Oil Market Hype And Crisis Signal Greater Troubles Ahead

Most people are not avid followers of economic news, and I don’t blame them. Financial analysis is for the most part boring and tedious and you would have to be some kind of crazy to commit a large slice of your life to it.

However, those of us who are that crazy do what we do (and do it independently) because underneath all the data and the charts and the overnight news feeds we see keys to future events. And if we are observant enough, we might even be able to warn people who don’t have the same proclivities but still deserve to know the reality of the world around them.

Most Americans and much of the rest of the planet probably were not aware of the recent oil producer’s meeting in Doha, Qatar this past Sunday, nor would they have cared. A bunch of rich guys in white dresses talking about oil production levels does not exactly spark the imagination. What the masses missed, though, was an event that could affect them deeply and economically for many months to come.

A little background highly summarized…

After the derivatives and credit crisis launched in 2007/2008 the Federal Reserve responded to disastrous levels of deflation with a fiat money printing bonanza. Everyone knows this. The problem was the central bankers never had any intention of actually using all that “cash” to support Main Street or the fundamentals of the economy.

Instead, they used their printing press and digital loan transfers to artificially re-inflate the coffers of banks and major corporations. It was a blood transfusion for vampires, if you will.

Through the use of TARP (Troubled Asset Relief Program), quantitative easing, artificially low interest rates, and probably a host of secret actions we’ll never hear about, a steady stream of capital (or debt, to be more precise) was pumped through corporate conduits. The goal? To keep the U.S. from immediate bankruptcy through treasury bond purchases, to boost bank credit, and to allow companies to institute an unprecedented program of stock buybacks (a method by which a corporation buys back its own shares to reduce the amount on the market, thereby manipulating the value of the remaining shares to higher prices).

As the former head of the Federal Reserve Dallas branch, Richard Fisher admitted in an interview with CNBC:

“What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.

It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow."

Why would the Fed want to engineer a hollow rally in stocks? As I have said in the past, they did this because they know that the average American watches about 15 minutes of television news a day and gauges the health of the economy only on whether the Dow is green or red.

From 2009 to 2015, the Fed felt it needed to support markets through fiat and keep the public placated and apathetic.

Stocks and bonds were not the only assets being propped up by the Fed, though. In tandem, oil markets were artificially inflated.

Oil suffered a historic spike in 2008, then collapsed to near $40 (WTI). Starting in 2009 and the initiation of major stimulus measures by the Fed, oil prices came back with a vengeance; almost as if the spike in 2008 was merely a measure to psychologically prepare the public for what was to come.

In 2010 prices climbed near the $90 mark, then in 2011 they peaked at around $115 a barrel.

Then, something magical happened — in December, 2013, the Fed announced the Taper of QE3, something very few people predicted would actually happen (you can read this article breaking down why I predicted it would happen).

The taper involved slowly cycling out Fed purchases a month at a time. By mid-2014 the taper was nearing completion. Suddenly, oil markets began to tank. By October, 2014 the Fed finished the taper and oil collapsed, from $95 a barrel to a low of under $30 a barrel at the beginning of 2016. The correlation between the Fed taper and the overwhelming drop in oil prices is undeniable. Clearly, high oil prices were primarily dependent on Fed QE.

While equities fluctuated heavily after the end of QE3, they were still supported by the Fed’s other pillar – near zero interest rates. NIRP allowed the Fed to continue funneling cheap or free money to banks and corporations so they could keep stock buybacks rolling, but oil was done for.

Now, until recently, oil markets have NOT reflected the true state of the global economy. All other fundamental indicators have been in decline since the crash of 2008, including global exports, imports, the Baltic Dry Index, manufacturing, wages, real employment numbers, etc.

Oil consumption in the U.S., according to the World Economic Forum, has sunk to lows not seen since 1997. Current levels of oil consumption are FAR below projections made in 2003 by the Energy Information Administration. By most tangible measurements, we never left the crisis of 2008.

Oil demand continued to fall but prices remained high because of Fed intervention. My theory:

As with stocks, the Fed at that time needed to pump up the only other indicator the mainstream might notice as a sign of dangerous deflation – energy prices.  Dwindling demand is the real problem being hidden in chaos surrounding arguments over production.  The establishment prefers we focus completely on supply while ignoring the warnings of falling demand.

QE was the first pillar to be pulled from the false recovery, and oil markets plunged. At the end of 2015, the Fed removed the second pillar of NIRP and raised interest rates. OPEC members met to discuss a possible production freeze agreement but the conference failed to produce anything legitimate. This resulted in stocks crashing in extreme volatility to meet up with oil.

Then something magical happened once again. In mid-February, OPEC members and non-members arranged yet another meeting, this time with much fanfare and steady rumors hinting at a guaranteed production freeze deal. Oil began to climb back from the brink, and stocks rallied over the course of six more weeks.  All eyes were on Doha, Qatar and the oil agreement that would "save markets".

I bring up the recent history of oil markets because I want to give some perspective to those people who suffer from a disease I call "ticker tracking".  This disease causes extreme short attention span issues and loss of long term memory.  The dopamine addiction of ticker tracking makes people forget about long term trends and their relation to the events of today, to the point that they ignore all fundamentals in the name of watching little red and green lines day in and day out.

For example, the fact that the Doha meeting failed but did not result in an immediate and massive slide in oil and stocks sent ticker trackers crowing that the market "will never be allowed to fall". 

