Monetary Policy Normalization and Global Financial Stability

2015 Bank of Korea International Conference

Mitsuhiro Furusawa, IMF Deputy Managing Director

June 8, 2015

As Prepared for Delivery

Good morning. It is my great pleasure to join you today at the 2015 Bank of Korea International Conference. I would like to thank Governor Lee for his kind introduction and the Bank of Korea for inviting me to discuss the monetary policy challenges of global interest rate normalization.

In recent years this gathering has earned the reputation as an important forum for discussing issues that have arisen since the 2008 global financial crisis. I am sure this year’s conference will continue to deepen our understanding of the challenges we face.

Today, I would like to focus my remarks on three themes:

1. The risks and challenges that lie ahead with monetary policy normalization in the United States, especially for emerging market economies;

2. How policy in both advanced and emerging market economies helps to mitigate these risks and challenges; and

3. The implications for monetary policy in the “new normal,” which is to say, once the crisis is finally and fully behind us. Here, in particular, I will highlight some of the areas where more work needs to be done to better understand the changing policy environment.

Monetary Normalization—Risks and Challenges

Let me begin by placing monetary policy normalization in the United States into a global economic context.

Nearly eight years after the global financial crisis, global growth is still modest, and disinflationary pressures remain. Despite a boost to growth from the decline in oil prices, the Fund’s April World Economic Outlook saw the global economy expanding by only 3.5 percent this year and picking up to 3.8 percent in 2016. Data releases since then have been generally weaker than expected, and our WEO update will be released in early July with an assessment of the implications for the global recovery.

Moreover, growth has been diverging across countries and regions. The U.S. recovery is continuing—although at a slower pace this year than originally forecast—and growth in the euro area and Japan is expected to pick up. By contrast, economic performance in many other parts of the world is falling short of expectations. Emerging market growth will decline for the fifth year in a row in 2015, but emerging and developing economies continue to account for a large share of global growth. We do see signs of an emerging market rebound next year.

In response to this outlook, monetary policy across major economies has become asynchronous.

Unconventional monetary easing is ongoing in the euro area and Japan, where inflation is subdued. Also, many smaller advanced economies and emerging market economies have eased monetary policy recently. These developments contrast with the continuing movement toward normalization in the U.S.

This situation gives rise to three sets of risks and challenges:

First, prolonged low interest rates and quantitative easing in advanced economies have produced large run-ups in asset prices, a compression of long-term yields, and very large capital flows to emerging markets

As you know well, the risk is that once market sentiment shifts—possibly triggered by normalization—yields could sharply increase and capital flows could reverse. This process could become disorderly, with impaired liquidity in certain markets or asset classes. And, with an increased correlation among major asset classes, there is a higher potential for contagion. So there is considerable scope for negative spillovers from monetary policy normalization.

Second, asynchronous monetary policies have spurred rapid dollar appreciation and sharply increased volatility in foreign exchange markets. This volatility, combined with depreciation in a number of emerging markets, may put strains on nonfinancial corporates that have borrowed heavily in foreign currencies. This vulnerability could trigger or exacerbate capital outflows.
Third, capital markets have become more important providers of credit, and the role of the asset management industry has been growing. Many asset managers offer funds that allow investor redemptions on a daily basis, while taking positions in assets that may become illiquid in periods of stress. We believe that this trend increases the risk of herd behavior if investors scramble for the exits. This could lead to fire sales and contagion to other parts of the financial system. Emerging economies could also be affected if a sharp reduction in the secondary market liquidity of certain financial assets amplifies the volatility of local markets and currencies.
Let’s not overstate these vulnerabilities. They are “pockets” of risk rather than harbingers of large-scale systemic risk. Nonetheless, they could easily combine with surprises in the timing and pace of the inevitable U.S. interest rate liftoff to give rise to disorderly portfolio rebalancing. We need only to recall the so-called “taper tantrum” in 2013 to get a sense of the forces that could be at work.

The Role of Policy

This brings me to the policy response.

I want to emphasize that normalization likely will have different effects on different countries, so there won’t be a single policy response. Here, the important point is that capital outflows often are a natural consequence of financial openness and integration, and not a major policy concern every time they occur. It is normal that changes in the global economy and financial markets will produce outflows.

That said, unusually large, sustained, or sudden outflows can pose significant policy challenges—even in the absence of a crisis. The consequences can be severe: depletion of foreign exchange reserves, excessive currency movements, financial system stress, and output losses.

The U.S. Federal Reserve can do its part to reduce the risk of disorderly capital outflows by continuing to communicate clearly its policy intentions. This has been discussed at length since 2013, and we believe that the Fed is well aware of this issue. Moreover, authorities in other large advanced economies should also do their part by nipping financial stability risks in the bud, mainly through appropriate micro- and macroprudential policies.

What can emerging market economies do?

Most importantly, they need to continually strengthen macroeconomic fundamentals and policy frameworks, building on their important work in recent years.

Work we have done at the IMF suggests that countries with sound macroeconomic fundamentals have seen smaller market reactions to monetary policy spillovers from advanced economies. In particular, higher GDP growth, stronger current account positions, lower inflation, and more liquid financial markets helped to contain market volatility. It is also becoming increasingly important for emerging markets to implement structural reforms that promote strong, sustainable, and balanced growth. Stronger fundamentals, in turn, can best be achieved by developing and implementing coherent and sound fiscal, monetary, exchange rate policies.

At the same time, emerging economies need to ensure that their financial systems are resilient to asset price volatility and a sudden decline in market liquidity.

