Trading Recommendation for Nov. 26

Fundamental Analysis
Euro$ Dips on Report of Strong Euro to Cut Growth in EZ in 2014

The Euro dropped to as low as 1.3490 from yesterday's high of 1.3556 per US$ after a report of its strength for the past several months may eventually lead to decline of the region's growth into 2014.

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Technical Analysis

Gold Bounce at Downtrend Channel Support Offers Selling Potential

Gold rebounded from its low of $1227.36 to closed at $1252.82 yesterday may be defined as a healthy correction from its slippage last week of $1291. The movement came from its low maybe considered as a normal pull-back reaction since it is still within the confines of the channel with a range of $35 from its resistance and support.


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Technical Reports: USDJPY Above the Triangle Pattern: Buy USD vs.JPY!

Support and Resistance LevelUSDJPY first attempt at 99.50  was faced by massive selling  and retreated to as low as 97.59 last November 7, creating a resistance  at said area. From then on the pair rallied and as of this writing is above 99.50 which now may be considered as the support and coincidentally the level above the triangle pattern shown on the daily chart.

 With the pair hovering above the triangle pattern level of 99.00, that signifies  the resumption of the US$ strength is underway. Bias is on the upside as long as the areas of 99.50-99.10 holds for initial goal at 100.65.

Buying position is recommended at 99.35. Stop loss at 98.90 which is below the triangle line. Take profit at 100.61 or near said resistance.Trend IndicatorsTriangle pattern breach indicated a rally on said pair may continue in the coming days.Buying opportunities call for this pattern.OscillatorsRSI (68.22) trendline break-out shows that the resumption of the USDJPY bull run may continue although it is nearing the 70% area in two-three days.

On most weekday mornings, House Republicans huddle in a windowless room in the Capitol basement. Over pastries and coffee, they confer with the leadership and discuss strategy. Sometimes they complain; sometimes they cheer. This past week, it’s been more of the former. As the tensions grow, the GOP’s internal debate can seem like a circus — the tea party vs. establishment. But behind the scenes, House Republicans are more nuanced than that caricature.

1. House Republicans want to default.

When they’re on the cable news shows, House Republicans can sound aggressive and unyielding about the upcoming debt limit; they won’t extend the federal government’s borrowing limit, they often say, unless Democrats make major concessions. This public, tough-talking stance, though, is only part of the story. House Speaker John A. Boehnerprivately reassured colleagues on Thursday that he won’t let the nation default, and within the inner sanctum of the House GOP, he has never promoted missing the deadline.

Instead, Boehner is struggling to balance his right flank’s appetite for brinkmanship with his desire to cut a deal that’s palatable to conservatives. To do that, he frequently shies away from publicly conceding any ground. But he and the Republican leadership aren’t eager to be blamed for economic chaos and risk their party’s House majority in next year’s midterms.

So don’t read too much into the fight-till-the-death posturing of the House’s debt-limit warriors. They have influence but not total say. Look for smaller clues — Boehner’s closed-door meetings, the chatter about a larger fiscal package — as evidence of how the impasse will probably end: with an eleventh-hour, smaller compromise that Boehner has been slowly but surely shepherding.

2. Ted Cruz is directing the House GOP’s strategy.

The Republican senator from Texas gained headlines recently for a story that was first reported by National Review: He was secretly meeting with House conservatives and urging them to oppose the leadership. Soon after, media outlets started to proclaim Cruz, a freshman and conservative star, as the unofficial speaker of the House — and the one player whom Boehner had to appease or else risk losing conservative favor.

Of course, “Cruz as speaker” was a dramatic spin by reporters. But for a moment, it had a ring of truth: Cruz’s House allies challenged Boehner in those morning strategy meetings, and the speaker subsequently followed Cruz’s direction, from championing the “defund Obamacare” effort to holding firm in his negotiations with Democrats. Cruz, for his part, seemed to relish the attention. As the buzz grew, he happily acknowledged in interviews that he was, indeed, pressuring the House leadership.

But Cruz’s moment as Republican conductor was fleeting, and his power over the House’s rabble-rousers has dimmed. He still keeps in touch with them, but he has retreated to his comfort zone: the outside game. Boehner’s allies worry that Cruz might suddenly decide to reenter the House fray, but for now, he’s working more with conservative groups than with House members.

3. Boehner is powerless.

The House speaker has endured an arduous post-election period, going back to late December, when his strategy for solving the “fiscal cliff,” the infamous “Plan B,” failed to gain traction in the House Republican conference. In a memorable moment, Boehner, nearly in tears, conceded defeat and pulled Plan B from the floor. A few weeks later, there was an embarrassing coup attempt in which about a dozen Republicans broke ranks. Ever since, Boehner’s grip on his conference has been threatened by 30 to 40 House conservatives who don’t trust his instincts and ignore his direction.

Five myths about House Republicans

But Boehner isn’t powerless. That group of 30 to 40 conservatives, while a dominant bloc, represents only about 10 percent of the House. Boehner goes along with them on many issues, but not because he doesn’t have other options; it’s because he wants to keep the conference united. If he wanted to break with them in the current fiscal drama, he could, and that power shouldn’t be dismissed. Should he decide to bring a compromise to the House floor, there’s nothing, other than political considerations, that would stop him.