Their affliction keeps them from realizing that the effects of Doha, like any other major financial event in the past, take TIME to set in.  Not to mention, they seem oblivious to the implications of oil struggling to move comfortably beyond $40 a barrel.

Remember, oil was around $60 (WTI) six months ago, and had held over $100 (WTI) for years before then.  The crash in oil markets has ALREADY happened, folks.  What we are witnessing today is the last vestiges of that crash playing out in extreme volatility.  Now we wait for equities to fall and meet oil, as they did at the beginning of 2016, and as they eventually will again.

Are stocks tracking oil prices? It may not be an absolute correlation, and they do tend to decouple at times, but the overall trend has been consistent; when oil falls, stocks loosely follow.

The Doha meeting was always a farce; that much was obvious before it even took place.

Bloomberg along with other media outlets were planting rumors of backroom deals between Russia and Saudi Arabia before the Doha event which would solidify a production freeze.

Numerous mainstream “experts” claimed an agreement was essentially a sure thing. Even some skeptics within the liberty movement were doubtless that a deal was certain because “the internationalists would never allow oil prices to continue to drag on the public perception of the economy.”

First, I am not a believer in the idea that global economic decisions are really made at these meetings.

Any nation that has a central bank that is tied to the Bank of International Settlements and the International Monetary Fund is a CONTROLLED nation. Period. Economic arrangements are handed down from on high, not debated spontaneously in open forums. Read Harper’s 1983 article on the BIS titled “Ruling The World Of Money” for more information on how globalists control the economic policies of nations.

Second, even if a person believes that such vital economic decisions as a global oil production freeze are decided in closed meetings while the press waits just outside, why would anyone buy into the Doha event?

I am not quite sure why some people were gullible enough to think that after 15 YEARS of oil producers refusing to come together on any form of meaningful agreement they would suddenly shake hands this year. The only hope markets had was the possibility that the Doha meeting would result in an empty deal that they could spin in the mainstream news as a legitimate “production freeze.” Apparently they won’t even be getting that.

The Doha talks ended in failure. All the signs said this would happen. As I wrote in my article “Lost Faith In Central Banks And The Economic End Game”:

For anyone who was betting on oil markets to continue their rally past the $40 per barrel mark, there was a lot of bad news. Saudi Arabia crushed optimism by announcing that it would not be entertaining a “production freeze” proposal unless ALL other oil producing nations, including Iran, also agreed to it.

Iran then doubly crushed optimism by announcing an increase in production rather than committing to a freeze.

Russia then administered the final blow by releasing data showing that their oil output had risen to historic levels, indicating that they will not be entering into any agreement on a production freeze.

Besides a recent overly optimistic (and rather suspicious inventory draw) which has caused a short term rebound, all indicators show that oil will be headed back to the lows seen at the beginning of this year.

The effects of the Doha failure were delayed by a convenient labor strike in Kuwait, which caused algo trading computers to buy en masse despite the negative news.  As I pointed out on Monday, though, the Kuwait situation would be very short lived.  Now, it is time to watch and wait for Saudi Arabia and Iran to begin battling over market share and increasing production even more.  These things take a little time to develop.

Currently oil has dropped back below $40(WTI) and markets are extremely volatile. I do not believe the failure of the Doha meeting alone will translate to a fantastic drop in stocks. But, I do believe that it is a very heavy straw added to the camel's back, and there is a negative trend developing before our very eyes that will become apparent in the next couple of months.

As I have said in the past, a market entirely supported by rumors and hearsay can rally quickly, but also lose all gains at the drop of a hat. What the Doha debacle represents is a signal that the establishment is incrementally abandoning support for market systems.  This is translating to a loss of faith in central banks and major financial institutions.

On top of this, look at the incredible amount of misinformation and misdirection that went into Doha, now completely exposed. The truth is crystal; the MSM lied and obfuscated helping the establishment to drive up oil prices and stocks, all for a mere six to eight weeks of market security.  As soon as these lies were revealed, volatility began to return.

If the oil market bubble can implode (as it already has) in such a way due to the striking of fundamentals, then stocks can also be destabilized as well. It will happen, and I believe 2016 is the year it will happen.

There are those out there that miscalled how the Doha meeting would end because they were blinded by a particularly dangerous bias; they have assumed that central banks and internationalists want or need to continue propping up markets indefinitely. This is not necessarily true. In fact, I have outlined time and again evidence showing that they are planning the opposite. That is to say, they are planning to deliberately bring down markets in a controlled manner.

Oil was the most recent system to be undermined, and stocks will likely follow before the year is out. The fall in oil and the circus at Doha signals a change in strategy by the globalists. It signals a shift towards the controlled demolition of our economy and the centralization of fiscal power into a single global administrative entity. Order out of chaos.

There is a steady stream of events in the next few months that can be used as a steam valve for sinking global markets. Watch the April Fed meeting carefully. The Fed recently held two “emergency meetings” along with a third surprise meeting between President Barack Obama and Fed Chair Janet Yellen. The last time such a meeting occurred the Fed hiked rates less than a month later. I expect that the Fed will raise rates once again either this month or in June.

Also, watch for the Brexit (the British exit from the EU) referendum in June. Such a development would greatly shock an already unsteady Europe as well as the rest of the West.

And, of course, watch for trends in oil and stocks, but do not get caught up in the day-to-day mindlessness of ticker tracking. It is pointless and will not help you to understand what is happening economically. In any economic crisis, stocks are the LAST indicator to turn negative and daily analysis by itself is in no way a crystal ball.