A vigilant macroprudential stance is the first line of defense, particularly for countries with high foreign currency debt and those vulnerable to sudden capital flow reversals. At the microprudential level, regular monitoring and stress tests are needed to assess foreign currency risks, especially bank and corporate foreign currency exposures. This places a premium on better data collection, including on derivatives positions—whether for hedging or speculation.

How to react if market volatility and disorderly outflows emerge? Central banks and governments need to be fully prepared to respond quickly. Financial system stress may require temporary, aggressive, and targeted liquidity support, and changes in prudential policies. The macroeconomic policy mix should be calibrated to support external adjustment, with exchange rate depreciation and changes in the monetary and fiscal policy stance.

So the appropriate policy mix will depend on the specific circumstances in a country—both macroeconomic and financial. I look forward to hearing how you see these issues.

Korea provides a good example of how strong fundamentals combined with decisive and swift policy action can help countries reduce and cope with market volatility. Remarkably effective steps have been taken to strengthen the resilience of the financial sector, which helped to reduce banks’ short-term external debt by half, to 27 percent, between 2008 and 2013. I am thinking in particular of the limit on banks’ foreign-exchange derivatives positions, and the levy on banks’ non-core foreign-exchange liabilities.

In certain conditions, foreign exchange intervention or capital flow management measures could also be used. But such measures should not substitute for macroeconomic adjustment. Let me mention here that the IMF and OECD have recently prepared a joint assessment for the G20 of our respective approaches to measures that address both macroprudential and capital flow issues. This work underscores the IMF’s commitment to ensuring that these measures are used appropriately and in a manner consistent with the smooth functioning of the international monetary system.

At the IMF, we also see a potentially important role for international policy coordination and safety nets. Here, as always, we stand ready to provide advice and support. Central bank collaboration is also important, for example by providing foreign currency swap lines, as they did in the early stages of the global financial crisis when spillovers and spillbacks threatened global financial stability.

Closer coordination between the IMF and Regional Financing Agreements would be helpful, and there could be greater sharing across countries in the areas of policy thinking and contingency plans.

Monetary Policy in the New Normal

Now to my last point for today: which considerations will drive monetary policy in the “new normal,” when the recent crises have been fully overcome.

We have already learned that price stability and strong microprudential regulation are not sufficient to achieve macroeconomic and financial stability. It is now widely recognized that more needs to be done to limit systemic financial risk, and that macroprudential policies are the main tool for this job. But are macroprudential policies enough? Or does monetary policy also need to be used to limit system-wide financial risk?

Needless to say, we do not yet have a complete answer. What we do know is that macroprudential policies do not remedy all ills. For example, their effectiveness may be hampered by leakages. This may occur within a country through a shift of financial activities from the regulated to the less regulated. It also may occur across countries, as financial market participants gravitate to less regulated jurisdictions. Moreover, the effectiveness of macroprudential policy may suffer owing to institutional shortcomings or political reasons.

This is why there have been calls for monetary policy to support financial stability by sometimes “leaning against the wind” of rising financial imbalances—even as the primary focus remains on price stability. We know a fair amount about the costs of such “leaning”; for example, deviations from inflation targets along with output and employment losses. But much less is known about the benefits of leaning in terms of reducing the likelihood and severity of financial crises. At the IMF and elsewhere, these questions remain an active and crucial area of inquiry.

Another important question will be how to design governance of central banks in view of the greater role expected of them in maintaining financial stability. One concern is that if central banks are obliged to implement unpopular financial stability policies, they may invite political interference that could undermine their ability to deliver price stability. There is no “one size fits all” solution to this problem. Some countries have decided to keep monetary policy separate from macroprudential policy, relying on interagency committees to coordinate the two. Others, such as the United Kingdom, have assigned both responsibilities to the central bank, but with separate policy committees to improve transparency and accountability.


Let me conclude.

Monetary policy normalization in the United States is coming. But even with the best preparations and communications, normalization may give rise to risks. The IMF is strongly committed to closely monitoring and assessing the impact of these developments, and helping its membership to address the related challenges. We still need to better understand the transmission of spillovers, and further thinking is needed on what this implies for policy options.

I am very much looking forward to a continuing fruitful debate on these issues. I am sure this conference will provide new insights into how all countries can navigate the uncharted waters leading to the “new normal”.

Thank you.


Inside Scoop

Goldman CEO Blankfein Sells $22.4M in Stock

Lloyd C. Blankfein exercised options and sold 109,436 shares near a multiyear-high.