4. Paul Ryan is AWOL.

Ryan, a Wisconsin congressman and former GOP vice-presidential nominee, has had a lower profile since last year’s election. He remains Budget Committee chairman, but he’s not out there as a leading spokesman for House Republicans. This is by design. Ryan knows he’s an outsize presence in Republican politics, and, according to his confidants, he doesn’t like to use his political capital, in terms of TV appearances and interviews, unless necessary, such as when he backed a flagging Boehner during the fiscal cliff debate.

On the debt limit and the government shutdown, Ryan has kept his head down. When reporters press him in the Capitol’s hallways, his usual refrain is “no comment.” But he’s not AWOL. In fact, Boehner’s aides tell me he’s one of the speaker’s most important advisers. And when it comes to crafting the emerging Republican offer to end the shutdown and extend the debt limit in one fell swoop, they’re turning to Ryan to nail down the specifics. He has been sketching out a potential budget deal, and Boehner tapped him as a conferee on Republicans’ proposed congressional panel to put together a fiscal agreement.

Perhaps most important, Ryan is Boehner’s conservative whisperer, a veteran of the movement who can filter the leadership’s strategy to the right.

5. There are few centrist House Republicans.

They may sometimes be silent and fearful of stirring conservative ire, but more than 100 members of the House GOP are much more centrist than you’d imagine. These are the members from purple and light-red districts, who rarely go on television and, unlike their more unruly colleagues, stick with the leadership. They are critical to sustaining Boehner’s power, and, should the GOP find a way to extend the debt limit and once again fund the government, they’ll deserve credit.

Two dozen of these Republicans — including Reps. Charlie Dent (Pa.) and Peter King (N.Y.) — have pressed Boehner to quickly end the shutdown and assure them that the government wouldn’t default. They’re rattled by the House GOP’s rightward drift, and they’re tired of Cruz and his House compatriots embracing a standoff that has no end in sight. Dent is working with House Democrats to pass legislation that would reopen the government and repeal the medical-device tax, a plan with bipartisan support. King, perhaps the most prominent in the centrist caucus, tells me he expects most Republicans to eventually come his way.

Ultimately, a large group of rank-and-file Republicans wants the mess to end. They may not have the moxie to outmaneuver House conservatives, but they certainly have the numbers.

Credit: Robert Costa is Washington editor of National Review and a political analyst for CNBC.

Obama warns Wall Street over fiscal crisis

'BE WORRIED.' US President Barack Obama says investors should be very worried about a political crisis that has shut down the government and could trigger a debt default. Photo by AFP

WASHINGTON, United States – President Barack Obama sent Wall Street a blunt warning that it should be very worried about a political crisis that has shut down the government and could trigger a US debt default.

Obama said he was "exasperated" by the budget impasse in Congress, in an interview with CNBC apparently designed to pressure Republicans by targeting the financial community moments after markets closed.

The president then met Republican and Democratic leaders for their first talks since the US government money's ran out and it slumped into a shutdown now well into its second day.

But few informed observers held out much hope for a sudden breakthrough.

Obama was asked in the interview whether Washington was simply gripped by just the latest in a series of political and fiscal crises which reliably get solved at the last minute.

In unusually frank comments on issues that could sway markets, Obama warned that investors should be worried.

"This time's different. I think they should be concerned," Obama said, in comments which may roil global markets.

"When you have a situation in which a faction is willing potentially to default on US government obligations, then we are in trouble," Obama said.

Obama said he would not negotiate with Republicans on budget matters until House lawmakers pass a temporary financing bill to reopen federal operations and raised the $16.7 trillion dollar debt ceiling.

If the borrowing limit is not lifted by the middle of the month, the US government could default on its debts for the first time in history.

"If and when ... that vote takes place and the government reopens, and if and when they vote to make sure Congress pays our bills on time so America does not default on costs it's already accrued, then I am prepared to have a reasonable, civil negotiation around a whole slew of issues," Obama said.

The president said he had "bent over backwards" to accommodate Republicans -- a statement his foes would dispute -- but warned it would set a terrible precedent to allow lawmakers of any party to hold a White House to ransom over raising the debt ceiling.

"Absolutely I am exasperated, because this is entirely unnecessary," Obama said.

The government shutdown has sent 800,000 federal workers home, closed museums, national parks and monuments and crippled government services.

Obama wants a straightforward temporary spending bill to end the first shutdown in 17 years, while Tea Party Republicans have repeatedly tied the measure to a dismantling or delay of his signature health care law.

With neither side willing to budge, hopes of an early exit to the shutdown are fading.

"Most of the time you can see an end game," Republican Senator Johnny Isakson told MSNBC. "Right now there's no end game in sight."

Some signs of incremental movement emerged, with Democrats pledging to appoint negotiators to thrash out a long-term budget -- provided that the Republicans agree to an immediate six-week federal spending measure with no anti-Obamacare provisions.

Obama met at the White House with his chief political rival, House Speaker John Boehner, as well as top Senate Republican Mitch McConnell to address the standoff.

Senate Majority Leader Harry Reid and top House Democrat Nancy Pelosi were also there.

Boehner's office said the fact the talks were taking place was a victory in itself and had the potential to lead to "serious talks between the two parties."