The next couple of months should be very interesting. Stay vigilant.

Up and Down Wall Street

Ultralow Interest Rates Pose Long-Term Challenge

To garner better returns investors will need to take on more risk and wander further afield—say, to emerging markets.

  These are the days of miracles and wonder, even more so than when Paul Simon wrote those lyrics three decades ago.
We carry the equivalent of a supercomputer of that era in our pockets and the world of communication, data, and entertainment in our hands. We also witness the steady conquest of diseases and maladies that have beset mankind for millennia.
There are other miracles in what’s being eliminated. We’re referring, of course, to driverless automobiles, which eliminates the tedium of dealing with today’s traffic. But the real miracle is featured in a local advertisement, which touts the sale of (brace yourself) gluten-free vodka. Not that there would be any gluten left after the fermentation and distillation to produce ethanol, the alcohol in all spirits. But that’s marketing for you.
The similar miracle of the modern investment world is the negative-interest-rate instrument. Investors have always expected to be paid to let somebody else use their money to buy a house, build a business, and the like. No more.
Negative interest rates have taken over the world, with an estimated $7 trillion in government bonds around the globe yielding less than zero percent. Deutsche Bank Asset Management likens receiving negative interest on a bond or bank deposit to a parking fee for investors’ funds. But that still has given rise to some bizarre situations, such as the instance reported last week by The Wall Street Journal of a Danish homeowner receiving a check from his bank— rather than sending the bank a check—for his mortgage.
But, asks Jason Trennert, head of Strategas Research Partners, how can something be a risk-free investment when one has to pay to own it? A bond with a negative yield guarantees a loss if held to maturity, which doesn’t jibe with most folks’ idea of a safe investment.
Even though negative rates haven’t reached U.S. shores, ultralow bond yields and high-priced stocks have put investors in a kind of “purgatory,” says Matt Kadnar, a member of the asset-allocation team at Grantham Mayo van Otterloo. Every asset class—from bonds to stocks, domestically and globally, plus some alternative investments—offers paltry real-return opportunities, according to GMO’s seven-year forecast.
The best that can be expected in these circumstances is to “eke out returns, hopefully with a positive sign in front of them,” adds Quincy Krosby, chief market strategist at Prudential Annuities. Japan’s experience with two decades of near-zero (and now negative) interest rates offers a chastening example of their potential effects on those trying to save for their retirement. In an extreme anecdote that Krosby relates, various press reports tell of elderly Japanese shoplifting—with the intent of being arrested and jailed, in order to obtain free housing, food, and medical care after their savings had been exhausted.
It’s unlikely that fortunate Barron’s readers would face such a fate. Yet they cannot count on the historic returns to which they have become accustomed. It’s unclear how a traditional 60/40 stock and bond portfolio would provide returns even in the 5% to 6% range in the future, says Adrian Grey, head of fixed-income at Insight Investment Management. That is a far cry from the 7% to 8% future returns assumed by many public pension plans.
A normalization of interest rates, he continues, would lift yields on cash and bonds with a widening of credit spreads, all of which would make for equity head winds. With major gauges such as the Standard & Poor’s 500 index within “spitting distance” of their records, that would mean inevitable capital losses.
Similarly, GMO’s seven-year projections look for a negative 1.2% real (that is, after inflation) annual return from U.S. large-capitalization stocks, owing to their high current valuations resulting from previous appreciation. With gains having been pulled forward by central banks’ stimulus, “we’ve gotten 10 years’ of returns in five years,” GMO’s Kadnar comments. U.S. bonds are likely to do worse, by GMO’s forecast, with a negative 1.7%, and Treasury inflation-protected securities and cash faring slightly better, at negative 0.2% and negative 0.3%, respectively.
To garner better returns requires going further afield, to emerging market equities and bonds, which GMO forecasts will return a real 4.6% and 2.4% per annum, respectively. Their better future return prospects are the product of their battering in recent years, he explains. One alternative investment, timberland, is expected to do the best of GMO’s asset classes, 4.8% in real terms. Still, all of those are well short of the 6.5% real return that U.S. equities historically have provided.
This is the market we have, not the one we want, Prudential’s Krosby observes. But that has resulted in a number of coping mechanisms to deal with low returns.
Ultralow interest rates reflect the global disinflationary head winds, writes Chun Wang of the Leuthold Group. At the same time, tepid nominal economic growth is restraining corporate profit margins; they have limited pricing power but are facing a cost squeeze from increasing wage demands. CEOs’ obvious solution has been to take advantage of cheap money and leverage up, which is the quickest way to boost returns on equity (as the share counts shrink via buybacks). But the market has seen through this financial engineering ploy, he says, rewarding less-leveraged but higher-margin stocks more.
From the investment standpoint, Strategas’ Trennert says, economic historians will probably look upon negative interest rates as a policy error. Also, “It’s certainly causing us to make certain sector calls that feel unnatural and risky to us,” he continues, “like overweighting the consumer-staples sector, trading at 21 times forward earnings, and dropping to neutral the financials, trading at a discount to book value.”
PNC Asset Management Chief Investment Officer Thom Melcher says that ultrahigh-net-worth clients are philosophical and may leave $10 million in cash earning nothing out of a $100 million portfolio rather than risk all of it. A high-class problem, to be sure.
For the rest of us, low returns will mean a combination of working longer, retiring later, and calibrating a lifestyle to cope with longer life expectancies, he says. In other words, a Zen approach—that suffering is inevitable and the result of craving—rather than hoping for some miracles and wonders to escape purgatory.