By Grace L. Williams           

Updated June 10, 2015 5:40 p.m. ET

Goldman Sachs Group insiders including the top executive of the investment giant sold shares in recent weeks as they headed to a multiyear-high price, mostly through Rule 10b5-1 planned transactions.
Six executives sold 324,301 Goldman Sachs shares for $66,420,905, an average of $204.81 each, from May 5 through June 3.
Chief Executive and Chairman Lloyd C. Blankfein exercised options and sold 109,436 Goldman Sachs shares for $22,435,045, an average of $205.01 each, in a planned sale. Regulatory filings show the options were exercised at $131.64 each and were set to expire Nov. 27. Blankfein now directly holds 1,893,354 shares alongside 342,331 shares held through trusts. His most recent previous transaction was on Aug. 28, 2012, when he exercised options and sold 68,800 shares for $8.2 million, an average of $119.26 each, also a planned transaction.
President and Chief Operating Officer Gary D. Cohn exercised options and sold 152,291 shares for $31,229,249, an average of $205.06 each, another planned sale. The options were exercised at $131.64 each and were set to expire Nov. 27. Cohen now directly holds 615,854 shares alongside 249,093 shares held through entities including trusts. His most recent previous transaction was on Nov. 28, 2012, when he exercised options and sold 90,000 shares for $10.7 million, an average of $119.26 each, in a planned transaction.
Vice Chairman John S. Weinberg exercised options and sold 25,699 Goldman shares for $5,142,405, an average of $200.10 each, in yet another planned sale. The options were exercised at $131.64 each and were set to expire Nov. 27. Weinberg now directly holds 1,020,051 shares alongside 89,341 shares held through entities including trusts. His most recent previous transaction was on April 23 when he exercised options and sold 91,400 shares for $18.3 million, an average of $200.17 each, in another planned sale.
Sarah G. Smith, principal accounting officer, sold 4,664 shares in a planned transaction for $979,440. Edith W. Cooper, executive vice president and global head of human capital management, sold 16,659 shares for $3,446,510. Gregory K. Palm, executive vice president and general counsel, exercised options and sold 15,552 shares for $3,188,254.
Each executive holds a total stake of less than 1% in Goldman Sachs.
Blankfein has held his current post since June 2006. Cohn has served as president and COO (or co-COO) since June 2006.
A spokeswoman for Goldman Sachs declined to comment on the sales.
Shares traded to as high as $213.40 on Wednesday, a multiyear intraday high. Goldman Sachs hasn’t traded at that level since November 2007, adjusted for cash dividends.
On April 16, Goldman Sachs reported a better-than-expected first quarter. Susquehanna analyst Doug Sipkin responded by raising estimates and lifting the price target to $215 from $198.
“[R]obust merger-and-acquisition results should continue as Goldman Sachs works off of a breakout year in 2014 for announcement activity,” Sipkin wrote in a research report. He maintained a Neutral rating.
In an email, Dominick Manaro, president of Executive Buying, writes, “The recent sales are not worrisome in my opinion. The largest amounts of shares were by Blankfein and Cohn. In both cases, these transactions are tied to simultaneous exercising of options. It is very hard to look at these transactions as anything but executives diversifying their wealth.”

Recent Insider Activity

Company Name Insider's Name  Title $ Value  No. of Shares Range of Values  Transaction Dates
American Assets TrustE. Rady                     H  2,985,92975,78539.40June 9 2015
Abercrombie & FitchC. Angelides                O  1,001,61845,20022.16June 9 2015
Prospect CapitalJ. Barry                    CEO992,780131,0607.58June 5 2015
American Assets TrustE. Rady                     H  953,62824,21539.38June 8 2015
Kratos Defense & Security SolutionsB. Carano                   DO 904,440150,0006.03June 5 2015
Alexander & BaldwinD. Hulihee                  D  797,33120,00039.75-39.95June 4-5 2015
Goldman Sachs Mlp And Energy Renaisnc FdK. Loupis                   OE 529,81037,00014.32June 8 2015
NuvasiveG. Lucier                   CEO492,61610,00049.17-49.36June 5-8 2015
Golub Capital BdcD. Golub                    CEO484,43628,06717.26June 8 2015
InsuletP. Sullivan                 CEO293,88010,00029.39June 5 2015
Source: Thomson Reuters

Recent Insider Activity

Company Name Insider's Name Title $ Value No. of Shares Range of Values  Transaction Dates
ComcastM. Angelakis                CFO22,322,347382,56658.18-58.40June 8 2015
Affiliated Managers GroupN. Dalton                   P  16,671,47075,000221.01-222.70June 5-8 2015
StarbucksH. Schultz                  CEO16,294,732311,73852.27June 5 2015
HubspotS. Bishop                   D  14,908,857299,83345.56-50.20June 5-9 2015
NielsenD. Calhoun                  D  7,951,500178,12544.64June 5 2015
Palo Alto NetworksN. Zuk                      CT 5,175,27230,000169.47-173.66June 5 2015
MacysD. Broderick                GC 4,632,67767,21268.90-68.96June 9 2015
Natus MedicalJ. Hawkins                  CEO4,208,000100,00042.08June 8 2015
Barracuda NetworksZ. Levow                    D  3,601,81487,51841.03-41.17June 3-4 2015
NetsuiteZ. Nelson                   CEO3,420,61737,31991.34-91.90June 8 2015
Source: Thomson Reuters

Here’s a rundown of insider trading activity reported on June 10, 2015. An insider is any officer, director or owner of 10% or more of a class of the company’s securities. The table shows purchases and sales which must be reported to the SEC and other regulators by the 10th of the month following the month of the trade, includes both open-market and private transactions involving direct and indirect holdings. Excludes stock valued at less that $2 per share, acquisitions through options and companies being acquired. Included are purchases, sales and stock registered for sale for individual officers, companies, and sectors.
AC-member of the advisory committee. AF-affiliated person. AI-affiliate of investment advisor. AV-assistant vice president. B-beneficial owner of more than 10% of a security class. BC-beneficial owner as custodian. BT-beneficial owner as trustee. C-controller. CB-chairman. CC-member of the compensation committee. CEO-chief executive officer. CFO-chief financial officer. CI-chief investment officer. CO-chief operating officer. CP-controlling person. CT-chief technology officer.

D-director. DO-director and beneficial owner. DS-indirect shareholder. EC-member of the executive committee. EVP-executive vice president. F-founder. FC-member of the finance committee. FO-former. GC-general counsel. GM-general manager. GP-general partner. H-officer, director and beneficial owner. I-indirect transaction filed through a trust, insider spouse, minor child or other. IA-investment advisor. LP-limited partner. M-managing partner.

MC-member of committee or advisory board. MD-managing director. O-officer. OB-officer and beneficial owner. OD-officer and director. OE-other executive. OP-officer of parent company. OS-officer of subsidiary company. OT-officer and treasurer. OX-divisional officer. P-president. R-retired. S-secretary.