European Central Bank chief Mario Draghi warned Wednesday that a US shutdown "is a risk if it is protracted."

"It would be a risk not only for the US, but also the world economy," Draghi said.

Obama on Wednesday gathered a group of high flying CEOs, apparently hoping they would pressure Boehner to pass a straight temporary funding bill.

Goldman Sachs boss Lloyd Blankfein warned that America was getting onto dangerous ground by flirting with not raising the debt ceiling. A previous period of brinkmanship on the issue badly hit the US credit rating.

"There's a precedent for a government shutdown, there's no precedent for a default," he said after meeting Obama.

Furious tourists meanwhile are locked out of Washington museums and monuments, as well as national parks and landmarks like the Statue of Liberty in New York. Cancer research and treatment at the world-class National Institutes of Health has ground to a halt.

The fallout has already caused Obama to shorten his long-planned Asia trip, scrapping stops in Malaysia and the Philippines that were due to begin this weekend, so he could attend to the crisis at home.

The president's attendance at regional summits in Indonesia and Brunei was also in doubt.

A no show in Asia would be seen as a blow to Obama's policy of rebalancing US diplomacy and military might towards the fast growing region.

But James Clapper, Director of National Intelligence warned lawmakers that US security was already being compromised.

Seventy percent of the intelligence workforce had been furloughed, potentially offering an opening to foreign recruiters in the field, Clapper said.

Credit: STEPHEN COLLINSON, MICHAEL MATHES, AGENCE FRANCE-PRESSE

US shutdown: a guide for non-Americans

The American government has begun shutting its non-essential services. Why? And what will it mean?

US shutdown: the Capitol in Washington DC, where Republicans control the lower house and Democrats control the Senate. Photograph: J Scott Applewhite/AP.

Please explain what just happened

The US government has begun shutting its non-essential services. Hundreds of thousands of workers are waking up to the news that they are on unpaid leave, and they don't know how long it will last. The shutdown, triggered at midnight Washington time, will bring a range of services to a standstill across the world's largest economy.

Why?

The Federal government had no choice. The US financial year ended on 30 September, and politicians on Capitol Hill have failed to agree a new budget for the 2013-2014 financial year. Even a 'stopgap' funding deal proved beyond them. Without a budget deal approved by both parts of Congress, the House of Representative and the Senate, there's no legal agreement to pay non-essential staff.

Weren't they supposed to fix this last night?

They tried. A series of proposals rattled between the two sides on Monday night until midnight struck without a deal.

Why couldn't they agree a deal?

Under the US constitution, the president cannot unilaterally bring in legislation. And despite weeks of talks, Republicans continue to include cuts and delays to Barack Obama's Affordable Care Act in the budget legislation they sent up to the Senate.

The House of Representatives is controlled by the Republican Party, whose Tea Party movement remain deeply opposed to Obamacare. They tried to use the budget as leverage to crowbar changes to the Act. The Senate, which is under the control of Obama's Democrats, has stood firm.

Will the shutdown mean the entire US government grinds to a halt?

No, it's not an anarchist's (or libertarian's?) dream. Essential services, such as social security and Medicare payments, will continue. 
The US military service will keep operating, and Obama signed emergency legislation on Monday night to keep paying staff. But hundreds of thousands of workers at non-essential services, from Pentagon employees to rangers in national parks, will be told to take an unpaid holiday.

So what happens how?

US politicians are meeting again in Washington on Tuesday. Before Monday's session broke up, the lower house proposed a 'bipartisan committee' to consider a way forward. The Senate is expected to reject this proposal, sticking to its position that Obamacare cannot be unravelled. Federal staff will remain unpaid until a budget is agreed. A 'stopgap' funding plan is an option, but Obama appeared wary of that option, arguing that would simply guarantee a repeated fight in a few weeks' time.

How much damage will it cause?

If people aren't getting paid, they won't spend as much in the shops. They may be unable to meet essential financial commitments, such as mortgages and credit card payments.

Analysts at IHS Global Insight have calculated that it will knock $300m a day off US economic output (total US nominal GDP, or output, was around $16 trillion last year).

The key issue is how long it lasts. Moody's Analytics reckons that a two-week shutdown would cut 0.3% off US GDP, while a month-long outage would knock a whole 1.4% off growth.

When did this last happen?

It's the first shutdown since 1995-1996, when Bill Clinton and the House of Representatives (and its speaker, Newt Gingrich) also failed to agree on a budget to fund federal services. That row ran for 28 days (over two stages).
But it was a more regular event in the 1980s, usually for a few days at a time. In total, the US government has partially shut down on 17 occasions before today.

Why doesn't it happen in other countries?

The shutdown situation is a product of the US democratic system. The president is both head of state and head of the federal government, without a guaranteed majority in either of the legislative bodies where new laws are debated and voted upon (because presidents, congressmen and women and senators are elected separately). The president can't simply ram laws through Capitol Hill.

In Britain, for example, tax and spending policies are outlined in the budget, presented to parliament by the chancellor of the exchequer. These changes are brought into law in a finance bill in the House of Commons. That's in effect a confidence vote in the government, and even the most fractious backbench MP would balk at rebelling on it.