IN LAST WEEK’S COVER STORY, Janus Capital’s Bill Gross offered a few ideas on how to cope with ultralow yields, including investments where companies borrow cheaply on your behalf, as in the case of mortgage real estate investment trusts. The closed-end municipal-bond funds featured in that issue’s Current Yield column utilize the same tack.
Leverage is always a risky tool, boosting returns when the cost of the borrowing is low or declining, but wreaking havoc when borrowing costs rise. That risk is minimized by the low likelihood in coming months of the Federal Reserve following up on December’s quarter-point increase.
Indeed, according to Bloomberg’s calculations, there is a greater chance of a rate cut at the April 27 meeting of the Federal Open Market Committee—albeit at 2%, a small one—but greater than the zero probability of a hike priced into federal-funds futures market. Punk numbers released last week on retail sales, industrial production, and consumer confidence further argue against a rate hike anytime soon.
Only by the Dec. 14 FOMC confab does the futures market put an over 50% probability of an increase from the current target of 0.25% to 0.5%. Not coincidentally, the aforementioned muni closed-end funds make up a large part of the New York Stock Exchange’s new-high list in recent days, along with other bondlike stocks such as preferred and REITs.
As for the overall market, the S&P 500 added 1.6% for its seventh winning week in the past nine, bringing it within 2.4% of its peak touched last May. Moreover, the big-cap benchmark may be understating the overall market.
Bespoke Investment Group notes that the cumulative advance-decline line of the S&P 500 (the daily tally of the number of rising stocks minus declining ones, going back to the birth of the bull on March 10, 2009) did make a new bull-market high. “That suggests the S&P is actually stronger than what the index’s price is telling us, and the expectation is that price will catch up with breadth and a new high will be made,” B.I.G. comments.
If so, a cynic might wonder if the bull’s run could be his own undoing. A new high in time for the June 14-15 FOMC meeting could raise the (negligible) odds of a hike. The long-awaited initial rate increase last December came as the S&P hovered near its highs, while the decision to push out future rate rises at the March 15-16 confab followed the market’s swoon in the first six weeks of the year.
Then again, even if stocks are at new highs by June, BCA Research notes geopolitical events around the time of the FOMC meeting that would induce the panel to hold off on hikes, including the United Kingdom’s Brexit vote on June 23. Of course, global considerations have figured increasingly in the deliberations of Yellen & Co.
Back in the U.S., the June 7 California primary will tell whether there will be a contested (and contentious) Republican convention, BCA adds, although it’s unclear what impact the potential political turmoil would have on the Federal Reserve. The stock market, however, may be another story.

The Great Recession Blame Game

Banks took the heat, but it was Washington that propped up subprime debt and then stymied recovery.

By Phil Gramm and Michael Solon

Photo: Shivendu Jauhari/iStock

When the subprime crisis broke in the 2008 presidential election year, there was little chance for a serious discussion of its root causes. Candidate Barack Obama weaponized the crisis by blaming greedy bankers, unleashed when financial regulations were “simply dismantled.” He would go on to blame them for taking “huge, reckless risks in pursuit of quick profits and massive bonuses.”

That mistaken diagnosis was the justification for the Dodd-Frank Act and the stifling regulations that shackled the financial system, stunted the recovery and diminished the American dream.

In fact, when the crisis struck, banks were better capitalized and less leveraged than they had been in the previous 30 years. The FDIC’s reported capital-to-asset ratio for insured commercial banks in 2007 was 10.2%—76% higher than it was in 1978. Federal Reserve data on all insured financial institutions show the capital-to-asset ratio was 10.3% in 2007, almost double its 1984 level, and the biggest banks doubled their capitalization ratios. On Sept. 30, 2008, the month Lehman failed, the FDIC found that 98% of all FDIC institutions with 99% of all bank assets were “well capitalized,” and only 43 smaller institutions were undercapitalized.

In addition, U.S. banks were by far the best-capitalized banks in the world. While the collapse of 31 million subprime mortgages fractured financial capital, the banking system in the 30 years before 2007 would have fared even worse under such massive stress.

Virtually all of the undercapitalization, overleveraging and “reckless risks” flowed from government policies and institutions. Federal regulators followed international banking standards that treated most subprime-mortgage-backed securities as low-risk, with lower capital requirements that gave banks the incentive to hold them. Government quotas forced Fannie Mae and Freddie Mac to hold ever larger volumes of subprime mortgages, and politicians rolled the dice by letting them operate with a leverage ratio of 75 to one—compared with Lehman’s leverage ratio of 29 to one.

Regulators also eroded the safety of the financial system by pressuring banks to make subprime loans in order to increase homeownership. After eight years of vilification and government extortion of bank assets, often for carrying out government mandates, it is increasingly clear that banks were more scapegoats than villains in the subprime crisis.

Similarly, the charge that banks had been deregulated before the crisis is a myth. From 1980 to 2007 four major banking laws—the Competitive Equality Banking Act (1987), the Financial Institutions, Reform, Recovery and Enforcement Act (1989), the Federal Deposit Insurance Corporation Improvement Act (1991), and Sarbanes-Oxley (2002)—undeniably increased bank regulations and reporting requirements. The charge that financial regulation had been dismantled rests almost solely on the disputed effects of the 1999 Gramm-Leach-Bliley Act (GLBA).