SC-member of the science/technology committee. SH-shareholder. SVP-senior vice president. T-trustee. TR-treasurer. UT-unknown. VC-vice chairman. VP-vice president. VT-voting trustee. X-deceased.

*-Half of the transactions were indirect.

Gold And Silver - Too Many Are Still Getting It Wrong

By: Michael Noonan

Saturday, June 6, 2015

Americans labor under the misguided belief that they have freedom, and by extension, freedom of choice. This simply is not true. Corporations are dictating more and more how Americans live, what to think, what to eat, and more. Google is a perfect example of what was once a superior search engine-turned-government-tool-for-propaganda. Searches have been sanitized to provide only that information the corporate federal government wants you to know, and no more.

It used to be the will of one in this country was protected against the majority. You can no longer find any references to this line of thinking when one Googles "rights for the will of one."

There is no such reference but mostly talk about the importance of a majority rule in a democratic society to get people to believe is such a dysfunctional point of view. If you want to do any research on topics the government prefers you do not know, content results will be sanitized, and depending on how "anti-government" a search may be, many available responses can no longer be found but have been cleansed.

Freedom of choice? How about the Miller family of 4 from Mississippi? They attended their niece's high school graduation and shouted out a cheer of support when their niece walked across the stage to get her diploma. The school district superintendent has asked the audience to hold their applause and support until the end, or they would be asked to leave. Security guards were told to escort the Millers out of the ceremony. A week later, the superintendent pressed charges against the Millers, and now they face up to 6 months in jail and a potential fine of $500. This is governmental authority, even at a low local level, gone amok. Is this an example of freedom? [There are far more serious ones from which to choose.]

Monsanto. We have posted articles of this corporate behemoth's use of Genetically Modified Organisms [GMOs] being forced into the food chain, none of which are healthy for consumption. Despite wide-spread unpopularity from the masses, even world-wide, Obama and his corporate federal government are doing everything to ensure corporate profits take precedent over public health interests. Is Obama's government representing you?

Not a few analysts are calling for a collapse of the Federal Reserve Note, aka the "dollar," and a major disruption in the American life style. If we have learned anything from Japan and its hara-kiri sacrifice of its own Yen over the past two decades, destruction of a fiat currency almost always takes longer than most expect, and the US "dollar" will be and is no exception.

Recall how many were calling for a huge rally in gold and silver in 2013, repeated to no effect in 2014. In late 2013 and the first half of 2014, we began saying that the end of 2014 will not look much different from 2013, for PMs. At no point since, have we been advocating a change in the 4 year down trend, extended into 2015, and unless or until there is a change in market behavior, 2015 may similarly pass unfazed.

Central bankers have had an agenda of suppressing the PMs markets in order to preserve the fiat "dollar" as the world's reserve currency. This has not changed, and there is no potential alternative for the US "dollar" to be used for trade settlement. Will the Chinese renminbi be used in place of the "dollar?" Maybe one day, but not any day son.

Will Specialized Drawing Rights [SDRs] become the next reserve "currency?" The elites and the IMF are pushing for that direction, but keep in mind SDRs are another form of a fiat currency no matter how well the lipstick is applied. Even if the Chinese renminbi is included in the SDR basket, in October as anticipated, its percent is small so that change is more of a political accommodation for the growing economic power of China.

Yes, the Fed's fiat "dollar" is increasingly becoming recognized as a fast fade as the world's reserve currency for trade, and yes there is increasing use of the yuan as a trade settlement amongst Asian countries, and starting to grow in the West, but the yuan [renminbi] is in no position, [meaning China] to replace the US fiat anytime soon. Plus, there is no other country willing to oppose the proxy wars, responsible by the US, to keep the fiat "dollar" in place.

Despite the disappearance of the middle class in America, rising unemployment, rising numbers of people on government assistance, cities and counties on the verge of bankruptcy, a decreasing tax base, no ability to manufacture anything and create jobs [thank you Clinton and NAFTA and its disastrous outcome...expect similar disastrous results once Obama's TPP goes into effect], there is little to no opposition to the overt lies and abuse by the elite-driven corporate federal government.

The mostly docile American public are too ill-informed and/or simply unwilling to believe how corrupt the government is as it serves only interests of bankers and corporate leaders...public be damned, and damned they will be.

These are more pragmatic reasons for buying and owning physical gold and silver, more so than relying upon the regurgitation of how many ounces are being sold to an insatiable public, how many tonnes of gold China and Russia continue amass, [include silver for China, too], the corruption of the Western metals exchanges, all of these very real factors but of little effect on prices.

When gold used to be the backing behind the US dollar [the real dollar], prior to the privately owned Federal reserve usurping the constitutionally mandated control of the money supply only by Congress, people were independent of and not reliant upon the government. There was no unemployment insurance, no social security, no social safety nets for the public. This is why gold and silver are so despised by the elites. People do not need the government when they have independent wealth in gold and silver.

Enter the elites and the passage of the Federal Reserve Act in 1913 leading to the elimination of specie-backing and elimination of the US dollar, replaced by the now totally fiat Federal Reserve Note, deceptively called a "dollar" by the Fed, even though by law FRNs are not dollars but instruments of debt. The purpose of removing gold and silver was to get rid of the public's ability to have wealth [physical gold and silver] and independence from the government influences. Now, with no gold or silver, [no wealth], the duped American public has become dependent on useless fiat, credit, and government handouts.

The above paragraph is the best reason to buy and hold gold and silver, at any price, and especially at these artificially suppressed prices. Both PMs are a means of economic freedom and independence from the de facto corporate federal government doing everything it can to enslave the country, and succeeding quite well.