Finance bills are also one area where the elected House of Commons has the upper hand over the unelected House of Lords. The Lords have no power to reject a money bill; they can only delay it for a month.

How does the US shutdown row tie in with the debt ceiling battle?

They are separate issues, but the shutdown is raising fears over the debt ceiling.

America has a legal limit on its borrowing of $16.7tn dollars, and it's likely to hit that point in mid-October.

If a deal isn't reached, then America would run out of borrowing room, meaning the world's biggest economy would default on its debts. Both problems need solving – and a shutdown is now eating into valuable time to fix the debt ceiling.

Why can't they just raise the debt ceiling?

Again, legislation is needed. Republicans are again trying to link the plan to Obamacare – arguing that the healthcare reforms are unaffordable.

How are the markets reacting?

So far, there's no panic. Investors are calculating that the shutdown will be short. But prepare for nervousness as that debt ceiling deadline gets closer.
The dollar, though, is being hit – dropping half a cent against major currencies.

Credit: Graeme Wearden

The strange symbolism of the $1 bill

An eagle holding 13 arrows? A giant pyramid with an eye on top? Your currency's strange imagery, explained.

For a small bill, it holds a lot of history.

Crack open your wallet, pull out everyone's favorite portrait of George Washington, and be prepared to learn about some odd symbolism that probably seemed perfectly normal in the 18th century. Here are the explanations behind some of the more baffling parts of our nation's smallest bills.

What's that weird pyramid drawing on the reverse of the bill?
The two circular drawings on the reverse of the bill are actually parts of the two-sided great seal of the United States. Although we don't see the entire seal outside of our wallets too often, the notion of having a great seal is actually as old as the country itself. The Continental Congress passed a resolution on July 4, 1776, to create a committee to design a great seal for the fledgling nation, and heavy hitters John Adams, Benjamin Franklin, and Thomas Jefferson got the first crack at creating the seal.

Congress wasn't so keen on the design these big names brought back, though, and it took nearly six years and several drafts to finally find a suitable seal. Congress finally approved of a design on June 20, 1782.

What's the story behind the great seal of the United States?
According to the State Department, which has been the official trustee of the seal since 1789, both the obverse (front) and reverse (back) of the seal are rich with symbolism. The obverse picturing the eagle is a bit easier to explain. The bird holds 13 arrows to show the nation's strength in war, but it also grasps an olive branch with 13 leaves and 13 olives that symbolize the importance of peace. (The recurring number 13, which also appears in the stripes on the eagle's shield and the constellation of stars over its head, is a nod to the original 13 states.) The shield floats unsupported over the eagle as a reminder that Americans should rely on their own virtue and strength.

The symbolism of the pyramid on the seal's reverse is trickier. The pyramid has 13 steps — the designers apparently never got tired of the 13 motif — and the Roman numeral for 1776 is emblazoned across the bottom. The all-seeing Eye of Providence at the top of the pyramid symbolizes the divine help the early Americans needed in establishing the new country. The pyramid itself symbolizes strength and durability.

The divine overtones don't stop with the unblinking eye, though. The Latin motto Annuit Coeptisappears over the pyramid; it translates into "He [God] has favored our undertaking." The scroll underneath the pyramid reads Novus Ordo Seclorum, or "A new order of the ages," which was meant to signify the dawn of the new American era.

How did the seal end up on our dollar bill?
We can thank former Secretary of State Cordell Hull's busy schedule for that one. Secretary of Agriculture Henry A. Wallace had to wait for a meeting with Hull in 1934 and decided to kill time by thumbing through a State Department pamphlet on the great seal. The pamphlet contained an illustration of the reverse side of the seal with the pyramid, and Wallace was quite taken with the drawing. He took the seal to President Franklin Roosevelt and suggested the country mint a coin using the two sides of the seal.

FDR liked the seal, too. (Roosevelt and Wallace were both Masons and loved the all-seeing eye part of the reverse design, which echoed the concept of the Great Architect of the Universe.) He thought the seal should be on the reverse of the dollar bill rather than a coin, but he was worried the mystical imagery would offend Catholics. After Postmaster General James Farley assured FDR he didn't think his fellow Catholics would have any problem with the design, Roosevelt approved a new dollar bill design that first appeared in 1935.

Did the founding fathers swipe any ideas from a magazine?
Possibly. The familiar E Pluribus Unum motto that the eagle holds in its beak underscores the union and togetherness of the 13 colonies. It might also underscore early Americans' love of periodicals.

According to the State Department, recent historical research has indicated that this Latin motto may have been borrowed from Gentlemen's Magazine, a London publication that ran from 1732 to 1922.

The magazine was popular in the colonies, and its title page always carried the E Pluribus Unummotto.

Why don't the dates on the front of the bills change that often?
At the lower right of the portrait on the bill's obverse you'll see the word "Series" and a year. You might notice that these don't change each year the way the numbers on minted coins do. Why not?

According to the Treasury, the series date only changes when there's a new design for a bill, a new treasurer of the United States, or a new secretary of the Treasury. (These are the two officials whose signatures appear on either side of the portrait.) The series year itself changes when the secretary of the Treasury changes, while a change in the treasurer of the United States means that the series year remains the same, but a suffix letter gets tacked onto the end of the year.

