against all odds

Grüne Linie: Open Interest. Insgesamt eine bullische Indikation

Autor: John Carney, Senior Editor, CNBC.com

Link: http://www.cnbc.com/id/100497710

When someone says "loans create deposits," usually that means at least that the marginal impact of new lending will be to create a new asset and a new liability for the banking system. But in our system it's actually a bit more complicated than that.

A bank makes a loan to a borrowing customer. This simultaneously, creates a credit and a liability for both the bank and the borrower. The borrower is credited with a deposit in his account and incurs a liability for the amount of the loan. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. All four of these accounting entries represent an increase in their respective categories: the bank's assets and liabilities have grown, and so has the borrower's.
It's worth noting that at least two more types of liabilities are also created at this moment: a reserve requirement is created and a capital requirement is created. These aren't standard financial liabilities. They are regulatory liabilities.

The reserve requirement arises with the creation of the deposit (the bank's liability), while the capital requirement arises with the creation of the loan (the bank's asset). So loans create capital requirements, deposits create reserve requirements.

(See also: What Really Constrains Bank Lending.)

Banks are required to have a 10 percent reserve for deposits. (For simplicity's sake we're going to ignore some technical aspects of reserve requirements that actually make this number smaller than 10 percent.) Which means that a bank incurs a reserve requirement of $10 for every $100 deposit it takes on. Since loans create deposits, a $100 loan gives rise to a $10 required reserve liability.

To be considered well-capitalized, a bank in the U.S. must currently have a 10 percent combined Tier One and Tier Two Capital ratio (we'll ignore the more complicated angles for capital requirements also). What this means is that the $100 bank loan gives rise to a regulatory capital liability of $10 of Tier One/Two Capital.

What this means is that the $100 loan that created a $100 deposit, actually created a $100 asset for the bank (the loan) and $120 of liabilities (the deposit plus the required reserves and capital). That might sound like a pretty bad deal for a bank. But it's not quite as bad as you might think.

Let's imagine a bank that is starting off from scratch. Scratch Bank lends $100 to Mr. Parker. It does this by crediting Mr. Parker's deposit account at Scratch Bank with $100. The bank must now immediately figure out how to meet its two new liabilities: its reserve requirement and its capital requirement.

To raise the $10 of required capital, Scratch Bank will have to sell shares, raise equity-like debt or retain earnings. Since Scratch Bank just got started, the only way to create immediate earnings would be to charge a ten percent origination fee to Mr. Parker. The last option isn't really as outlandish as it sounds (although 10 percent is way too high). Lots of loans come with versions of origination fees that can go to help banks settle their capital requirements. A $10 fee that is kept as retained earnings would completely satisfy the capital requirement.

This is actually quite extraordinary. The bank is meeting its capital requirement by discounting a deposit that it created out of its own loan. Which is to say, it is meeting the capital requirement with nothing other than its own money creation power. This makes sense because, as we will see in a moment, the effect of it is to reduce the liability of the bank without reducing its asset. What it really does is allow the bank to have an asset that is greater than the deposit liability it created.

Note that the way this would be done, in most circumstances, would be to net the $10 fee directly out of the $100. So the actual deposit would be just $90 dollars. The bank's reserve requirement would decrease by $1 dollar because of this accounting. Which means that the $100 loan really creates $119 of liabilities for the bank: a $9 reserve requirement plus a $10 capital requirement.

How can the bank meet the requirement for $9 of reserves? It could try to attract a new customer, let's call him Mr. Christie, who would deposit at least $10 dollars. This would create a liability for the bank of $10 as well as a cash balance (an asset) of $10. The bank would need to use $1 dollar of this as a reserve for Mr. Christie's account and could use the rest as the reserve for Mr. Parker's account. (There's no capital requirement for a cash asset, so the reserve requirement is the only one that applies.)

The bank could also borrow the reserves from another bank in what's known as Fed Funds market. This is the unsecured overnight lending market in which banks with excess reserves lend to banks with deficient reserves. Basically, instead of getting Mr. Christie to deposit $10 in Scratch Bank, Scratch Bank would borrow that deposit from Establishment Savings Bank instead. Right now the Federal Reserve targets the interest rate in this market as between 0 and 0.25 percent. In other words, acquiring the $9 of reserves is easy as pie.

Now here's what happens when Mr. Parker writes a check on his account to pay for a new window for his shop (it was broken by someone who wanted to stimulate the local economy, of course.) Scratch Bank will need to transfer $90 dollars to the window maker's bank through the payment system of the Federal Reserve. Scratch Bank, however, doesn't have anything like $90. All it has is $9 dollars in borrowed reserves plus $10 in retained earnings.