Prior to GLBA, the decades-old Glass-Steagall Act prohibited deposit-taking, commercial banks from engaging in securities trading. GLBA, which was signed into law by President Bill Clinton, allowed highly regulated financial-services holding companies to compete in banking, insurance and the securities business. But each activity was still required to operate separately and remained subject to the regulations and capital requirements that existed before GLBA. A bank operating within a holding company was still subject to Glass-Steagall (which was not repealed by GLBA)—but Glass-Steagall never banned banks from holding mortgages or mortgage-backed securities in the first place.

GLBA loosened federal regulations only in the narrow sense that it promoted more competition across financial services and lowered prices. When he signed the law, President Clinton said that “removal of barriers to competition will enhance the stability of our financial system, diversify their product offerings and thus their sources of revenue.” The financial crisis proved his point. Financial institutions that had used GLBA provisions to diversify fared better than those that didn’t.

Mr. Clinton has always insisted that “there is not a single solitary example that [GLBA] had anything to do with the financial crisis,” a conclusion that has never been refuted. When asked
by the New York Times in 2012, Sen. Elizabeth Warren agreed that the financial crisis would not have been avoided had GLBA never been adopted. And President Obama effectively exonerated GLBA from any culpability in the financial crisis when, with massive majorities in both Houses of Congress, he chose not to repeal GLBA. In fact, Dodd-Frank expanded GLBA by using its holding-company structure to impose new regulations on systemically important financial institutions.

Another myth of the financial crisis is that the bailout was required because some banks were too big to fail. Had the government’s massive injection of capital—the Troubled Asset Relief Program, or TARP—been only about bailing out too-big-to-fail financial institutions, at most a dozen institutions might have received aid. Instead, 954 financial institutions received assistance, with more than half the money going to small banks.

Many of the largest banks did not want or need aid—and Lehman’s collapse was not a case of a too-big-to-fail institution spreading the crisis. The entire financial sector was already poisoned by the same subprime assets that felled Lehman. The subprime bailout occurred because the U.S. financial sector was, and always should be, too important to be allowed to fail.

Consider that, according to the Congressional Budget Office, bailing out the depositors of insolvent S&Ls in the 1980s on net cost taxpayers $258 billion in real 2009 dollars. By contrast, of the $245 billion disbursed by TARP to banks, 67% was repaid within 14 months, 81% within two years and the final totals show that taxpayers earned $24 billion on the banking component of TARP. The rapid and complete payback of TARP funds by banks strongly suggests that the financial crisis was more a liquidity crisis than a solvency crisis.

What turned the subprime crisis and ensuing recession into the “Great Recession” was not a failure of policies that addressed the financial crisis. Instead, it was the failure of subsequent economic policies that impeded the recovery.

The subprime crisis was largely the product of government policy to promote housing ownership and regulators who chose to promote that social policy over their traditional mission of guaranteeing safety and soundness. But blaming the financial crisis on reckless bankers and deregulation made it possible for the Obama administration to seize effective control of the financial system and put government bureaucrats in the corporate boardrooms of many of the most significant U.S. banks and insurance companies.

Suffocating under Dodd-Frank’s “enhanced supervision,” banks now focus on passing stress tests, writing living wills, parking capital at the Federal Reserve, and knowing their regulators better than they know their customers. But their ability to help the U.S. economy turn dreams into businesses and jobs has suffered.

In postwar America, it took on average just 2 1/4 years to regain in each succeeding recovery all of the real per capita income that had been lost in the previous recession. At the current rate of the Obama recovery, it will take six more years, 14 years in all, for the average American just to earn back what he lost in the last recession. Mr. Obama’s policies in banking, health care, power generation, the Internet and so much else have Europeanized America and American exceptionalism has waned—sadly proving that collectivism does not work any better in America than it has ever worked anywhere else.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Solon is a partner of US Policy Metrics.

The world economy

System says slow

The IMF sees political danger in the economic doldrums

IS THERE a global economic crisis on the horizon? Probably not. Is the world in danger of falling into recession? Not soon. Yet the IMF’s latest update of its forecasts is nevertheless resolutely downbeat. Speaking this week in Washington, DC, its chief economist, Maurice Obstfeld, outlined yet another downward revision to its prediction for global GDP growth. It is likely that the next revision will again be down. One of the big threats to the world economy, he said, is from “non-economic risks”—fund-speak for grubby politics. A world economy stuck in the doldrums, he cautioned, may be a perilous place politically.

The actual forecasts are far from horrible. The fund nudged down its estimate of global growth for 2016 from 3.4% to 3.2%. That is still a shade faster than in 2015. The revisions are broad-based: America, Europe and the emerging world as a bloc all saw similar downgrades (see chart). The forecast for sub-Saharan Africa was pared back the most, in large part because of a gloomier outlook for oil-rich Nigeria, the continent’s bigest economy. The recent recovery in crude prices will take some pressure off oil producers, but “we won’t be seeing prices at the $100 a barrel level for some time, if ever,” said Mr Obstfeld. Of biggish economies, only China escaped a downgrade. The fund is more confident than it was in January that stimulus measures there will work. But there is a concern about the quality of China’s growth, said Mr Obstfeld, as fresh credit is directed towards sputtering industries.