What are the various other numbers on the obverse of the bill?
The bill's serial number is the most prominently displayed set of digits on the dollar, but they're not alone. If you take out a dollar, you'll notice there are four large numbers in the corners of the bill's open space. Like the encircled letter to the left of Washington's portrait, these numbers tell which Federal Reserve Bank issued the note. (Each Fed's number corresponds the letter of the alphabet assigned to the bank, with A=1, B=2, and so on.)

The tiny letters and numbers that appear on the top left and bottom right of the bill's obverse indicate the position of the note on the Treasury's printing plates. If your dollar bill has a tiny "FW" before this code, those letters indicate that it was printed at the Treasury's facility in Fort Worth, Texas, rather than in Washington, D.C.

Credit: Ethan Trex

The Guy Who Predicted Lehman Brothers' Fall Sees Big Trouble Ahead for China

A Q&A with former Lehman Brothers VP Lawrence McDonald

Lawrence McDonald, author of the New York Times Bestseller "A Colossal Failure of Common Sense," gave International Business Times his views on the 2007 financial crisis, the collapse of Lehman Brothers and where the next big downfall is going to come from.

What do you make of the news that Bank of America Corp. is being replaced in the Dow by Goldman Sachs?

The Dow is an interesting index; it has 30 large cap companies. I'm not sure what you can make out of that. Goldman's market cap right now is $77 billion and Bank of America's is $157 billion. So it's unclear why they did this. One reason could be, Bank of America have had an extremely volatile stock price in recent years. I mean, it's made a bunch of round trips. In 2011 it hit $5.03, in 2009 it hit $3.87. Five years ago today it was trading at around $40 at one point. So it's had multiple periods of volatility.

Also, there is no investment bank in the Dow. Bank of America is a commercial bank. There's a lot of talk about Glass-Steagall, I wrote about in my book. They may break up the big banks over the next year.

What would you characterize as the successes and failures of U.S. policy in the crisis aftermath?

Successes are getting the banks in a much healthier leverage and higher capital ratios. That's the biggest success by far.

The failure is, and there's a theme in my book about this, capitalism doesn't work without transparency of risk. And if you listen to what Sandy Weill said about that, it's "in a capitalist system, dollars are votes."

And when you can see the banks risk and see the risk on the balance sheets, that's transparent banking. Let's just say our dad gave us $200 million and we wanted to invest $10 million it in Citigroup. You wouldn't put that money in if you knew they were sitting on toxic assets, and if you can't see the toxic assets, then capitalism doesn't work.

All of my systemic risk indicators are clearly pointing at Asia. Asia is back where we were in 2007; they have a trillion dollars of toxic assets off the balance sheets -- hidden.

Where they've failed: Here we are five years later and there isn't a lot of transparency in terms of what is on the balance sheets, so you have trillions of bank deposits sitting on top of very opaque black box type investments. Whereas in the '60s, '70s, '80s and '90s, if you walked into Chase bank you knew they had deposits and they had real estate loans but they didn't have credit default swaps. Credit default swaps are still not on public exchanges.

So if you buy 100 shares of IBM, that's on the exchange and everyone can see it. If you buy a million shares of IBM, everyone can see that so everyone knows about that bet. If you buy $1 million worth of credit default swaps, that's still invisible. There's no public exchange.

When Lehman went down it had $8 trillion in credit default swaps, so that's $8 trillion of bets on different organizations that nobody knew about, and that's when credit in the U.S. froze. If you look at GE and Goldman -– they had to get a loan from [Warren] Buffet because nobody would loan any money to anybody because credit was frozen.

Going forward, what needs to change?

More transparency. The key is to either break the banks up or bring back Glass-Steagall. The current banks, if they are not broken up, must be much more transparent and show us what's on the balance sheets.

For example, when I sat down to write my book I talked to people who are paid $10 million a year to stay five or six steps ahead of the regulators. These guys' entire job is just to be ahead. You know, "what are the regulators gonna do next?" It's like chess. 

It doesn't matter what type of regulation you have, if the regulators don't have real experience on Wall Street, they can't execute.

Why, five years after Lehman, does most of what has happened in terms of regulation have to do with insider trading, which had nothing to do with the financial crisis? The financial protection bureau is consumed with these credit card bank fees. What's that got to with the financial crisis?

What they've done is: Dodd-Frank is like an eight-lane highway. Some cars are moving 10 mph and some are doing 90 mph, but the cars that are moving 90 mph are the least important to prevent another crisis and the cars that are moving 10 mph are the most important. That's the problem. They had a mandate to do something and they went to the low-hanging fruit.

Are we likely to repeat the mistakes that led to the last meltdown if there are people out there whose only job is to beat regulation?

There's no question that they've learned a lot, so you can say what you want about these guys trying to be five steps ahead, but they are not idiots and the banks are far better leveraged today.
The next financial crisis will not come from the United States. All of my systemic risk indicators are clearly pointing at Asia. Asia is back where we were in 2007; they have a trillion dollars of toxic assets off the balance sheets -- hidden. If you look at interbank lending, we meticulously measure every day how much banks trust each other, and that is a phenomenal leading indicator.

