Wall Street for President?

by Simon Johnson

WASHINGTON, DC – America’s presidential election is still nearly two years away, and few candidates have formally thrown their hats into the ring. But both Democrats and Republicans are hard at work figuring out what will appeal to voters in their parties’ respective primary elections – and thinking about what will play well to the electorate as a whole in November 2016.

The contrast between the parties at this stage is striking. Potential Republican presidential candidates are arguing among themselves about almost everything, from economics to social issues; it is hard to say which ideas and arguments will end up on top. The Democrats, by contrast, are in agreement on most issues, with one major exception: financial reform and the power of very large banks.

The Democrats’ internal disagreement on this issue is apparent when one compares three major proposals to address income inequality that the party and its allies have presented in recent weeks. There are only small differences between President Barack Obama’s proposals (in his budget and State of the Union address), those made in a high-profile report from the Center for American Progress, and ideas advanced by Chris Van Hollen, an influential member of Congress. (For example, Van Hollen recommends more redistribution from higher-income people to offset a larger tax cut for middle-income groups.)

Against this backdrop of programmatic unity, the difference of opinion among leading Democrats concerning Wall Street – both the specifics of the 2010 Dodd-Frank financial reforms and more broadly – stands out in bold relief.

On Dodd-Frank, Democrats – including Obama – are apparently of two minds on the extent to which they should stick up for their own reforms. In December, the White House agreed to a Republican proposal to repeal a provision of Dodd-Frank that would have limited the risk-taking of the country’s largest banks (in fact, the proposal’s language was drafted by Citigroup).

More recently, however, Obama has threatened to veto any further attempts to roll back financial reform. And now he is proposing to impose a small tax on the largest banks’ liabilities, which he hopes will encourage “them to make decisions more consistent with the economy-wide effects of their actions, which would in turn help reduce the probability of major defaults that can have widespread economic costs.”

In contrast, the Center for American Progress report devoted very little space to financial-sector reform – in the authors’ view, such issues hardly seem to be a high priority. Van Hollen does have some concerns – and proposes a financial transaction tax to reduce speculative activities.

But a serious challenge to all of these views has now emerged, in proposals by Senator Elizabeth Warren, a rising Democratic star who has become increasingly prominent at the national level. In her view, the authorities need to confront head-on the outsize influence and dangerous structure of America’s largest banks.

Warren’s opponents like to suggest that her ideas are somehow outside the mainstream; in fact, she draws support from across the political spectrum. In last month’s fight against Citigroup’s successful effort to roll back Dodd-Frank, for example, Warren’s allies included the House Democratic leadership, the Independent Community Bankers of America, Republican Senator David Vitter, and Thomas Hoenig (a Republican-appointed vice chair of the Federal Deposit Insurance Corporation).

Warren’s message is simple: remove the implicit government subsidies that support the too-big-to-fail banks. That single move would go a long way toward reducing, if not eliminating, crony capitalism and strengthening market competition in the financial sector. This is a message that plays well across the political spectrum. And growing support for Warren’s ideas helps the Federal Reserve and other responsible regulators in their efforts to prevent big banks from taking on dangerous levels of risk.

The big Wall Street banks have enormous influence in Washington, DC, in large part because of their campaign contributions. They also support – directly and indirectly – a vast influence industry, comprising people who pose as independent or moderate commentators, edit the financial press, or produce bespoke “research” at think tanks.

These megabanks are making a determined attempt to repeal as much of Dodd-Frank as possible, and the House Republicans seem keen to help them. This is not an issue that will fade away.

The Democrats need to figure out their policy on Wall Street. In the past, they have simply gone for the campaign contributions, doling out access and influence in exchange. It is now obvious that this is not consistent with defending what remains of Dodd-Frank.

Warren offers a plausible, moderate alternative approach to financial-sector policy that would play well in the primaries and attract a great deal of support in the general election. Will the Democrats seize the opportunity?

