (and support at $85) would warn of a down-turn.
Fedex

Structural flaws in the US economy remain, but the market is gaining momentum and the current advance shows no signs of ending.

April 11, 2013

Time to clean up the Banks

Gabriele Steinhauser at WSJ writes:

A group of key crisis managers believes cleaning up weak banks is the only way to get Europe’s economy to grow again, after superlow interest rates and large-scale liquidity injections from the ECB have failed to produce the desired results. These officials see continued doubts over the health of many lenders as the main reason banks are reluctant to lend to companies, especially in the continent’s weaker countries.

“We’ve been stuck in this rubbish for five years, because we’ve been doing everything to prevent the banks from being recapitalized properly and the stress tests from being stringent enough,” said a senior EU official. “If we don’t do this, we will stay in this trap until 2020.”

The time has come to clear up the mess from the GFC and strengthen bank balance sheets — not only in Europe — so that a similar financial crisis is unlikely to ever happen again. Moves are also afoot in the US where Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) are working on a bipartisan bill to end too-big-to-fail banks. The bill does not attempt to break up big banks but focuses on improving bank capital ratios. Risk-weighted capital ratios as suggested by Basel III disguise banks’ true leverage and encourage risk-taking. Australian banks are particularly exposed to low risk-weighting of residential mortgages. Eliminating risk-weighting would force banks to strengthen their underlying capital base and discourage risk concentration in low risk-weighted areas.

The biggest obstacle to change, however, is the banks who benefit from an implicit taxpayer-funded guarantee in the event of failure. Being able to rely on a bailout enables them them to take bigger bets than their balance sheets would otherwise allow. Columbia University’s Charles Calomiris points out that the banks are able to get away with this because they are supported by populist democratic governments who trade off banking instability in return for political (and financial) support.

April 10, 2013

Why Canada Can Avoid Banking Crises and U.S. Can’t | WSJ

Victoria McGrane at WSJ reports on a paper by Columbia University’s Charles Calomiris, presented at the Atlanta Fed’s 2013 Financial Markets Conference.

In populist democracies, such as the United States, the regulation of banking is used as a political tool to favor some parties over others. It is not that the dominant political coalition in charge of banking policy desires instability, per se, but rather, that it is willing to tolerate instability as the price for obtaining the benefits that it extracts from controlling banking regulation………..

Smart economists with their regulatory ideas are sort of dead on arrival. Political coalitions will decide — not whether you’ve got the right VAR model — [but] whether a banking system is going to be set up with rules that will lead it to be stable and have abundant credit or not.

Charles Calomiris has absolutely nailed it: Populist democracies are prone to financial instability. If you want a stable financial system, you first need to overhaul the political system.

April 8, 2013

S&P 500 tests resistance

The S&P 500 is headed for resistance at 1575, after repeated tests of support at 1540. Breakout above 1575 would test 1600*, but reversal below 1540 remains as likely and would warn of a correction. Although ripe for a correction, 13-week Twiggs Momentum troughs above zero continue to reflect a strong primary up-trend.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

April 7, 2013

Lessons for Australian banks: Why Risk Managers Should Be Spymasters | ProPublica

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.”

April 3, 2013

S&P 500 and 10-year Treasury yields

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.
Nasdaq 100 Index

The S&P 500 retreated from its 2007 high at 1575.

S&P 500 Index

* 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.
S&P 500 Index
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.
VIX Index

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.

April 1, 2013

Has Australia hit the floor with interest rates?

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.

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.