If you take summer 2011, the S&P dropped 20 percent in about 35-45 days. And sure enough, right before that, the interbank trust in Europe in May and June was completely breaking down because some banks in Europe, France and Germany own a lot of Greek bonds and the Greek bonds were in flames, dropping from 90, 70, 60, to 30, and there was hundreds of billions of these things and these losses needed to be borne back into the banks, so they banks were breaking down in terms of the trust.

And right before Lehman went down, five years ago in August 2008, interbank trust in the U.S. was almost gone. And if you meticulously track these indicators they will give you warning signs that the next elevator shaft is coming, and they are clearly pointing at Asia. It's mainly China. They've rallied in the last couple of weeks, but the bad real estate assets are adding to the 200 percent debt to GDP if you add the consumer debt. The U.S. has government debt and China has consumer and corporate debt. It's an unsustainable debacle coming.

They [China] are already trying to aggressively bail out out the banks. They are not letting them fail, they are lending them more money even though these banks have giant holes in their balance sheets, so essentially they are doing the same things as the U.S. [was] doing. Eventually that breaks. The government can only do so many things before the free market takes action. The good news is the Chinese banking system in the world is tiny relative to the U.S., so in other words, if you think of the U.S. banking system and everything in it, it's not as systemic. It will be a regional things and it will affect U.S. markets, but not in the same way as Lehman did.

What will happen to Fannie and Freddie in the future?

One theme that were seeing since Lehman is that politicians are making decisions that the free market used to make. So like when Lehman went down, Hank Paulson, as I said before, it is like a dictatorship where a small group of people are picking winners and losers. When GM went down, a small group of people were making decisions about who were the winners and losers. When Greece went down, the bondholders, same thing –- a small group of politicians that were picking winners and losers. And it's the same thing with Fannie and Freddie.

There is a bill to bring back and privatize Fannie and Freddie. Right now, 90 percent of all mortgages that are issued today will somehow be backed by either Fannie or Freddie. This is another ticking time bomb that won't be addressed because they don't want to rock the boat. So what's happening is, the U.S. taxpayer is getting longer and longer exposed to real estate.

In the '90s, Freddie and Fanie were only taking on 40 or 50 percent and the private sector was huge, but what's happened is the private sector market called securitization is really exploding on automobiles instead. It's actually working fine. Auto sales are up 15.7 million and securitization of auto loans is actually flourishing. So, if I'm a lender I can securitize those loans and sell them off to banks. I can take 1,000 auto loans and sell them to banks in China or in Europe.

Securitization in the mortgage space with home loans is not working, even five years after Lehman. And because of that every mortgage that is issued is a liability to the taxpayer, pretty much. If the bill succeeds it's going to create a super insurer.

In 2007, at least one and half times of economic growth was down to securitization. Now, a lot of those loans were good, but many were bad. Today not many of the goods ones are being done because Fannie and Freddie are broken and they haven't reformed. And that's a huge holdback.

The bottom line here is, it's holding back the U.S. economy because the U.S. economy doesn't have the securitization engine that the auto sales industry has. Auto sales are back above 2007 levels, but home sales are still down 60 percent and that's because there is no securitization in home lending.

Credits: Christopher Harress

MetisEtrade Happy Trading Hours !

Our doors will once again be open for people who want to trade with our senior traders. Feel free to come and trade with us on Friday, from 7:00PM to 10:00PM as we await important economics data from USA:

8:30 PM
US Core PCE Price Index m/m
US Personal Spending m/m
US Personal Income m/m

9:55 PM
US Revised UoM Consumer Sentiment
US Revised UoM Inflation Expectations

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Lehman Was Not Alone – Measuring System Risk in the 2008 Crisis

On September 15, 2008, Lehman Brothers filed for bankruptcy and ushered in the worst part of the recent financial crisis. Today, we still discuss whether taxpayer money should have been used to rescue Lehman. My colleagues at NYU and I have developed measures of systemic risk, and this fifth anniversary affords us a good opportunity to look at what these measures would have indicated to Treasury Secretary Paulsen if they had been available at that time.

The answer is quite surprising.

We estimate the amount of capital that a financial institution would have to raise in order to continue to function normally if we have another financial crisis like the one in 2008. This is interpreted as a capital cushion to protect against a decline of 40% in the broad equity market over the six months after this occurs. The rationale is that if all financial firms have an adequate capital cushion there cannot be a financial crisis. If one firm needs to raise capital under such circumstances, it is likely that the market can provide it or competitors can absorb its market share. But if many firms try to raise capital in the middle of a financial crisis, there is no source except the government.

We call this measure SRISK. We compute it weekly and post it on the website ‎systemicrisk. The estimation uses equity prices with methods that are extensions of the volatility models that formed the basis for my Nobel Prize. SRISK combines information on size, leverage, and risk to indicate how serious a default would be.

On the website, you can go back to August 29, 2008, to see the ranking of U.S. firms based on SRISK.  . Was Lehman at the top of the list in 2008? No. In fact, it was Number 11. The top of the list was Citigroup, which was estimated to need $139 billion. Following Citi, in order, were JPMorgan Chase, Bank of America, Morgan Stanley, Merrill Lynch, Freddie Mac, AIG, Fannie Mae, Goldman Sachs, and Wachovia. Interestingly, all of these institutions were either nationalized or rescued, with the arguable exception of JPMorgan Chase.