The scenario the fund seems most concerned about is a steady slide in global GDP growth that feeds on itself by discouraging investment, thereby exacerbating political tensions, which in turn make fixing the economy even harder. Brazil shows how a bad economy can be made worse by political paralysis. Low growth might add to the “rising tide of inward-looking nationalism” in the rich world, said Mr Obstfeld. Politics in America is moving against free trade. And there are various threats to Europe beyond the perennial problem of Greece. The refugee crisis has already put pressure on the European Union’s open-borders policy and there is a “real possibility” that Britain might leave the EU.

The IMF has some familiar remedies for the global economy: keep monetary policy loose, augment it with fiscal stimulus where possible and add some pro-growth reforms to the mix.

Such action is needed to insure against the risks the fund identifies. But the world should also be making contingency plans for a co-ordinated response if a financial shock hits. “There is no longer much room for error,” said Mr Obstfeld, with a certain weariness.

A Progressive Logic of Trade

Dani Rodrik
. shipping port

CAMBRIDGE – The global trade regime has never been very popular in the United States.

Neither the World Trade Organization nor the multitudes of regional trade deals such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) have had strong support among the general public. But opposition, while broad, was diffuse.
The difference today is that international trade has moved to the center of the political debate.
The US presidential candidates Bernie Sanders and Donald Trump have both made opposition to trade agreements a key plank of their campaigns. And, judging from the tone of the other candidates, standing up for globalization constitutes electoral suicide in the current political climate.
The populist rhetoric on trade may be excessive, but few deny any longer that the underlying grievances are real. Globalization has not lifted all boats. Many working families have been devastated by the impact of low-cost imports from China and elsewhere. And the big winners have been the financiers and skilled professionals who can take advantage of expanded markets. While globalization has not been the sole (or even the most important) force driving inequality in the advanced economies, it has been a contributor.
What gives trade particular political salience is that it often raises fairness concerns in ways that the other major contributor to inequality – technology – does not. When I lose my job because my competitor innovates and introduces a better product, I have little cause to complain. When he does so by outsourcing to firms abroad that do things that would be illegal here – for example, prevent their workers from organizing and bargaining collectively – I may have a real gripe.
Sanders has forcefully advocated the renegotiation of trade agreements to reflect better the interests of working people. But such arguments immediately run up against the objection that any standstill or reversal on trade agreements would harm the world’s poorest, by diminishing their prospect of escaping poverty through export-led growth. “If you’re poor in another country, this is the scariest thing Bernie Sanders has said,” ran a headline in the popular and normally sober Vox.com news site.
But trade rules that are more sensitive to social and equity concerns in the advanced countries are not inherently in conflict with economic growth in poor countries. Globalization’s cheerleaders do considerable damage to their cause by framing the issue as a stark choice between existing trade arrangements and the persistence of global poverty. And progressives needlessly force themselves into an undesirable tradeoff.
First, the standard narrative about how trade has benefited developing economies omits a crucial feature of their experience. Countries that managed to leverage globalization, such as China and Vietnam, employed a mixed strategy of export promotion and a variety of policies that violate current trade rules. Subsidies, domestic-content requirements, investment regulations, and, yes, often import barriers were critical to the creation of new, higher-value industries. Countries that rely on free trade alone (Mexico comes immediately to mind) have languished.
That is why trade agreements that tighten the rules are in fact mixed blessings for developing countries. China would not have been able to pursue its phenomenally successful industrialization strategy if the country had been constrained by WTO-type rules during the 1980s and 1990s. With the TPP, Vietnam gets some assurance of continued access to the US market (existing barriers on the US side are already quite low), but in return must submit to restrictions on subsidies, patent rules, and investment regulations.
Second, there is nothing in the historical record to suggest that poor countries require very low or zero barriers in the advanced economies in order to benefit greatly from globalization. In fact, the most phenomenal export-oriented growth experiences to date – Japan, South Korea, Taiwan, and China – all occurred when import tariffs in the US and Europe were at moderate levels, and higher than where they are today.
So, for progressives who worry both about inequality in the rich countries and poverty in the rest of the world, the good news is that it is indeed possible to advance on both fronts. But to do so, we must transform our approach to trade deals in some drastic ways.
The world’s trade regime is currently driven by a peculiarly mercantilist logic: You lower your barriers in return for me lowering mine. This approach has been remarkably successful in promoting trade expansion, but it has little economic justification. Now that the world economy is already very open, “exchange of market access” is causing more problems than it solves.
The time has come to embrace a different logic, that of “exchange of policy space.” Poor and rich countries alike need to carve out greater space for pursuing their respective objectives. The former need to restructure their economies and promote new industries, and the latter must address domestic concerns over inequality and distributive justice. This requires placing some sand in the wheels of globalization.
The best way to bring about such institutional re-engineering would be to rewrite multilateral rules.
For example, the “safeguards” clause of the WTO could be broadened to allow the imposition of trade restrictions (subject to procedural disciplines) in instances where imports demonstrably conflict with domestic social norms. (I discuss the specifics in my book The Globalization Paradox.) Similarly, trade agreements could incorporate a “development box” to provide poor countries with the autonomy they need to pursue economic diversification.
Progressives should not buy into a false and counter-productive narrative that sets the interests of the global poor against the interests of rich countries’ lower and middle classes. With sufficient institutional imagination, the global trade regime can be reformed to the benefit of both.

Too Big to Fail? So What, Say Bank Depositors

The biggest U.S. banks continued to gain deposits in the first quarter

By Aaron Back

    Wells Fargo and its U.S. big-bank peers held $4.2 trillion in deposits at the end of the first quarter. Photo: Andrew Harrer/Bloomberg News

Plenty of people say they don’t like too-big-to-fail banks. Yet plenty of people are still happy to give those same banks their money—even when it earns them next to nothing.