The bank can't use those $10 in retained earnings, however, because it needs them to meet its capital requirement. Even though the withdrawal of the $90 from the bank account extinguishes the need for a reserve requirement against the deposit, the loan still remains outstanding. Which, in turn, means the capital requirement remains in place.

So it needs to raise $81 from someone — more depositors, the interbank market, or perhaps money market funds willing to lend against some collateral. The only collateral it has is the loan to Parker, which is worth $100. After a haircut of a couple of points, however, raising $81 shouldn't be too much of a problem.

Note that the capital requirement has done its job, even though it was funded with bank created money. Because the bank effectively lent out only $90 dollars while creating a $100 loan, it is able to borrow on the collateralized market to fund its liability when the deposit created by the loan is drawn. It can borrow the $90 it needs to satisfy its reserve and withdrawal liability, take a pretty steep discount and still make a profit on the spread.

In other words, the effect of the origination fee is the same as if it actually raised outside capital. If instead of funding the loan with a fee, the bank met the capital requirement by sell $10 worth of equity, it would have had a $100 liability, a $100 asset, a $10 reserve requirement and a $10 capital requirement. When the money was withdrawn, it would owe $100 to the receiving bank. This could be paid with the $10 raised in equity, and $90 in borrowed funds. It doesn't really matter whether the capital requirement is met through outside capital, fee income or a combination of both (which is how it is done in real life).

Of course, for this to work, the market has to believe that the value of the loan to Mr. Parker is actually worth more than the $90. If counter-parties believe there is a significant chance that Mr. Parker will default on his loan, it could be worth less than $90. In that case, Scratch Bank would be forced to find other sources of funding — new investors, a government bailout—or default on its obligations to the window maker's bank.

But let's say it does work. What we have here is a functioning bank, a demonstration of how the basic infrastructure of banking is not built on a foundation of a bunch of cash that is then lent out. It's built on the loans themselves, with capital and reserves raised to meet regulatory requirements.

Schön formuliert von Yardeni: This calm has been reflected in the trend of the 52-week average of the Bull/Bear Ratio compiled by Investors Intelligence. It is up from 1.77 at the end of 2012 to 3.36 at the end of July of this year. The series, which starts in 1988, is in record-high territory. That’s because the sentiment survey’s percentage in the correction camp is also at a record high. In other words, when troubles mount, sentiment doesn’t turn bearish. Rather, it turns mildly defensive, betting that any selloff will be just a correction in a bull market. Ironically, that helps to explain why corrections have been missing in action since the start of 2013.

Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building, to purchasing a piece of a equipment, or building a brand new factory.

The Four Horseman is a independent cinematic feature documentary which lifts the lid on how the global economy really works. Living in the age of consequence unfettered growth and profit seeking have pushed humanity to the brink. Today's Four Horsemen - socially organised violence, debt, iniquity and poverty control all of our lives. They're gathering momentum, decimating communities and compromising future generations if they are not arrested the planet will gallop to a logical conclusion.

Autor: Steve Keen

Link: http://www.debtdeflation.com/blogs/2012/07/22/...-1000-words-or-less/

Both the crisis and the apparent boom before it were caused by the change in private debt. Rising aggregate private debt adds to demand, and falling debt subtracts from it. This point is vehemently denied on conventional theoretical grounds by economists like Paul Krugman, but it is obvious in the empirical data. The crisis itself began in 2008, precisely when the growth of private debt plunged from its peak of almost 30% of GDP p.a. down to its depth of minus 20% in 2010. The recovery, such as it was, began when the rate of decline of debt slowed. Across recession, boom and bust between 1990 and 2012, the correlation between the annual change in private debt and the unemployment rate was -0.92.

The causation behind this correlation is that money is created "endogenously" when the banking sector creates loans, and this newly created money adds to aggregate demand—as argued by non-orthodox economists from Schumpeter through to Minsky. When this debt finances genuine investment, it is a necessary part of a growing capitalist economy, it grows but shows no trend relative to GDP, and leads to modest profits by the financial sector. But when it finances speculation on asset prices, it grows faster than GDP, leads obscene profits by the financial sector and generates Ponzi Schemes which are to sustainable economic growth as cancer is to biological growth.

When those Ponzi Schemes unravel, the rate of growth of debt collapses and the boost to demand from rising debt becomes a drag on demand as debt falls. In all other post-WWII downturns, growth resumed when debt began to rise relative to GDP once more. However the bubble we have just been through has pushed debt levels past anything in recorded history, triggering a deleveraging process that is the hallmark of a Depression.