We estimate that the first ten firms, excluding JP Morgan, needed about $700 billion in capital, which is the precise amount of the TARP request. At Number 11, the estimate is that Lehman would have needed $48 billion in capital. And it was allowed to go under. Interestingly, Washington Mutual, at Number 14, also was allowed to fail. 

Thus, the policies that were followed were quite in line with the SRISK measures. But is it enough to rescue only the Top 10 banks in a financial crisis? Where should we stop the bailouts?

The best answer is not to get in this situation in the first place. And that is why financial regulatory reform is so important.

Credit: Robert Engle 

So the Fed is Super Dovish. Now What?

Like the plot twist in Fight Club, few people could have predicted the ending of the Septaper saga.

In a 9-1 decision, the FOMC members voted to keep its monthly asset purchases steady at $85 billion. Recall that improvements in the U.S. jobs market and other major economic data prompted traders to expect at least a $5 to $15 billion reduction to the Fed's bond purchases. With a disappointment like that, it's no wonder the Greenback got sold off like there's no tomorrow!

What motivated the Fed to refrain from tapering?

Ever since Bernanke hinted at a Septaper last June, the long-term mortgage rates started going up. For example, 30-year fixed mortgage rates have jumped from 3.5% in April to around 4.5% recently. That's not good if the Fed wants to stimulate the economy!

The Fed also believes that the lack of government spending is already hindering economic growth. What's worse, this problem will be further highlighted in a couple of weeks when the U.S. policymakers decide on whether or not they should raise the U.S. debt ceiling. If this story does not end well, Uncle Sam could be in for more budget cuts and less jobs, consumer activity, and investor confidence. Yikes!

What DID they change?

While the Fed didn't have any adjustments to its current stimulus program, they did make some changes when it comes to their economic forecasts. In particular, they announced another set of downward revisions for its GDP estimates for this year and the next while upgrading its inflation outlook.

Aside from that, Bernanke dashed hopes of an interest rate hike once the economy achieves the 7% jobless rate target. "There is not any magic number that we are shooting for," he clarified. He said that policymakers are waiting for an "overall improvement in the labor market" instead.

What now?

Big Ben didn't dismiss the idea of tapering entirely, as he said that it might still be a possibility this year. Of course, their decision mostly hinges on U.S. economic data in the coming months.

With that, the U.S. dollar might continue to react to fundamentals in the near term, as market watchers continue to adjust their expectations for a Fed taper.

Now that the Septaper fog has lifted, a return to fundamentals might also spark profit-taking among higher-yielding currencies which are being weighed down by weak fundamentals. For instance, EUR/USD might have trouble sustaining its rallies as the ECB has recently expressed its bias towards further easing.

Until the next big theme comes though, we could expect to see a continuation of the markets' initial reaction to the downbeat FOMC statement. 

Credit:  Piponomics

Simon Johnson: The Problem of Too Big to Fail Is Even Bigger Than Before 2008

Editor's Note: Welcome to Crash Week! This week marks five years since the bankruptcy of Lehman Brothers and the financial crisis that followed. A lot has happened since then, but how much has changed? All week long we will be exploring this question from a variety of economic angles. Below is an interview with Institute Advisory Board member Simon Johnson on too big to fail and the debate over financial regulation. The interview originally appeared at Finanz und Wirtschaft. Stay tuned for more contributions from our grantees, community members, leaders, and other prominent economic thinkers!

Simon Johnson, Professor at MIT and former chief economist of the IMF, calls for much higher capital requirements for big banks.

Five years have passed since the collapse of Lehman Brothers and the near meltdown of the global financial system. In various countries, a host of new regulations has been enacted to tighten the safety net in the global banking system. But Simon Johnson remains skeptical. The professor of economics at MIT and former chief economist of the International Monetary Fund warns that regulation such as the Basel III framework does not go far enough to effectively increase robustness in the financial system.

Professor Johnson, five years have passed since the collapse of Lehman Brothers. Is the financial system any safer today?


No, it is not structurally safer. The underlying incentives and rules have not changed, or not enough. It might be somewhat safer because people in financial markets got burned badly in 2008 and have become a little more cautious. But looking out five years, we should expect a repeat of the cycle and see something like that or even worse to happen again.

So, if a big bank failed today, the financial system would be in no better shape to handle it than five years ago?

It would of course depend on the exact circumstances, but there are certainly plenty of vulnerabilities out there.

Which vulnerabilities worry you the most?


The lack of equity capital in a lot of the big international banks. Second, they remain very big and intertwined across many jurisdictions, including but not only through derivatives. That makes any kind of near fail situations very difficult to handle. And as you know, there still is no crossborder framework for dealing with that. Third, there is still a lot of reliance on short term wholesale financing through money market funds. That was a big source of vulnerability in 2008, and that could come back to us again.

So the problem of too big to fail is still very much with us?

It is an even bigger problem than it was in the run up to 2007.

There was a vast regulatory response on global and national levels after Lehman. Why did that not succeed in making the financial system safer?


It is a combination of reasons. The key policy makers did not want to push too far in terms of reform. Perhaps it was because they did not believe in it and perhaps they thought it would slow down the recovery of the economy. Then of course the banking industry got back on its feet and the lobbying dollars became available again. The main industry strategy was simple: delay, delay, delay. Recognizing that the longer you delay things, the less likely they are to happen.