See the original article >>

Two-Thirds chance NYSE topping pattern in play

by Chris Kimble

CLICK ON CHART TO ENLARGE

Is the NYSE creating a "Giant Topping" pattern? Rising wedge patterns lead to lower prices around two-thirds of the time. At this moment, a top is not proven! For sure I do respect the potential that a rising wedge pattern could have some impact in the near future on this key broad market.

The upper left chart line (1) is based upon monthly closing prices starting with the 1987 lows. Notice that several key lows took place along this line and 2011's highs touched this line as well.

The apex of the rising wedge is narrowing, meaning this pattern should end fairly soon. The NYSE is a fraction below this line as of last night close, as the index has traded sideways for the past 6 months.

Last month SPY may have created a Doji Star topping pattern (lower right chart) at the 161% Fibonacci extension level based upon the monthly closing high in 2007 and monthly closing low in 2009. This "Doji Star" at this time has NOT proven that it is a topping pattern. Should the broad markets grow weak from here, the odds do shift higher that last months SPY pattern becomes more important.

CNBC Pro covered the potential Doji Star topping pattern earlier this month (see here)

See the original article >>

Apple $150 upside target still in play

by Chris Kimble

CLICK ON CHART TO ENLARGE

Apple had positive earning news come out last night and pre-market pricing shows it up.

Wanted to take a 30,000 foot, 30-year look at Apple's prices. As you can see, Apple has stayed inside of rising channel (1) for the past 35-years. Apple last hit channel line (1) back in 2012. After it hit this line, it proceed to lose about a third of its value in the next 9 months.

If one takes the monthly low during the financial crisis and the highs back in 2012 and applies Fibonacci levels to it, the 161% extension level comes into play around the $150 zone.

I find it interesting that channel line (1) and the Fib 161% level both meet around $150 and rising support line (2) gets closer and closer to current pricing.

$150 looks to be an important price point for Apple in the future and this price remains possible.

Apple bulls want/need the stock to remain above line (2)!

See the original article >>

Gold facing most important test in years and years right now!

by Chris Kimble

CLICK ON CHART TO ENLARGE

Gold is now testing the underside of an old 10-year support line, now as resistance. This line is also being joined by another resistance line, at current price levels.

The "X" marks the spot that looks to be VERY important for the future of long-term gold prices.

Keep a close eye on what happens here because it could determine if Gold gets out of its three year downward funk or its gets a breath of fresh air on a breakout.

See the original article >>

Two Ships Pass in the Night

by Marketanthropology

Ships that pass in the night, and speak each other in passing, only a signal shown, and a distant voice in the darkness; So on the ocean of life, we pass and speak one another, only a look and a voice, then darkness again and a silence. - Longfellow

For just the fourth time in the last fifty years, the S&P 500 yields more than 10-year Treasuries. If one was to mine the data, in the three previous occasions where this had occurred, equities rallied sharply over the short-term and strongly performed over the next year - quickly closing the aberration that represented a particular extreme between these two markets.

• June 1962: +14% 06/27/62 - 08/22/62 (1-year performance + 32%)
• November 2008: +24% 11/20/08 - 01/06/09 (1-year performance +35%)
• August 2011: +9% 08/09/11 - 08/31/11 52 (1-year performance  +25%)

That said, we would strongly caution anyone looking for similar returns or bolstering their respective equity biases with this fourth occurrence. From our perspective, the fourth time may be the charm as these two massive trends pass quietly in the night, ending an epoch that first set sail in 1959 as Treasury yields began their long and steep journey to a secular peak in 1981.  

While the Trend-Trading-To-Win and passive investor zen masters might view current market conditions as testament to equity strategies that should continue to outperform, you only need to look at a long-term chart of both metrics to realize, the times they are a changin' - or historically speaking, perhaps sliding back to a market relationship that stood for nearly a century before 1959. To boot, when one considers the equity market drawdowns of the previous three occasions that elicited such condition, the current "downturn" appears more coincidental of juxtaposition - than actionable of signaling a market extreme in equities.

