Let’s Kill All the Banks
By John R. Taylor, Jr.
Before we get too excited about whether the banks should be killed or even are being killed, we must define what we are talking about. What is a bank? Unfortunately, we don’t believe that we can find an answer that will apply around the world. Being an American, I see banks more as an adjunct to the economy and business – financial vehicles that allow savings to be collected and credit to flow effectively, generating economic growth – rather than as creatures of the government. In most cases, US banks take deposits from the public, but they don’t have to. The nature of the American banking system derives from the disjointed, but peaceful, nature of the American states, which allowed a plethora of small banks to compete and collapse through the last two centuries. In a way the structure that we are still operating under originated with President Andrew Jackson’s destruction of the Second Bank of the United States in 1833 and the devolution of banking power away from the federal government. The battle between centralization and control on the one side and independence on the other has continued through the Federal Reserve, the FDIC, Glass-Steagall, Reg Q and others. This has been followed by the dismembering and defanging of many regulations, but the pendulum is swinging the other way. Nevertheless, the core remains, banks stand on their own – except for three or four – and if they get into trouble the FDIC wraps them up neatly with equityholders and bondholders suffering first and the little guy is always protected. The banks open again on Monday with new signage and not much else – at least from the outsider’s viewpoint. The government is not involved. Before the bankruptcy, the banks pay what they want, make credit decisions, and are good or bad citizens. After a bankruptcy, no one’s sovereign debt is rumpled, no political party is injured. European banks are part of the government. They were set up to lend money to it, channeling funds to the sovereign and funding projects that find favor with the ruling elite, whether monarchical, fascist/ military, or democratic. They financed the wars for years, and now that they have ended, banks are financing the welfare state and the many state owned enterprises. They never failed as they were critical state assets and deposit insurance seemed redundant. The structure bears a striking similarity to US banking before Andrew Jackson. The birth of the Eurozone sent positive shockwaves through the system as banks no longer seemed to be as tied to their sovereign and loans flowed across borders, even if deposits didn’t. It looked as though decisions were being made on a more Europe-wide basis as sovereign lending followed commercial lending across borders, but recent events have proved that this was a mirage. Weak sovereigns soon meant that the only buyers of their debt would be the local banks. The OMT lessened cross border risk, but new rules on the drawing board to stop governments from selling their debt to local banks and financing it through the ELA actually make debt harder to sell. And freezing the ELA in Cyprus means it is every bank for itself. With Jeroen Dijsselbloem admitting that each bank must stand on its own and depositors must bear their fraction of the risk, just like the US, the banks are separated from their sovereign. But both are much weaker and the depositor has no protection from his weak country and his weak bank. It is like the US with multiple state banking systems that collapsed in the late 1830’s after Jackson forced the settlement of debts in gold and silver, leading to a major depression. Don’t forget that the EU is pressing for austerity and growth will be nil – or much worse in Cyprus. As this forced ‘internal devaluation’ with a fixed currency plus increased taxes and no growth looks even worse than the impact of Jackson’s deflation, we expect European depositors and banks to cut their risk. As even sovereign debt has risk, no European bank is safe. Credit to the economy will collapse and the quality of life in most Eurozone countries will deteriorate dramatically.
If the S&P 500 Is Peaking, This Is Bad for the Aussie
By Jonathan Clark
Historically, there has been a high correlation between the S&P 500 and the Australian dollar (red & black arrows). However, this relationship has deteriorated during the past seven months as US equities have climbed while the Aussie has lacked much overall direction. It can be argued that the reason for the breakdown in this normally reliable relationship is that the focus of the Aussie economy has shifted to Asia, with China now Australia’s biggest export partner. However, history shows us that Aussie and the S&P 500 eventually realign because the S&P 500 represents a significant proportion of ultinational corporations, and thus acts as a global growth indicator. Our cycles call for US equities to peak during the next few weeks and then turn lower and decline for several months. The cycles have been calling for a peak in the S&P 500 around the middle of April. But since most equity indices around the world topped out two weeks ago or earlier, there is a risk US equities turn down ahead of schedule to begin their downtrend – they do look like they are walking on a cloud. Weakening US equities could be the catalyst for the Aussie to break out of its narrowing trading range to the downside. The last time there was a major divergence between the Aussie and S&P 500 was between December of 2007 and July of 2008. Late in 2007, the S&P 500 turned lower to begin a downtrend, while the Aussie continued to climb into July and then collapsed. A sharp downmove in US equities would force the financial markets to accept that, for the fourth year in a row, equities will witness weakness during parts of the second and third quarters of the year or what we call the ‘summer swoon’. The Aussie tends to act as a pro-risk asset, like equities, where the downmoves take place at a faster pace than the rallies. Don’t let your eye wander, don’t overstay your welcome with long Aussie positions if US equities get into trouble. AUD/USD should form a peak between now and the end of next week. It now appears likely that any final strength seen will hold below the resistance at 1.0525 and this should be a good place to exit long positions. Following this peak it should turn lower and decline into the end of May or early June. By then, it should fall to 1.0250 area. This downmove is likely to prove even more aggressive, and if this level breaks then the downmove will last into late June or July. Our further objective for this ownmove is the .9800 area. Even if the Aussie closes above 1.0525 it is unlikely to rally above 1.0630 during the next two weeks before beginning a downtrend.