The last Depression saw debt levels fall from 240% to 45% of GDP over a 13 year period, and the ensuing period of low debt led to the longest boom in America's history. We commenced deleveraging from 303% of GDP. After 3 years it is still 10% higher than the peak reached during the Great Depression. On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when America had already exited what Minsky described as the "robust financial society" that underpinned the Golden Age that ended in 1966.

While we delever, investment by American corporations will be timid, and economic growth will be faltering at best. The stimulus imparted by government deficits will attenuate the downturn—and the much larger scale of government spending now than in the 1930s explains why this far greater deleveraging process has not led to as severe a Depression—but deficits alone will not be enough. If America is to avoid two "lost decades", the level of private debt has to be reduced by deliberate cancellation, as well as by the slow processes of deleveraging and bankruptcy.

In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a "Mod­ern Debt Jubilee” should take the form of “Quan­ti­ta­tive Eas­ing for the Pub­lic”: mon­e­tary injec­tions by the Fed­eral Reserve not into the reserve accounts of banks, but into the bank accounts of the public—but on con­di­tion that its first func­tion must be to pay debts down. This would reduce debt directly, but not advan­tage debtors over savers, and would reduce the prof­itabil­ity of the finan­cial sec­tor while not affect­ing its solvency.

record capital outflows totaling $859 billion over the past 12 months through July

Autor: prag cap

Link: http://www.pragcap.com/what-is-portfolio-risk/

The idea of risk is a rather confusing and nebulous concept in modern finance. The traditional textbook definition of “risk” is standard deviation or volatility. This is convenient for academic purposes because it allows us to quantify risk in a portfolio. But this is a flawed concept for several reasons:

Volatility isn’t always a bad thing. In fact, volatility with a positive skew is a good thing.  No one complains about a portfolio allocation that rises 20% per year and falls 5% every once in a while, but this is a volatile position relative to many portfolios.

Negative skew can be a good thing in a portfolio. For instance, many forms of insurance have a natural negative skew and detract from returns, however, it would be bizarre to argue that this is always a bad idea even if you don’t have to use the insurance.

Investors don’t live in a textbook world and don’t necessarily judge their portfolios by the academic concepts that drive the way many portfolio managers assess their portfolio performance. This can create a conflict of interest between the investor’s perception of risk management and the asset manager’s perception of risk management.

For most investors the “risk” of owning financial assets is not having enough financial assets when you need them. This arises primarily from two factors:

Purchasing power risk.
Permanent loss risk.

Permanent loss risk occurs when your savings is declining in value and you’re forced to take a loss for some reason (emergency, behavioral, short-termism, etc). Purchasing power risk is the potential that your savings does not keep pace with the rate of inflation.

Antizykliker reflektieren den Kreditzyklus und versuchen mit psychologischen Indikatoren die Phase seines Umschlagens zu 'erahnen'. Nur (!) in dieser Phase positionieren sie sich strategisch gegen die Masse.

Ein Umschlagen des Kreditzyklus bedingt logischerweise eine expandierende Kreditblase im Privatsektor, die an ihre 'natürlichen' Grenzen gestossen ist. Diese Kreditexpansion spiegelt sich psychologisch in ausgreifenden Optimismus bis hin zur Euphorie. Die letzte Entwicklung in China demonstrierte dies mustergültig.

Im Westen hingegen sehen wir in den US ein bescheidenes postrecessives Kreditwachstum, während in der Eurozone der private Kredit aufgrund der von den Michel verordneten Brüningkur seinen Schrumpfkurs noch nicht abgeschlossen hat. Eben deshalb schiesst hier kein Optimismus, geschweige den Euphorie ins Kraut. Gleichzeitig sehen wir aber ein fortgeschrittenes Kursniveau, wie es für den euphorischen Markt typisch ist. Dieses Niveau erscheint und ist trotz der Permabärenkapitulation solange nachhaltig, wie die gedrückte Stimmung keine echten Korrekturen zulassen kann

Entwicklung der Börsenkurse in den wichtigen Wirtschaftsräumen.

Während die Amis nicht nennenswert korrigieren, geht der Dax schon etwas stärker in die Knie und die EM's stecken teilweise in einer handfesten Rezession.

Selbst starke Kursschwankungen bei unseren chinesischen Freunden bringen die Amis nicht dazu mal eine ordentliche Korrektur abzuliefern.

So kriegt man kein klares Bild.