At some point, things will unravel, and this country will come apart at the seams, but it may be a slow bleed rather than a quick rupture. The elites are in the final process of killing off America and shifting their efforts to China, and they want a smooth, orderly transition in order to keep the facade alive.

Buy gold. Buy silver. The fact that the central bankers do not want you to own either should be sufficient reason. The fact that growing economic powerhouse China and rich in natural resources Russia are buying as much as is available is another tell for your wanting to be on the side of strength. The PMs have a history as a store of wealth and may be your economic life boat, at some point in the future. They may also literally be life savers. For sure, as bankers force people into a cashless society, it will mean your ability to buy and hold either or both PMs may come to an end, unless you prefer to have a target on your back.

Is the dollar ready to disappear, fall apart? No, absolutely not, according to the charts, and charts do not lie. The fact that many people do not understand them or cannot read them is more of an indictment against those people and not against charts, per se. The trend is up, and there is no confirmation whatsoever that the trend is in danger of changing, at least not yet.

We do not use charts to predict, only fools do, for no one can divine the future using them any more than they can with a Ouija board. However, a common sense read of the relationship between price and volume, information generated by the market itself, can yield some cogent clues as to direction and phase of where the market is and likely to continue. The trend is most reliably used for that purpose.

US Dollar Weekly Chart
Larger Image

The weekly trend takes more time to change direction than the daily, and the daily is now in a trading range [TR]. Volume for currencies is not very reliable, so we lean more heavily on price. Note, for example, the rally which began in late February, peaking in mid-March, a period of about 11 trading days [TDs]. The correction of the up move was retraced by the end of April [yes, the move continued into May], but it took 34 TDs to fully retrace the gains. Easier move up v a more labored move down. Which side had the momentum?

Notice how much price dropped from the swing high into the end of April initial support, from almost 101 to 94.50, or 6.5 cents. How much farther did price drop from the end of April to the May swing low? About 1.5 cents, clearly a loss of momentum to the downside.

Does this seem like a fiat currency about to implode? Common sense says no. 

Many newsletter writers will tell you otherwise. Trust your eyes. [And we hate the fiat "dollar."]

US Dollar Daily Chart
Larger Image

Speaking of the strength of trends, those for both silver and gold remain down, neither evidencing any sign of change. Always keep that in mind. Again, trust what you see and not what you hear, [or read].

Is the spike low in November 2014 the final swing low? If it is, why isn't price rallying up and away instead of languishing, moving sideways and giving ample opportunity to get in at the bottom of an about to change market? Know this about smart money: they will never make it easy for you to get in on a move. If we are recipients of so many invites to get in on a move higher, it becomes suspect, for that reason alone.

We [collectively], do not need to know if the swing bottom is in, or not. The market will give confirmation once a bottom is determined to be final. Buying after a bottom has been confirmed will mean buying at prices higher than the actual bottom, but one can be much more secure in positioning, once the trend has been confirmed as changed. Just ask all of the bottom pickers over the last 4 years how they have been faring in not waiting for that confirmation.

Let the market lead, and learn to be a follower. It will prove more beneficial to one's bottom line.

Silver Weekly Chart
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After the above, it seems a bit silly to try to dissect what the market is doing on a minor scale, but more people have a thirst for that kind of information. The chart comments are self-explanatory. Daily silver remains in a TR at the bottom of a price swing.

How bullish can that be? Trust your eyes.

Silver Daily Chart
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For how long can a TR last? The best answer we know is: until it ends. We see no evidence of an ending to this one, at this point. Buy the physical, but avoid being long paper.

Gold Weekly Chart
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Price is at an area of support, however, gold has consistently proven an inability to hold rallies.

The fundamental reasons for buying gold do not translate into the charts. The charts are more a product of central banker suppression, For whatever reason anyone wants to ascribe to why PM prices are low, the charts agree and show no signs of change.

Dold Daily Chart
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June 7, 2015 1:12 pm

Shunning Beijing’s infrastructure bank was a mistake for the US

Washington needs to learn from this embarrassing experience, writes Robert Zoellick
The Obama administration’s negative response to China’s proposed Asian Infrastructure Investment Bank was a strategic mistake. Though some Chinese moves might be destabilising and require US resistance, this initiative should have been welcomed.
The US should be careful about opposing ventures that are popular and likely to proceed.
Losing fights does not build confidence. Moreover, the new bank’s purpose — to develop infrastructure in Asia — is a good goal. The world economy needs more growth. Many emerging markets are eager to boost productivity and growth by lowering costs of transportation, improving energy availability, enhancing communications networks, and distributing clean water.
The AIIB offers an opportunity to strengthen the very international economic system that the US created and sustained. The AIIB’s designated leader, Jin Liqun, a former vice-president of the Asian Development Bank, sought advice in Washington. He engaged an American lawyer who was the World Bank’s leading specialist on governance. He also reached out to another American who had served as World Bank country director for China and then worked with the US embassy.
If the AIIB was indeed threatening the American-led multilateral economic order, as its opponents seemed to believe, then its Chinese founders chose a curiously open and co-operative way of doing so.

There is an easy way to connect the AIIB to existing multilateral efforts. In 2011 the World Bank created an infrastructure development hub in Singapore to learn how to make public-private partnerships more effective and backed it with a $1bn fund.
Even if the US decided not to become a shareholder in the AIIB, it could pledge support if the new bank pooled experience, analytical capacity and financing with the Singapore hub.
The World Bank launched a similar partnership with a group of Islamic, Arab and Opec development banks and funds. The Asian Development Bank, headquartered in Manila, with Japanese leadership, could also assist the AIIB.