By John R. Taylor, Jr.
Before we get too excited about whether the banks should be killed or even are being killed, we must define what we are talking about. What is a bank? Unfortunately, we don’t believe that we can find an answer that will apply around the world. Being an American, I see banks more as an adjunct to the economy and business – financial vehicles that allow savings to be collected and credit to flow effectively, generating economic growth – rather than as creatures of the government. In most cases, US banks take deposits from the public, but they don’t have to. The nature of the American banking system derives from the disjointed, but peaceful, nature of the American states, which allowed a plethora of small banks to compete and collapse through the last two centuries. In a way the structure that we are still operating under originated with President Andrew Jackson’s destruction of the Second Bank of the United States in 1833 and the devolution of banking power away from the federal government. The battle between centralization and control on the one side and independence on the other has continued through the Federal Reserve, the FDIC, Glass-Steagall, Reg Q and others. This has been followed by the dismembering and defanging of many regulations, but the pendulum is swinging the other way. Nevertheless, the core remains, banks stand on their own – except for three or four – and if they get into trouble the FDIC wraps them up neatly with equityholders and bondholders suffering first and the little guy is always protected. The banks open again on Monday with new signage and not much else – at least from the outsider’s viewpoint. The government is not involved. Before the bankruptcy, the banks pay what they want, make credit decisions, and are good or bad citizens. After a bankruptcy, no one’s sovereign debt is rumpled, no political party is injured. European banks are part of the government. They were set up to lend money to it, channeling funds to the sovereign and funding projects that find favor with the ruling elite, whether monarchical, fascist/ military, or democratic. They financed the wars for years, and now that they have ended, banks are financing the welfare state and the many state owned enterprises. They never failed as they were critical state assets and deposit insurance seemed redundant. The structure bears a striking similarity to US banking before Andrew Jackson. The birth of the Eurozone sent positive shockwaves through the system as banks no longer seemed to be as tied to their sovereign and loans flowed across borders, even if deposits didn’t. It looked as though decisions were being made on a more Europe-wide basis as sovereign lending followed commercial lending across borders, but recent events have proved that this was a mirage. Weak sovereigns soon meant that the only buyers of their debt would be the local banks. The OMT lessened cross border risk, but new rules on the drawing board to stop governments from selling their debt to local banks and financing it through the ELA actually make debt harder to sell. And freezing the ELA in Cyprus means it is every bank for itself. With Jeroen Dijsselbloem admitting that each bank must stand on its own and depositors must bear their fraction of the risk, just like the US, the banks are separated from their sovereign. But both are much weaker and the depositor has no protection from his weak country and his weak bank. It is like the US with multiple state banking systems that collapsed in the late 1830’s after Jackson forced the settlement of debts in gold and silver, leading to a major depression. Don’t forget that the EU is pressing for austerity and growth will be nil – or much worse in Cyprus. As this forced ‘internal devaluation’ with a fixed currency plus increased taxes and no growth looks even worse than the impact of Jackson’s deflation, we expect European depositors and banks to cut their risk. As even sovereign debt has risk, no European bank is safe. Credit to the economy will collapse and the quality of life in most Eurozone countries will deteriorate dramatically.
If the S&P 500 Is Peaking, This Is Bad for the Aussie
By Jonathan Clark
Historically, there has been a high correlation between the S&P 500 and the Australian dollar (red & black arrows). However, this relationship has deteriorated during the past seven months as US equities have climbed while the Aussie has lacked much overall direction. It can be argued that the reason for the breakdown in this normally reliable relationship is that the focus of the Aussie economy has shifted to Asia, with China now Australia’s biggest export partner. However, history shows us that Aussie and the S&P 500 eventually realign because the S&P 500 represents a significant proportion of ultinational corporations, and thus acts as a global growth indicator. Our cycles call for US equities to peak during the next few weeks and then turn lower and decline for several months. The cycles have been calling for a peak in the S&P 500 around the middle of April. But since most equity indices around the world topped out two weeks ago or earlier, there is a risk US equities turn down ahead of schedule to begin their downtrend – they do look like they are walking on a cloud. Weakening US equities could be the catalyst for the Aussie to break out of its narrowing trading range to the downside. The last time there was a major divergence between the Aussie and S&P 500 was between December of 2007 and July of 2008. Late in 2007, the S&P 500 turned lower to begin a downtrend, while the Aussie continued to climb into July and then collapsed. A sharp downmove in US equities would force the financial markets to accept that, for the fourth year in a row, equities will witness weakness during parts of the second and third quarters of the year or what we call the ‘summer swoon’. The Aussie tends to act as a pro-risk asset, like equities, where the downmoves take place at a faster pace than the rallies. Don’t let your eye wander, don’t overstay your welcome with long Aussie positions if US equities get into trouble. AUD/USD should form a peak between now and the end of next week. It now appears likely that any final strength seen will hold below the resistance at 1.0525 and this should be a good place to exit long positions. Following this peak it should turn lower and decline into the end of May or early June. By then, it should fall to 1.0250 area. This downmove is likely to prove even more aggressive, and if this level breaks then the downmove will last into late June or July. Our further objective for this ownmove is the .9800 area. Even if the Aussie closes above 1.0525 it is unlikely to rally above 1.0630 during the next two weeks before beginning a downtrend.
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