Overall, we view binary "signals" such as this as representative of market conditions that should not be compared to contemporary parallels for insights, such as Fed tightening cycles or recession and equity market impressions from an inverted yield curve. What they all have in common is probabilities and expectations entrenched over the past fifty years where yields were not exceptionally low and the Fed was not enacting or normalizing unconventional and extraordinary policy.
From a historical perspective of the equity and Treasury markets, we still view the closest parallel as the trough of the long-term yield cycle in the 1940's, where the Fed began to normalize policy after extraordinary support was extended to the markets with significant Treasury purchases by the Fed between 1942 and 1946. Our expectations remain that the U.S. equity markets will continue to come under pressure and normalize with policy (QE free), which should recalibrate risk and valuations as the Fed evaluates market conditions in its wake. Moreover, for those looking for guideposts in the road with the Fed allowing or telegraphing when their balance sheet will passively runoff, you'll notice that in the mid 1940's the equity markets revalued swiftly shortly after the Fed's balance sheet peaked - but before it started to decline. We suspect a similar dynamic this time around, which would likely further push back even a ceremonial rate hike by the Fed that some see occurring this year.

While 10-year yields have made their way back to where we expected they would last January - and we suspect they are currently completing the end of that move; from a relative performance perspective we would still favor long-term Treasuries relative to the S&P 500 this year, as these two ships pass, signaling one last time in the darkness.

See the original article >>

Lezione da Atene: questa Europa è troppo fragile

by Pietro Reichlin

Con la vittoria di Syriza alle elezioni, la rinegoziazione del memorandum è ormai inevitabile. Si tratta di un notizia, che evidenzia le molte fragilità del sistema federale europeo. Ma non è il rigore il vero problema dell’economia greca.

L’EUROPA AL BIVIO

Con la vittoria di Syriza si è aperto il fronte della rinegoziazione degli accordi stipulati con la Troika a seguito del fallimento della Grecia del 2010. Molti opinionisti e politici italiani (sia di destra che di sinistra) simpatizzano con Tsipras e ritengono che la sua vittoria possa portare buoni frutti anche per noi. Si tratta, tuttavia, di una strategia piena di rischi. In realtà la vittoria di Syriza è, piuttosto, una cattiva notizia, che fornisce un’ulteriore prova della fragilità del sistema federale europeo. Provo ad argomentare questa tesi nei seguenti quattro punti.