This strategy of networked partnerships would help the AIIB pursue high quality practices.

President Xi Jinping of China has launched a bold anti-corruption initiative, so the AIIB should want to follow his lead; the other multilateral development banks have learnt a great deal about warning signs of corruption and the use of transparency to lessen risks. All the multilateral banks have agreed that any company disbarred from future bids by one bank will be refused by all, so the AIIB could adhere to the same principle.

The existing multilaterals have procurement practices that encourage fair competition. It will be relatively easy to tell whether the AIIB is open to competitive bidding. One can assume China does not wish to waste its money. And if China or the AIIB does make poor investments — as in Venezuela — it will pay the price.

The Obama administration could highlight specific environmental infrastructure challenges. For example, building dams for hydropower on the Mekong river or its tributaries should be given special scrutiny given the risks to this unique ecosystem. The AIIB might assist with cutting-edge infrastructure and conservation work, such as accommodating wildlife corridors.

At the same time, the AIIB could assist the World Bank and regional banks to analyse how their governance practices and controls have added costs, procedures and delays. Competition can be healthy and revealing.

The US needs to learn from this embarrassing experience. China is offering an opportunity to support the global economy and substantial financing to back its own plan. The greatest mistake the US could make is to lose the initiative in shaping a changing international system.
The US should be adroit at connecting fresh prospects to the existing order so as to match new needs. This skill, insight and problem-solving capability, earned over many years, is a powerful American diplomatic asset and should not be squandered.

The writer was president of the World Bank and US Trade Representative

Getting Technical

Look Out Below: The Average Stock is Falling

Thanks to a few strong stocks, major indexes are holding on, but the average stock is already in decline.

By Michael Kahn

June 8, 2015 4:13 p.m. ET

I find it amazing how the stock market can look quite solid one day and then systematically get dismantled without most people really noticing. Only 11 trading days ago the Standard & Poor’s 500 printed a record high, but it has been all downhill from there. And although the major indexes have not suffered any significant technical damage, the average stock is not so lucky.

From simple observation of the performance of small stocks to the more arcane advance-decline line, it is starting to look as if something slightly wicked this way comes. I’m not suggesting investors stuff the mattress with cash, but it may be time to reduce risk.

The S&P 500 still has a series of higher highs and lower lows intact (see Chart 1). That is the basic definition of a bullish trend, so it is hard to make an argument for anything else. And even if that trend ends, there is ample support on the charts between 2040 and 2060, thanks to the March lows and the 200-day moving average (the index traded at 2085 Monday).

Chart 1

Standard & Poor’s 500

But the S&P 500 tracks big stocks, and is capitalization weighted. The bigger the stock the more it counts, and that can mask small stock weakness. Tech behemoths such as Apple and banking giants such as JP Morgan Chase are indeed doing a lot of the heavy lifting. To combat this problem, I like to look at the New York Stock Exchange composite index as the champion of the average stock. True, it still does favor larger stocks, and it includes non-domestic stocks such as bond funds and foreign shares, but the sheer number of issues contained dilutes their effects.
Warts and all, the NYSE composite gives me another angle on market breadth. And right now, it has moved below short-term trendlines drawn from the October 2014 closing low (see Chart 2).

Chart 2

NYSE Composite

I find this to be an important development, although it is hidden from the view of most investors and financial media. But even this does not tell us that the bear is here just yet. What it does tell us is that a decent correction is already in progress. Nearly half of its component issues are already trading below their 200-day moving averages.

Bull markets usually do not end with a clear continental divide between bull and bear trends. Market tops happen slowly, as group after group runs out of juice and starts to retreat.

The sector that recently got my attention was consumer staples. This is a defensive area that usually outperforms the market in times of uncertainty, thanks to the steady nature of the businesses of the stocks within. When times are hard, consumers are more likely to forego a car or DVR purchase than food or aspirin.

That is why it is a great surprise, from the technical point of view, to see the Select Sector SPDR Consumer Products exchange-traded fund ) as one of the worst performers over the past month. It was second only to energy and utilities, and those two have bigger problems than just a shaky stock market.

It could be a sympathy move with the bond market, as many stocks tracked by the ETF sport generous dividend yields. Or, it could be that prices were driven up too far by investors piling into these stocks in search of the stability – or income – they are supposed to offer.

Whatever the reason, this is yet another sector that looks to have seen its better days. Indeed, the chart now shows a breakdown below a six-month trading range and dip below the key 200-day moving average (see Chart 3).

Chart 3

SPDR Consumer Staples ETF

This makes three of the nine major SPDR sector ETFs trading below that 200-day average. Industrials  and basic materials are very close behind. And do not forget that transports – a subset of industrials – already has a serious breakdown in place (see Getting Technical, Transport Stocks Crack; Now It’s Time to Worry, May 26).

As I wrote here last month, selling at the start of the summer months may not be a viable money maker – or even money conserver – but it has saved a lot of volatility headaches over the past several years (see Getting Technical, Sell in May Is Dead, May 20). With so much of the stock market looking worse than the major averages, it really does feel like time to lighten up just in case a volatile summer turns into a bearish autumn.


