TBTF - Killing the Golden Goose
By John R. Taylor, Jr.
We know as a hedge fund, as a counterparty to and friend of the biggest banks, and as New Yorkers, that we are unloved, in fact, hated, by almost everyone in the US and most of the world as well, but all those people are wrong. Very wrong! The financial world might be wayward and crisis prone, but we should be humored back to health, not pilloried. Too many forget that GDP growth is positively related to credit growth, the correlation in country after country, decade after decade is always over 80%. Shrink credit today and harvest political overthrow tomorrow. You can kill the banks, but then you are also killing the economy and social stability. Without us as a group, those banks that are ‘too big to fail’ (TBTF), the US economy would collapse – especially in today’s world. Throw in the European banks that are being vilified for their related sins, and the whole world could go down the drain if the current legislative foolishness continues. The concepts and theories supporting the global capitalist system should be taught in the first week of Political Economy 101 – whoops! – no one takes this course. In fact, the study of this subject is not common except in the Communist world. It seems that the only ones in the capitalist world who understood the relationship between money and growth were the great thinkers of the last century, plus Adam Smith over 200 years ago. We should never forget that there was no growth in the world before Adam Smith, and that he was regarded with skepticism for at least one hundred years. It is clear that almost no one in Washington or Brussels understands that they are fooling with the magic sauce that makes the world work. Unintended consequences are certain.
Although we often rant about the European efforts at banking structure reform, warning that growth and political stability was certain to suffer from the Basel III-, EBA-, and Troikainspired restrictions and regulations, the latest destructive monster has been hatched in Washington. A non-inding resolution calling for specific punitive measures against the 5 TBTF banks has passed the US Senate in a 99-0 vote. Many, many pundits are cheering. The bill titled cynically the “Terminating Bailouts for Taxpayer Fairness (TBTF) Act of 2013 would cripple the only US banks that operate in the global marketplace and severely weaken the United States globally as well as send the US economy into a deep recession. This Act (S.798) is very simple, as it currently stands –so simple that we can be assured that it cannot be applied in this form even though there is no current opposition to it. By mandating a 15% capital requirement for any large bank and demanding that all off-balance sheet items and derivatives be consolidated and reserved against, the bill assures the destruction of the derivative markets and the shrinkage of the 5 TBTF banks and any other banks that might threaten to take their place by expanding their balance sheets – i.e. making the loans that would be necessary to keep our economy growing. As all reserves, the capital cushions, must be liquid, the only gainer here would be the US government as the demand for risk-free government bonds would go through the roof. Rates would go to zero or below. After adjustment for the TBTF rules, the balance sheets of the major US banks would look just like they did during the Depression – and the economy would be about as strong too. It might be fun to hate banks, the bigger the more hateful, but without them thriving and growing, capitalism and our world doesn’t work. Very safe banks mean a very weak economy.
South Africa's Perfect Storm
By Jonathan Clark
In the two years between early-2009 and early-2011, everything was going South Africa’s way. Commodity prices made an astounding rebound and money flooded into the mining industry. Chromium, platinum, gold, coal and iron ore made up 37% of the country’ sexports. South African 10-year government bonds were paying around 9%, which also attracted money into the country. During this same period, benchmark interest rates fell from 12% to 5% and provided a boost to the economy. The rand appreciated by 81% from its low in 2008 but then it ended in mid-2011. The rand turned lower, beginning a downtrend. Commodity prices, as measured by the GS Commodity Index, peaked in 2011 and have been declining since that time. Labor relations in South Africa began to sour, culminating in the Marikana miners' strike in August of 2012, where police fired live ammunition that resulted in a number of deaths. South Africa fell from favor in the investment community, while lower commodity prices contributed to a worsening of the country’s current account toward historically large deficits. South African 10-year bond yields had been declining since the beginning of April, but have begun to rise over the past two weeks, a sign that money is departing the country. South Africa’s credit rating was lowered by the major rating agencies, largely due to the strikes, and further downgrades appear likely. Since its peak in 2011, the South African rand has declined by 32%, and the cycles call for further weakness lasting as long as another five months. The combination of falling commodity prices, fleeing capital, and labor unrest mean that the rand could be a particularly weak currency. With the unemployment rate above 25%, further interest rate cuts could prove helpful to growth, but the central bank has little room to maneuver with inflation at 5.9%.
The cycles call for USD/ZAR to trade higher into next week, when a medium-term peak is due. It can trade as high as our initial target of the 9.8700 area before peaking. Following this peak, the dollar should pull back for a week to two weeks before the uptrend resumes. There is a further peak due during the second half of July, when the cycles expect a significant dollar peak versus the European currencies. Our further objective for USD/ZAR is the 10.5000 area. The longer-term cycles argue that dollar/rand could trend higher as long as October and it could trade as high as 11.2500 before a final peak is reached. We doubt it will fall below the support at 9.3700 and, if seen this should be a good place to buy. Only a close below 9.0200 means that our positive outlook is wrong and it is headed lower into August, but this negative outlook is extremely unlikely
By John R. Taylor, Jr.
