Forecasting for Dummies

Posted on April 1, 2014 by MN Gordon

Peter Zoellner is Head of the Banking Department at the Bank for International Settlement (BIS).  He holds a PhD from Vienna University of Economics and Business Administration.  Over the weekend, he told the ACI Financial Markets Association congress in Berlin that the dollar’s share of central bank reserves may fall by 10 to 15 percent in the years’ ahead.

Yet not to worry about a thing, assures Dr. Zoellner.  The reduced use of the dollar by central banks as foreign exchange reserves won’t threaten its world reserve currency status.  This is a remarkable insight, indeed.

“It could happen that the percentage will go slightly down with the reserve currency from between 65 and 70 maybe to between 50 and 60 percent,” said Dr. Zoellner.  “But the relative dominance of the United States dollar I do not believe that this will change for the next 10, 20 years.”

So how does Dr. Zoellner know what will happen over the next 10 or 20 years?  In short, he doesn’t.  We suppose he’s merely predicting tomorrow’s weather based on how sunny it was yesterday. Continue reading →

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How to Achieve Honest Banking

Posted on March 28, 2014 by MN Gordon

How to Achieve Honest BankingToday we take pause from the markets to bring you a brief review of new research by economists at the New York Federal Reserve.  On Tuesday, they published a special Economic Policy Review series.  It includes 11 research papers, providing analysis of the big banks.

One of their key findings:  The five largest banks, which include Bank of America and JPMorgan Chase, enjoy a “too-big-to-fail” advantage in financial markets.  The study also found that large U.S. banks can borrow at about 0.31 percent less than smaller banks.  Why is that?

The Fed’s research didn’t identify the exact reason.  But, perhaps, the big banks can borrow more cheaply because investors know the U.S. government would bail them out in a financial crisis.  While the Fed economists didn’t give this reason, they did note that the big banks can take bigger risks.

“The new research shows ‘it is improper to ask the taxpayer to underwrite the non-commercial banking operations of a complex bank holding company,’” said Dallas Fed President Richard Fisher.  This only seems fair. Continue reading →

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The End of Carte Blanche Bailouts

Posted on March 25, 2014 by MN Gordon

There’s a forthcoming crisis developing.  Stocks have run up over the last five years to new highs.  Many find this cause for celebration…we find it cause for alarm.

Somewhere along their travels, stocks drifted out of orbit from the real economy.  In short, the economy reclined while the stock market boomed.  Of course, no one quite knows what’s going to happen next.

Stocks could continue to rise.  They could drift sideways.  Or they could slowly slide down from their highs.  But like an out of control satellite we have a feeling stocks could very quickly burn up and disintegrate.

The conventional wisdom from Wall Street is that with the Fed still goosing the markets with $55 billion a month and a federal funds rate at practically zero the market will remain inflated.  Prices can’t dramatically fall, goes the popular delusion.  Naturally, we have some reservations.

We understand the logic and the massive put the Fed has under the market. Continue reading →

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What Is Really Backing the Dollar

Posted on March 21, 2014 by MN Gordon

Japan can’t seem to catch a break.  In February, they notched their 20th straight monthly trade deficit.  Like America, Japan now imports more than it exports.  In other words, as a country, Japan grows poorer each month.

This, alas, was not supposed to happen.  In particular, this wasn’t supposed to happen on Prime Minister Shinzo Abe’s watch.  Not with his policies of Abenomics promoting exports.

If you recall, Abe’s implemented extremely loose monetary policy since taking control of the Japan’s high office in December 2012.  More exactly, he’s pursued aggressive monetary easing (i.e. money printing) and a weak yen.  It was his firm belief these economic policies, referred to as “Abenomics”, would boost exports and pull Japan’s economy out of a two decade slump.

Abe’s big blunder, like many political fellows, was he didn’t care to appreciate that the world is not a static place.  It’s dynamic.  If you push one thing down…another thing must pop up. Continue reading →

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