Michael Kahn, a longtime columnist for, comments on technical analysis at A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

A Speech of Hope for Greece

Yanis Varoufakis

JUN 4, 2015

Tsipras Merke

ATHENS – On September 6, 1946 US Secretary of State James F. Byrnes traveled to Stuttgart to deliver his historic “Speech of Hope.” Byrnes’ address marked America’s post-war change of heart vis-à-vis Germany and gave a fallen nation a chance to imagine recovery, growth, and a return to normalcy. Seven decades later, it is my country, Greece, that needs such a chance.
Until Byrnes’ “Speech of Hope,” the Allies were committed to converting “…Germany into a country primarily agricultural and pastoral in character.” That was the express intention of the Morgenthau Plan, devised by US Treasury Secretary Henry Morgenthau Jr. and co-signed by the United States and Britain two years earlier, in September 1944.
Indeed, when the US, the Soviet Union, and the United Kingdom signed the Potsdam Agreement in August 1945, they agreed on the “reduction or destruction of all civilian heavy-industry with war potential” and on “restructuring the German economy toward agriculture and light industry.” By 1946, the Allies had reduced Germany’s steel output to 75% of its pre-war level. Car production plummeted to around 10% of pre-war output. By the end of the decade, 706 industrial plants were destroyed.
Byrnes’ speech signaled to the German people a reversal of that punitive de-industrialization drive. Of course, Germany owes its post-war recovery and wealth to its people and their hard work, innovation, and devotion to a united, democratic Europe. But Germans could not have staged their magnificent post-war renaissance without the support signified by the “Speech of Hope.”
Prior to Byrnes’ speech, and for a while afterwards, America’s allies were not keen to restore hope to the defeated Germans. But once President Harry Truman’s administration decided to rehabilitate Germany, there was no turning back. Its rebirth was underway, facilitated by the Marshall Plan, the US-sponsored 1953 debt write-down, and by the infusion of migrant labor from Italy, Yugoslavia, and Greece.
Europe could not have united in peace and democracy without that sea change. Someone had to put aside moralistic objections and look dispassionately at a country locked in a set of circumstances that would only reproduce discord and fragmentation across the continent. The US, having emerged from the war as the only creditor country, did precisely that.
Today, it is my country that is locked in such circumstances and in need of hope. Moralistic objections to helping Greece abound, denying its people a shot at achieving their own renaissance.
Greater austerity is being demanded from an economy that is on its knees, owing to the heftiest dose of austerity any country has ever had to endure in peacetime. No offer of debt relief. No plan for boosting investment. And certainly, as of yet, no “Speech of Hope” for this fallen people.
It is the mark of ancient societies, like those of Germany and of Greece, that contemporary tribulations revive old fears and foment new discord. So we must be careful. Teenagers should never be told that, due to some “prodigal sin,” they deserve to be educated in cash-strapped schools and weighed down by mass unemployment, whether the scene is Germany in the late 1940s or Greece today.
As I write these lines, the Greek government is presenting the European Union with a set of proposals for deep reforms, debt management, and an investment plan to kick-start the economy. Greece is indeed ready and willing to enter into a compact with Europe that will eliminate the deformities that caused it to be the first domino to fall in 2010.
But, if Greece is to implement these reforms successfully, its citizens need a missing ingredient: Hope. A “Speech of Hope” for Greece would make all the difference now – not only for us, but also for our creditors, as our renaissance would terminate the default risk.
What should such a declaration include? Just as Byrnes’ address was short on detail but long on symbolism, a “Speech of Hope” for Greece does not have to be technical. It should simply mark a sea change, a break with the past five years of adding new loans on top of already unsustainable debt, conditional on further doses of punitive austerity.
Who should deliver it? In my mind, the speaker should be German Chancellor Angela Merkel, addressing an audience in Athens or Thessaloniki or any Greek city of her choice. She could use the opportunity to hint at a new approach to European integration, one that starts in the country that has suffered the most, a victim both of the eurozone’s faulty monetary design and of its society’s own failings.
Hope was a force for good in post-war Europe, and it can be a force for positive transformation now. A speech by Germany’s leader in a Greek city could go a long way toward delivering it.

When Will Bond Markets Join the 21st Century?

Fundamental problems with the way bonds are traded have added to the current volatility.

By Larry Harris

June 4, 2015 7:20 p.m. ET

  Photo: Bloomberg News

Bond-market gyrations are giving investors and regulators the jitters. Much of the volatility is due to concerns about the potential for rising interest rates and a slowing economy. But it is also due to decreasing liquidity in the bond markets, thanks in part to traders who have migrated to the credit-default-swap markets where essentially the same credit risks trade. And some illiquidity is due to fundamental problems with the structure of bond-market trading.

In bond markets, dealers participate in almost all trades when they provide liquidity to their clients. Much trade in these markets is still conducted over the telephone, which means that trades occur as a result of a series of bilateral conversations among human broker-dealers and their clients. In contrast, most equity-market liquidity comes from investors trading directly with each other at electronic exchanges. In other words, equity markets operate in the 21st century whereas bond markets still operate in the 19th century.

As a result, bond-trading costs dwarf those seen in the equity markets, especially for non-institutional investors. Small investors often pay 50 to 100 times more to trade the bonds of a corporation than they do to trade the same corporation’s stock shares. The contrast is particularly disconcerting because bonds generally are much less risky than equities and thus should be much cheaper to trade.

The Securities and Exchange Commission could rapidly and substantially improve bond-market efficiency by requiring brokers to post their customers’ limit orders to an electronically accessible broker platform or alternative trading system. Once posted, one investor’s limit order could trade against another investor’s order without dealer intermediation. As similar requirements have done for stock limit orders, this would significantly improve bond-trading transparency and execution.
Dealers would remain important in the bond markets because investors rarely are present on both sides of the market at the same time for many bonds. But when they are, they should be able to easily trade with each other if they can trade at more favorable prices than dealers offer. Reducing the dependence of bond markets on dealers—many of whom are subject to increasing regulation of their trading—will improve market liquidity, and thereby attenuate volatility.