We know as a hedge fund, as a counterparty to and friend of the biggest banks, and as New Yorkers, that we are unloved, in fact, hated, by almost everyone in the US and most of the world as well, but all those people are wrong. Very wrong! The financial world might be wayward and crisis prone, but we should be humored back to health, not pilloried. Too many forget that GDP growth is positively related to credit growth, the correlation in country after country, decade after decade is always over 80%. Shrink credit today and harvest political overthrow tomorrow. You can kill the banks, but then you are also killing the economy and social stability. Without us as a group, those banks that are ‘too big to fail’ (TBTF), the US economy would collapse – especially in today’s world. Throw in the European banks that are being vilified for their related sins, and the whole world could go down the drain if the current legislative foolishness continues. The concepts and theories supporting the global capitalist system should be taught in the first week of Political Economy 101 – whoops! – no one takes this course. In fact, the study of this subject is not common except in the Communist world. It seems that the only ones in the capitalist world who understood the relationship between money and growth were the great thinkers of the last century, plus Adam Smith over 200 years ago. We should never forget that there was no growth in the world before Adam Smith, and that he was regarded with skepticism for at least one hundred years. It is clear that almost no one in Washington or Brussels understands that they are fooling with the magic sauce that makes the world work. Unintended consequences are certain.
Although we often rant about the European efforts at banking structure reform, warning that growth and political stability was certain to suffer from the Basel III-, EBA-, and Troikainspired restrictions and regulations, the latest destructive monster has been hatched in Washington. A non-inding resolution calling for specific punitive measures against the 5 TBTF banks has passed the US Senate in a 99-0 vote. Many, many pundits are cheering. The bill titled cynically the “Terminating Bailouts for Taxpayer Fairness (TBTF) Act of 2013 would cripple the only US banks that operate in the global marketplace and severely weaken the United States globally as well as send the US economy into a deep recession. This Act (S.798) is very simple, as it currently stands –so simple that we can be assured that it cannot be applied in this form even though there is no current opposition to it. By mandating a 15% capital requirement for any large bank and demanding that all off-balance sheet items and derivatives be consolidated and reserved against, the bill assures the destruction of the derivative markets and the shrinkage of the 5 TBTF banks and any other banks that might threaten to take their place by expanding their balance sheets – i.e. making the loans that would be necessary to keep our economy growing. As all reserves, the capital cushions, must be liquid, the only gainer here would be the US government as the demand for risk-free government bonds would go through the roof. Rates would go to zero or below. After adjustment for the TBTF rules, the balance sheets of the major US banks would look just like they did during the Depression – and the economy would be about as strong too. It might be fun to hate banks, the bigger the more hateful, but without them thriving and growing, capitalism and our world doesn’t work. Very safe banks mean a very weak economy.
South Africa's Perfect Storm
By Jonathan Clark
In the two years between early-2009 and early-2011, everything was going South Africa’s way. Commodity prices made an astounding rebound and money flooded into the mining industry. Chromium, platinum, gold, coal and iron ore made up 37% of the country’ sexports. South African 10-year government bonds were paying around 9%, which also attracted money into the country. During this same period, benchmark interest rates fell from 12% to 5% and provided a boost to the economy. The rand appreciated by 81% from its low in 2008 but then it ended in mid-2011. The rand turned lower, beginning a downtrend. Commodity prices, as measured by the GS Commodity Index, peaked in 2011 and have been declining since that time. Labor relations in South Africa began to sour, culminating in the Marikana miners' strike in August of 2012, where police fired live ammunition that resulted in a number of deaths. South Africa fell from favor in the investment community, while lower commodity prices contributed to a worsening of the country’s current account toward historically large deficits. South African 10-year bond yields had been declining since the beginning of April, but have begun to rise over the past two weeks, a sign that money is departing the country. South Africa’s credit rating was lowered by the major rating agencies, largely due to the strikes, and further downgrades appear likely. Since its peak in 2011, the South African rand has declined by 32%, and the cycles call for further weakness lasting as long as another five months. The combination of falling commodity prices, fleeing capital, and labor unrest mean that the rand could be a particularly weak currency. With the unemployment rate above 25%, further interest rate cuts could prove helpful to growth, but the central bank has little room to maneuver with inflation at 5.9%.
The cycles call for USD/ZAR to trade higher into next week, when a medium-term peak is due. It can trade as high as our initial target of the 9.8700 area before peaking. Following this peak, the dollar should pull back for a week to two weeks before the uptrend resumes. There is a further peak due during the second half of July, when the cycles expect a significant dollar peak versus the European currencies. Our further objective for USD/ZAR is the 10.5000 area. The longer-term cycles argue that dollar/rand could trend higher as long as October and it could trade as high as 11.2500 before a final peak is reached. We doubt it will fall below the support at 9.3700 and, if seen this should be a good place to buy. Only a close below 9.0200 means that our positive outlook is wrong and it is headed lower into August, but this negative outlook is extremely unlikely
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