While big banks suffered during the tumultuous first quarter, deposits continued to roll in the door. That was one of several silver linings in what was an otherwise dispiriting first quarter.

Combined, the big four commercial banks— J.P. Morgan Chase, JPM 0.58 % Bank of America, BAC 1.41 % Wells Fargo WFC 1.14 % and Citigroup C 0.79 % —held $4.2 trillion in deposits at the end of the first quarter. That was up 2.1% from the previous quarter, outpacing the overall growth of deposits at U.S. banks, according to Federal Reserve data.

Granted, big banks’ deposits were down slightly versus the first quarter of 2015. But this likely reflects efforts by J.P. Morgan last year to shed so-called nonoperating deposits, or idle corporate deposits not linked to daily cash management, to shrink its balance sheet and cut excess capital it must hold.

For banks, this counts as good news. In recent years, the flood of deposits into big banks was a burden; they couldn’t use all of it due to weak loan demand. That led to a buildup of securities portfolios.

But in the first quarter, total loans at BofA, Citi and Well Fargo were up 5.8%. So the banks are able to put more of the deposit money to work. Indeed, at J.P. Morgan, where total loans rose 11% from a year earlier, the bank’s loan-to-deposit ratio of 64% in the first quarter was up sharply from 56% a year earlier.

Here is why that is good: In the first quarter, BofA paid an average yield of just 0.08 percentage points on U.S. interest-bearing deposits of about $707 billion. Meanwhile, its loans and leases of about $893 billion earned an average yield of 3.74%. That was better than the 2.45% its nearly $400 billion in securities earned, excluding some market-related adjustments. So loan growth allows the banks to at least hold the line on their flagging net-interest margins.

Of course, this wasn’t enough to offset some other big negatives during the quarter, such as market tumult, reduced trading activity and falling long-term yields. But without it, things could have been even worse. And, if nothing else, it shows big-bank depositors aren’t walking the angry too-big-to-fail talk.

martes, abril 26, 2016



Gold Is Overvalued

by: Gold Bug

- Too many gold investors think they should buy at any price, but this is not a smart way to invest.

- According to the CPI gold is overvalued.

- Price target: $900 per ounce in physical, around $75 per share in GLD.
The Different Types of Gold Investors:

An article was recently posted that addressed the different types of people who buy gold. I agree with the basic premise of that article, but I think the concept can be simplified. To me there are two types of people who buy gold: the rational investor and the emotional speculator.

This dichotomy can be found in any investment medium and is commonly described as "smart money" vs "dumb money."

Dumb (unsophisticated) money has an emotional attachment to an investment and outcome. He buys when it is going up and sells when it is going down. Sometimes he never sells and bagholds forever. This type of investor follows the crowd and lacks originality. As a result, the dumb money typically invests at the top of a mountain and is left with the losses when the bubble eventually collapses.

Smart money buys low and sells high. This type of investor waits for the lowest point in the market before making a move. Smart money is careful, investing with an entry plan and an exit plan.

Note: Risk is minimized by investing when the market simply cannot fall any lower. A good example of smart money is Warren Buffet, he gets a lot of credit, but what he does is quite simple and natural for those of us who understand how markets work.

Gold is Overvalued:

The purpose of gold is to protect purchasing power and hedge against inflation. Some will say the metal has little direct correlation to inflation, but this is not the point. The point is that gold is a readily available currency that is guaranteed to retain some value, even during an apocalyptic doomsday scenario - something no fiat currency can promise. Exchange traded gold products make this process easier than ever.

Nevertheless, gold is not immune from speculative bubbles and overvaluation. This concern is especially pertinent for products like the SPDR Gold Trust (NYSEARCA:GLD). Unlike physical gold, ETFs like are not designed to kept forever. The point of these funds is to preserve wealth for a later date. If you buy GLD when gold is overvalued you are making a mistake and are no different from the people who bought houses at the peak of 2007 or investors who bought stocks during the tech bubble in 2001. The investment will not protect purchasing power in the long term.

Gold vs the U.S CPI:

US Consumer Price Index Chart

Purchasing power and inflation can be measured with the Consumer Price Index (NYSEARCA:CPI).

The CPI is a measurement of the average change over time in a market basket of consumer goods and services. It can be used to measure purchasing power erosion and inflation in the U.S dollar. Comparing the CPI to gold lets us know how well gold is doing at protecting purchasing power. It also shows us when gold has become overvalued by speculation.

What caused the bubble in gold?

The bubble in gold was caused by the Federal Reserve's Quantitative Easing policy. QE was done to, not only stimulate the economy, but to prevent deflation. Because of the vast amounts of money being printed many institutions expected that the U.S economy would experience "stagflation"- a situation of rising prices with zero economic growth.

When stagflation didn't materialize, the gold bubble lost its footing. This is why the metal is slowly unwinding to a more reasonable valuation. In the present, expect gold spikes after dovish Fed meetings and drops when the dollar strengthens or if the Fed tightens.

When to buy gold?

The best time to buy gold was from 1990 to 2005. The worst times to buy it was in the early 1980s and in 2011 to the present:

This chart indicates that the fair value of gold is around $750, and this is in the ballpark of the metal's profitable cost of production. The chart shows major resistance when gold started to hit the CPI in 1983 and 2009. In the years between 1990 to 2006 we had a major undervaluation of gold that was probably due to how attractive the equities markets were during that period.