Practitioners recognize that the interest-rate and credit risks of holding a corporate bond are similar to the combined risks of holding a Treasury bond (pure interest-rate risk) and some shares of the corporation’s stock (pure credit risk). With this understanding, the illiquidity of the corporate bond market is particularly surprising because government bonds and corporate equities both trade in highly efficient transparent electronic markets. The examples of these related markets suggest that greater transparency and more direct access for investors will substantially improve corporate bond markets. Municipal bond markets also would benefit from these changes.
In 2014 Michael Lewis identified several concerns about electronic equity markets in his book “Flash Boys.” Fixing problems in these markets would save investors a couple of basis points in execution costs here and there. These gains are minor compared to the efficiency gains possible in the bond markets. A few simple rule changes designed to harness the forces of competition and technology to better serve bond investors could rapidly achieve these efficiencies.

Partly in response to the concerns that Mr. Lewis raised, the SEC created a new Equity Market Structure Advisory Committee that met for the first time this month. At a minimum, the SEC should also convene an advisory committee to address bond-market structure issues. It would be wise to do so before another clever author focuses the public’s attention on them. In the meantime, investors continue to pay more than they should to trade bonds.

As investors approach retirement, many reallocate their portfolios from equities to fixed income. The aging of populations in all developed countries suggests that fixed-income markets will be of increasing importance to investors. Now is the time to bring them into the 21st century.

Mr. Harris is a professor at the USC Marshall School of Business and a member of the Financial Economists Roundtable, from whose 2015 policy statement this op-ed was adapted.

New Housing Crisis in the Making? If So, What's the Solution?

By: Mike Shedlock

Sunday, June 7, 2015

Home ownership rates are sinking and demographics are part of the reason. But does that constitute a new housing crisis?

Housing: A Crisis in the Making
The Wall Street Journal writer Nick Timiraos makes the case in New Housing Crisis Looms as Fewer Renters Can Afford to Own.
Last decade's housing crisis has given way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing. 
The latest crisis looks very different from the subprime mania of the early 2000s, but it does share one trait: Policy makers in Washington appear either unaware or unwilling to do much about it. 
The U.S. homeownership rate is now below where it stood 20 years ago when President Bill Clinton launched a national campaign to encourage more Americans to buy homes. Conventional wisdom says the rate, now at 63.7%, is leveling off to where it was for decades before the housing-market peak. 
But this is probably wrong, according to research from the Urban Institute, which predicts homeownership will continue to slip for at least the next 15 years. 
Demographics tell the story. The Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households -- nearly half of which will be Hispanic -- have lower incomes, less wealth and lower homeownership rates than the U.S. average. 
The declines reflect a surge of new renter households, which is boosting rents. Together with tougher mortgage-qualification rules, this will leave households stuck between homes they can't qualify to purchase and rentals they can't afford, says Ron Terwilliger, who spent two decades running Trammell Crow Residential, one of the nation's largest apartment developers. 
As rental households devote a greater share of their income to rent, families could face greater challenges in saving for a down payment. This could restrain a housing market that has failed to provide any real lift to the economy in the current expansion. 
What's to be done? Given budget pressures, it may not be realistic to expect the government to spend any more money on housing than it already does. Thus, the focus now should be on reallocating what is already committed, says Mr. Terwilliger, a Republican, who this month will formally launch a foundation designed to start these conversations. His goal is legislation after the 2016 election that realigns housing policy with the shifting dynamics.

Breaks for Apartment Builders

Given that Terwilliger spent two decades as one of the nation's largest apartment developers the answer should be easy to figure out. He wants to end tax breaks for home ownership to subsidize new home owners and "free up funds for the rental side."
His complaint: 75% of the housing tax breaks go to the top 20% of individuals. That is hardly shocking given the top 20% buy the most expensive homes and therefore pay the most in interest.
Timiraos, buys all Terwilliger's nonsense hook line and sinker, finishing the WSJ article with "Politically, none of this will be easy . Some will say it's a zero-sum game -- helping renters at the expense of owners. Not so, says Mr. Terwilliger. If renters can't ever become homeowners, who will buy those homes when today's homeowners need to sell?"

Housing Crisis Past and Present
The 2015 housing crisis was caused the same way as the one in 2007: Interference by the Fed, by Congress, by local officials wanting to create affordable housing.
Terwilliger wants a combination of affordable housing and affordable renting. Lovely.
Driving up home ownership rates does is guaranteed to do one thing: drive up prices.
Fannhie Mae, Freddie Mac, and hundreds of other government programs culminating with president Bush's "Ownership Society" all contributed to make housing unaffordable.
The government has no business promoting one form of living over another.

Self-Correcting Problem

Terwilliger ends with the question "If renters can't ever become homeowners, who will buy those homes when today's homeowners need to sell?"
The answer should be obvious: Prices will fall until there is a pool of buyers!
In the wake of the great financial crisis, home prices actually fell to the point of being affordable. Few seemed happy with the result. The Fed wanted to prevent deflation and in the greatest financial experiment in history unleashed round after round of QE.
Asset prices recovered, but wages didn't. As a result, homes are once again unaffordable.
Does Terwilliger want affordable housing or not?
If government and the Fed got out of the way, there would be no problem. Instead, Terwilliger wants the government to "do something".
I suggest the government and the Fed have done far too much already.

Solution is Undoing
Instead of promoting something, a process that has failed every time, how about undoing everything that contributed to the mess.
My proposal
  • Eliminate Fannie Mae
  • Eliminate Freddie Mac
  • Eliminate the FHA
  • Eliminate rent rent controls
  • Eliminate itemized deductions and replace with a flat tax

That's the real solution to the problem, not more self-serving affordable housing nonsense from people with a vested interest in promoting something for their own benefit.