And they have been successful with that.


Oh yes, it is one of the best organized and financed lobbies we have seen in modern democracies.

What should have been done if we really had wanted to increase the robustness in the world financial system?


During the crisis, one or more of the big banks should have been taken through a resolution process and wound down. And when time came for reform, they should have broken up the big banks and introduced much higher capital requirements.

You mean a re-enactment of some kind of a Glass-Steagall Act?


You could do it through a Glass-Steagall or through a hard size cap on the balance sheet of the bank. Simply limit the size of the firms. In the United States, some combination of those would have been the right way to go.

The Basel III framework recommends higher capital requirements. Do they simply not go far enough?


Yes, absolutely. They do not go far enough by a long way. We have seen Sir John Vickers, chairman of the Independent Banking Commission in the UK, saying that we should move capital requirements to the region of 20% instead of 10%. And I think that would be the right direction. Basel III recommends 10%. But that is all on a risk-weighted basis, where a lot of funny accounting is going on. It is really not enough of a buffer against future losses.

Many countries are still debating on how and whether to introduce all the Basel-III recommendations. Would it be better to scrap the whole thing and start again?


Well, Europe is in trouble because they are still debating about Basel III. In the United States, the debate has already shifted to how far beyond Basel III we should go. That is the right approach. These big international negotiations take years and usually do not lead to very much. Every country should make its own decisions and take the necessary steps further to increase financial stability. It is a question of how much political courage the national regulators have.

How much equity capital should a globally active bank have? The economists Martin Hellwig and Anat Admati argue that we should be talking about 10 to 20% on an non-risk-weighted basis. Is that your view too?


Yes. Hellwig and Admati make a very strong case for higher capital requirements and much less leverage in bank balance sheets. They are very convincing.

The banks argue that equity is expensive, and that higher capital requirements will slow down the economy. What do you make of that?


The banks are lobbying and making these arguments up. There is no factual basis for their arguments. If you implement higher capital ratios the way it should be done, through retained earnings, you do not take anything away from the shareholders. It is a cushion against future losses, rather than have the taxpayer on the hook again. There are completely responsible ways to do this. And by the way, even Ben Bernanke, chairman of the Federal Reserve, is quoted in the minutes of a Fed meeting that higher capital requirements do not slow down economic growth.

But if you split up, say, J. P. Morgan into ten smaller banks, they could still all serially fail in case disaster hits. What do you make of that argument?


Nobody is saying that there is one magic bullet. You want to have other safety mechanisms as well. The analysis actually says that you would create more shareholder value if you split up a bank like J. P. Morgan into different pieces. About the idea that they would all fail at the same moment: Yes, it is a theoretical possibility, but so is it theoretically possible that the world gets struck by a big meteor that would cause eternal winter.

The big universal banks argue that they have inherent diversification, which acts as a buffer against risk.


Again, that is an interesting theory. But what we have seen in Europe, where the universal banking model is prevalent, has actually been rather tragic for your economies. The universal banks did not diversify their risks, they used their size relative to the economy to take on more risk and concentrate that risk. And I think you would agree that there have been some spectacular bank failures in Europe and some situations where very large financial institutions needed a government bailout. The idea that the universal banking model protects you is a theory that is not supported by the facts.

Are banks in Europe even weaker than in the United States?


You have to be careful with comparisons between US GAAP and IFRS because of the way derivatives are accounted for. But if you look on an apples to apples basis, there are some big European players that have significantly lower capital levels than their US counterparts. The level in the US is not impressive and needs to be higher, but in Europe you have some very weak players, including most notably Deutsche Bank.

UBS and Credit Suisse count among the best-capitalized banks when looking at their core tier one ratio. But their leverage ratio is below 3%. Is the risk-weighted approach even something we should look at?


In some situations it can be informative, for example to the management of the bank. But it can also be highly misleading. All that we really know about risk weights is that in every crisis they are completely wrong. I am in favor of moving to regulating the leverage ratio. I am not saying the risk weighted approach has no information, but some very big mistakes have been made in risk-weighing the assets, also in the case of UBS.

So the Swiss should not feel too safe when we see our two big banks touting their high core tier one ratios?


The Swiss taxpayer should be pushing for much higher equity as reflected in a leverage ratio of six to ten per cent or even higher, if possible. You in Switzerland have a particularly extreme problem, as those two banks are huge in comparison to Swiss GDP. That is a big vulnerability, compared to any advanced economy. You need to be very careful when you allow these balance sheets to grow so big, because ultimately, that is an implicit liability for the Swiss tax payer should they get into trouble.

Why can we not just let banks go under and let the system cure itself?


You remember that idea was very influential in the early 1930s, when large numbers of banks in Europe and the US did fail. That helped cause the Great Depression. Since that time, we have recognized that there are big externalities we have to worry about. Having said that, I am very sympathetic that investors who have bought equity and bonds in such a bank should lose, and that management should lose too. We need to find a balance between making sure that you can fail and lose your investment, and preventing systemic panic. We have leant too far towards protecting investors and management, and that has created a much bigger moral hazard in recent years.

Credit: The Institute for New Economic Thinking