Current holders of physical gold shouldn't necessarily sell, but potential buyers might want to wait for a reliable indicator that prices have bottomed out before getting in. Paper gold products like GLD should simply be avoided right now.

My Price Target:

I do not think gold prices will go as low as $750, but that is the hard fundamental floor prices below which represent extreme undervaluation. However, I would expect this to occur in a full fledged deflationary period lasting more than 4 quarters.

The dovish policies of the U.S Federal Reserve make this unlikely, and the probability of Quantitative Easing being used to prevent deflation during economic downturn should provide speculative resistance to price decreases below $1000. The price of gold should bottom at around $850-950 as the CPI rises to meet it over a decade or so.

Shrunken Citigroup Illustrates a Trend in Big U.S. Banks


A Citibank branch in Caracas. Citi has shed retail branches from Boston to Pakistan. Credit Carlos Garcia Rawlins/Reuters       
Citigroup became the nation’s first megabank some two decades ago by expanding into new businesses while pushing to knock down barriers that limited its size.
A much different Citigroup was evident on Friday as it reported its quarterly results. Business lines like subprime lending, which used to define the company, have all but disappeared.
Over the last seven years, Citigroup has sold more than 60 businesses, shedding retail bank branches from Boston to Pakistan. In all, the bank’s holdings have shrunk by $700 billion — an amount roughly equivalent to Switzerland’s economic output. The bank’s chief executive said on Friday that since he took over in 2012, the company’s work force had declined by 40,000 jobs, through layoffs or selling businesses.
On the campaign trail, and in the Democratic debate Thursday, the conversation has often returned to an assumption that very little has changed in the nation’s banking system since the 2008 financial crisis. But Citigroup’s financial results were one of many reminders this week of just how much success the government has already had in pushing banks to become simpler and safer, if not always smaller.
Bank of America and JPMorgan Chase, in their own earnings announcements this week, emphasized how much more of a financial cushion they had built up to protect themselves in a crisis, and how many risky businesses they had jettisoned.
The bank presentations this week also indicated that even if Senator Bernie Sanders, Democrat of Vermont, does not win the White House — and is thwarted in his wish to break up the big banks — the companies will still face intense pressure from their regulators and their shareholders to shed more employees and business lines.
On Thursday, Bank of America talked about the likelihood of further reductions, while Goldman Sachs is said to be embarking on its biggest cost-cutting campaign in years.
All of these moves are a testament to the power of the tools that the regulators have already used, and appear intent to continue using, to change the profile of the biggest American banks.

Rather than simply telling the banks to shrink, regulators have used a set of sometimes arcane instruments — like capital requirements — that have quietly but significantly penalized the banks for their size and complexity, and required them to find ways to shrink on their own.
Just this week, the top bank regulators wielded a relatively new tool when they told five of the eight largest banks that they needed to develop better plans for winding themselves down in case of a crisis. If the banks do not do so, the regulators threatened to force the banks to shrink even more.
Citigroup was the only one of the eight largest banks to have its plan, or so-called living will, approved by the Federal Reserve and the Federal Deposit Insurance Corporation, in large part because of the steps the bank has already taken to slim down.
Like the other big banks, it is not yet out of the woods, however. Because of the regulatory penalties for being large, some on Wall Street are questioning whether even in its diminished state, Citigroup is still too large.
“You should be selling the silverware in the dining rooms or the paper clips from the desk or the desk chairs or the whole desk,” the banking analyst Mike Mayo told Citigroup’s top executives in a conference call Friday morning.
The challenges have pushed bank stocks down this year to their lowest level since 2012. That in turn, has forced bank executives to cut salaries and bonuses, and thousands of jobs, across their business lines.
Financial services nonetheless is still among the highest-paying sectors in the country. And more important, the big banks remain behemoths. JPMorgan Chase and Wells Fargo are bigger than they were before the financial crisis. At all the big banks, the risk-taking Wall Street operations still provide a major proportion of revenue and profit.
But all of that is being squeezed by the “vise that is the current regulatory environment,” said Brian Kleinhanzl, an analyst with Keefe Bruyette & Woods, an investment bank.
Mr. Kleinhanzl has said that Citigroup will probably have to eventually break into smaller pieces if it wants to increase growth under current regulations.
Until now, many of the assets that large banks like Citigroup have sold have included a hodgepodge of businesses — student loans, an insurance unit and retail operations in far-flung corners or the developing world.
Mr. Kleinhanzl says the bank needs to take more drastic steps, making the case for Citigroup to split its consumer and corporate businesses into two separate companies or sell parts of its profitable Mexican unit.
Still, the banks could get a reprieve from many of these pressures if a Republican wins the White House in November. All of the top Republican candidates have called for a reversal of the Dodd-Frank financial overhaul that has guided many of the recent regulatory actions.
“We don’t think it’s the time to start selling the furniture,” Citigroup’s chief financial officer, John C. Gerspach, said in response to Mr. Mayo.
But at more than a few points, hints of resignation crept into the presentations of the top bank executives as they spoke of the need to submit to the tightening regulatory vise.
“We’re trying to meet all the regulations, all the rules and all the requirements,” JPMorgan’s chief executive, Jamie Dimon, said on Thursday, after announcing one of the bank’s worst quarters in years.
“We’ve been doing that now for five or six years. It’s six years since Dodd-Frank was passed; they have their job to do, and we have to conform to it.”