• Il bail-out della Grecia avvenuto nel 2010 costituisce un precedente fondamentale per capire come funziona il sistema monetario e, più in generale, il nostro modello federale. In un sistema del genere le decisioni fiscali sono decentrate e, quindi, il costo del debito degli stati membri riflette rischi locali. Se le istituzioni centrali dichiarassero che nessuno stato può mai fallire, si determinerebbe un gigantesco problema di rischio morale (assenza di incentivi a controllare i conti pubblici) a cui la federazione non potrebbe sopravvivere. Se, d’altra parte, le garanzie sui debiti statali sono incomplete, si deve accettare che i debiti sovrani non si scambino alla pari, e che gli stati possano fallire. Il sistema monetario europeo si colloca in questo incerto crinale, in cui le garanzie europee esistono ma sono implicite e incomplete. È un problema che interessa molto l’Italia, data la dimensione del nostro debito e l’onere per interessi che grava sulle casse dello stato. Gli investitori vorrebbero capire: l’Europa lascerebbe fallire uno stato? E cosa farebbe in questo caso? In termini generali, un fallimento non è necessariamente un disastro se i costi che ne derivano possono essere contenuti. Gli Stati Uniti sono un esempio ambiguo. Il governo federale americano decise per il bail-out degli stati a fine Settecento ma li lasciò fallire a metà Ottocento senza eccessivi contraccolpi.
• Il caso della Grecia è il primo esempio di fallimento coordinato nell’Eurozona. Le istituzioni internazionali hanno imposto un haircut del 50 per cento sul debito nei confronti dei privati, un allungamento delle scadenze e l’assorbimento della quasi totalità del debito presso il Fmi e il Fondo salva stati a tassi di estremo favore, condizionatamente all’adozione di misure di consolidamento fiscale. Il successo di questo esperimento dipende da due condizioni: che il governo greco rispetti gli impegni e che il programma di consolidamento non sia talmente oneroso da portare il paese a una nuova bancarotta. Se non si realizza la prima condizione abbiamo la dimostrazione “sul campo” che un bail-out compatibile con l’assenza di un rischio morale eccessivo è impossibile e, quindi, che l’Europa si trova di fronte a un bivio: convivere con il rischio morale o lasciare che gli interessi sui debiti sovrani riflettano interamente i rischi degli stati membri. Nel primo caso avremo, prima o poi, la dissoluzione dell’Unione, e nel secondo caso saremo continuamente soggetti a ondate speculative sui debiti sovrani.
• Chi simpatizza con il programma di Syriza sostiene che gli accordi con la Troika non siano sostenibili per la Grecia. Il debito greco è, in effetti, molto elevato, ma se i creditori si limitassero ad accettare un contenimento del debito esistente, un’altra ristrutturazione non avrebbe alcuna giustificazione. Non è, infatti, il debito che frena la crescita di quel paese. Il bail-out del 2010 (e 2012) ha posto i titoli pubblici greci al riparo dalla speculazione e ridotto drasticamente il costo degli interessi che, secondo stime recenti, rappresenta un conto meno salato di quello pagato dal governo italiano, spagnolo e portoghese. Un’altra ristrutturazione del debito non equivale ad un classico problema di ridistribuzione delle risorse tra debitori e creditori, come si sente spesso dire in questi giorni. Il conto sarebbe pagato anche da paesi già fortemente indebitati (come l’Italia, la Spagna e il Portogallo) che stanno facendo rilevanti sacrifici per tenere sotto controllo il proprio debito.
• Se un ulteriore bail-out della Grecia sembra incoerente con la costruzione europea, si può tuttavia porre il problema dei tempi e delle dimensioni del consolidamento fiscale. Questo è il secondo punto del programma di Syriza e raccoglie le simpatie del governo italiano e di altri partner europei. Il rigore fiscale non aiuta a superare le recessioni prolungate, ma questo non significa che la spesa in disavanzo sia sempre e comunque una via per la crescita. Nel caso della Grecia, questa politica creerebbe nuovo debito che il governo dovrebbe collocare sul mercato a tassi ben superiori a quelli che oggi gravano sul debito esistente. È noto che la spesa in disavanzo può essere utile in alcune circostanze e in alcuni paesi. Il problema principale è farlo in modo da non provocare un aumento eccessivo dei tassi d’interesse, che avrebbe l’effetto di spiazzare gli investimenti e quella crescita economica che si vorrebbe generare. I paesi che riescono a indebitarsi a tassi moderati sono quelli che dispongono di una ricchezza privata rilevante e che riescono a costruirsi nel tempo la reputazione di debitori virtuosi, capaci di contenere i disavanzi pubblici quando non fronteggiano una recessione. Inoltre, in assenza di una ripresa degli investimenti privati e della produttività, la maggiore spesa pubblica generata dal governo greco non farebbe che alimentare le importazioni e il disavanzo commerciale, che la Grecia è riuscita a contenere con grande fatica da poco tempo. I sacrifici dei cittadini greci di questi ultimi anni sarebbero completamente vanificati.

IL MALESSERE NON DERIVA DAL RIGORE

Con queste considerazioni non intendo sottovalutare i problemi sociali che derivano dalla crescita della povertà in Grecia, ma sarebbe più corretto e onesto da parte di Tsipras chiedere all’Europa un maggiore e straordinario aiuto per affrontare questo dramma sociale piuttosto che invocare le virtù delle politiche keynesiane. Il malessere sociale dei cittadini greci non deriva principalmente dalle politiche rigoriste imposte dalla Germania, ma dall’incapacità dei governi greci di combattere l’evasione fiscale e utilizzare in modo efficiente le risorse pubbliche. Il Pil della Grecia oggi non è inferiore a quello che essa aveva al momento di entrare nella zona euro e, quindi, alla maggiore povertà di oggi corrisponde la maggiore ricchezza di qualcuno. Siamo sicuri che una parte delle risorse per ridurre le disuguaglianze in Grecia non possano essere trovate anche all’interno del paese?

See the original article >>