Der Dax irrlichtert je schon mit teils erheblichen Spikes in beide Richtungen um die Amis, hat aber weiter nichts zu melden. Der Ami korrigiert nicht, weil er dafür zu schlecht drauf ist. Er ist zu schlecht drauf, weil er einerseits auf zuviel Altschulden sitzt, die andererseits relativ zu sehr bescheidenen Einkommenserwartungen abgearbeitet werden wollen. Diese Erwartungen triggern die Akkumulation privaten Kredits, nicht wie der Stammtisch meint der Zins (so).  

Autor: Richard Murphy (born 1958) is an economist who advises the TUC on economics and taxation, and a longstanding active member of the Tax Justice Network. Murphy writes for the The Guardian, and was a blogger for Forbes.

Link: http://www.taxresearch.org.uk/Blog/2015/08/16/...sthash.bIvlFAJ1.dpuf

The reason is that there are, in macroeconomic terms four sectors in the economy and they must balance. The first is consumer spending. If consumers borrow more to increase spending then someone must lend it to them, or borrow less, as a matter of fact. That person who must borrow less might be business, who might invest less as they borrow less to compensate for more consumer borrowing, or it might be net overseas trade, or it can be the government. But the point is that the net lending and borrowing of these four sectors, consumers, business, overseas and government, will always balance, as a matter of fact.

So, frustrating as this might be to a politician who wants to appear to be in control of the destiny of their government and the state, the fact is that they have remarkably little control over how much they will borrow. If consumers insist on saving, as does business, and trade is running a deficit, (which in effect means foreigners are saving in Britain) then as a matter of fact the government will run a deficit whether it likes it or not. And there is nothing, bar stimulating business investment, exports, or consumer borrowing that they can do to change this.

weiter s.o.

Despite the fact that S&P 500 has only corrected by minuscule 4% since the peak in May of this year, cumulative number of stock market sentiment surveys have dropped to levels of pessimism usually associated with major corrections or even bear markets. At the reading of 17 percent bulls (thanks to SentimenTrader research), the mood of investors is now almost as negative as it was during October 2014 correction. Furthermore, it is clear that pessimism is also at the second lowest reading in over 3 years (shortsideoflong).

Fazit: Aus Sentimentsicht gibt es beim Ami quasi keine Luft mehr nach unten.  

Based on his continuing exploration of the decision making process under opaque circumstances, Nassim Taleb, author of The Black Swan and Antifragile: Things That Gain from Disorder, shares how the benefits of random conditions can be successfully harvested to help navigate a world we do not fully understand.

Abba Lerner, 1943

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound … The principle of judging fiscal measures by the way they work or function in the economy we may call functional finance.

The first responsibility of the government (since nobody else can undertake the responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment.

The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes so that taxpayers have less money left to spend. By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced.

In applying this first law of Functional Finance, the government may find itself collecting more in taxes than it is spending, or spending more than it collects…. [In] the latter case it would have to provide the difference by borrowing or printing money. In neither case should the government feel that there is anything especially good or bad about this result….

An interesting, and to many a shocking, corollary is that taxing is never to be undertaken merely because the government needs to make money payments…. Taxation should therefore be imposed only when it is desirable the taxpayers shall have less money to spend… [to avoid] inflation….

[The] government should borrow money only if it is desirable that the public should have less money and more government bonds…. This might be desirable if otherwise the rate of interest would be reduced too low… and induce too much investment, thus bringing about inflation….

The almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent….

Functional Finance rejects completely the traditional doctrines of "sound finance"…. [It] prescribes… the adjustment of total spending… to eliminate both unemployment and inflation… the adjustment of public holdings of money and of government bonds… to achieve the rate of interest which results in the most desirable level of investment… the printing, hoarding, or destruction of money as needed….

[The] result might be a continually increasing national debt…. [This] possibility presented no danger… so long as Functional Finance maintained the proper level of total demand for current output; and… there is an automatic tendency for the budget to be balanced in the long run as a result of the application of Functional Finance, even if there is no place for the principle of balancing the budget….

As long as the public is willing to keep on lending… there is no difficulty, no matter how many zeros are added to the national debt. If the public becomes reluctant to keep on lending… [and] the public hoards, the government can print the money to meet its interest and other obligations, and the only effect is that the public holds government currency instead of government bonds, and the government is saved the trouble of making interest payments. If the public spends, this will increase the rate of total spending so that it will not be necessary for the government to borrow… and if the rate of spending becomes too great, then is the time to tax to prevent inflation…. In every case Functional Finance provides a simple, quasi-automatic response.

http://delong.typepad.com/sdj/2013/04/...1943-functional-finance.html