November crude oil closed lower on Monday. The high range close sets the stage for a steady to higher opening when Tuesday's night session begins. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If November extends the decline off June's high, the 62% retracement level of the 2009-2011 rally crossing at 80.80 is the next downside target. Closes above the 20 day moving average crossing at 90.64 are needed to confirm that a low has been posted. First resistance is the 10 day moving average crossing at 88.63. Second resistance is the 20 day moving average crossing at 90.64. First support is last Friday's low crossing at 83.15. Second support is the 62% retracement level of the 2009-2011 rally crossing at 80.80.
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November Henry natural gas closed higher on Monday as it consolidates some of last week's losses. The high range close sets the stage for a steady to higher opening when Tuesday's session begins trading. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If November extends last week's decline, September's low crossing at 3.812 is the next downside target. Multiple closes above the late August high crossing at 4.163 are needed to confirm an upside breakout of the late summer trading range. Closes below July's low crossing at 3.786 would confirm a downside breakout of the late summer trading range. First resistance is the reaction high crossing at 4.184. Second resistance is the reaction high crossing at 4.487. First support is September's low crossing at 3.812. Second support is July's low crossing at 3.786.
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December gold closed higher on Monday as it extends this month's short covering rally. The high range close sets the stage for a steady to higher opening when Tuesday's night session begins trading. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. If December extends this month's rally, the 38% retracement level of the July-October decline crossing at 1246.00 is the next upside target. Closes below the 10 day moving average crossing at 1214.20 would confirm that a short term top has been posted. First resistance is the 38% retracement level of the July-October decline crossing at 1246.00 . Second resistance is the 50% retracement level of the July-October decline crossing at 1265.50 . First support is October's low crossing at 1183.30. Second support is monthly support crossing at 1179.40.
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December coffee closed lower due to profit taking on Monday. The low range close set the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off September's low, weekly resistance crossing at 24.30 is the next upside target. Closes below the 20 day moving average crossing at 19.79 are needed to confirm that a top has been posted.
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Monday, October 13, 2014
Saturday, October 11, 2014
The Broken State and How to Fix It
By Casey Research
The United States of America is not what it used to be. Unsustainable mountains of debt, continuous meddling by the government and Fed to “stimulate the economy,” and the U.S. dollar’s dwindling status as the world’s reserve currency are very real threats to Americans’ standard of living. Here are some opinions from the recently concluded Casey Research Fall Summit on the state of the state and how to fix it.Marc Victor, a criminal defense attorney from Arizona and a staunch liberty advocate, says there’s really no such thing as “the state”—“it’s just some people bossing other people around.”
Not everyone wants to fix things, he says; the bosses like the status quo. For example, aside from drug lords, DEA agents are the ones benefiting most from the “War on Drugs.”
Victor believes that democracy and freedom are incompatible, since “democracy is majority rule, and freedom is self-rule.” If you want to bring true freedom to America, he says, winning hearts and minds is the only way to reboot this country and create a free society.
Paul Rosenberg, adventure capitalist, Casey Research contributor, and editor of “A Free Man’s Take,” views America’s future similarly. He thinks the United States is in a state of entropy.
The bad news, says Rosenberg, is that there will be no revolution. The good news is that the peak of citizens’ obedience to the state is behind us, and people are getting fed up with the government’s shenanigans.
Real change is slow, he says, so we must work persistently to create a better world.
Stephen Moore, chief economist at the Heritage Foundation, says the problem is liberal economic policy: Red states in the US, he says, have blown away blue states in job creation since 1990. Texas alone accounts for the entire net growth of the US economy over the past five years.
As another proof point in favor of a free market economy, Moore emphasizes that both Obama and Reagan took office during terrible economic times. While Obama has raised taxes and instituted Obamacare, Reagan cut taxes and regulation. As a result, the Reagan economic recovery was almost twice as robust as the Obama “recovery.”
One of the US’s biggest problems, says Moore, is that companies can’t reinvest profits because dividend, capital gains, and income taxes all have increased under Obama. Corporate taxes in the rest of the world have dramatically declined in the last 25 years, but in the US, they haven’t budged. The average corporate tax rate around the world is 24%—in the US, it’s 38%.
Overall, though, Moore is bullish on the U.S. economy. American companies, he says, are the best run in the world, if only the US government would adopt less economically destructive policies.
Doug Casey, chairman of Casey Research, legendary speculator, and best-selling financial author, isn’t so optimistic. First of all, he says, we’re in the Greater Depression right now, which began in 2008. He fears it’s too late to repair America, but says if anyone would attempt to do so, the following seven step program would help:
- Allow the collapse of “zombie companies” (companies that are only being held up by government handouts and other cash infusions).
- Abolish all regulatory agencies.
- Abolish the Federal Reserve.
- Cut the size of the military by at least 90%.
- Sell all US government assets.
- Eliminate the income tax.
- Default on the national debt.
He recommends owning significant assets outside your home country: for example, by buying foreign real estate. You should also buy and store gold, “the only financial asset that’s not simultaneously someone else’s liability.”
Casey’s suggestions include going short bubbles that are about to burst (like Japanese bonds denominated in yen), selling expensive assets like collectible cars and expensive real estate in major cities, as well as looking toward places like Africa as contrarian investment opportunities.
Nick Giambruno, senior editor of International Man, agrees that internationalizing your wealth—and yourself—is the most prudent way to go for today’s high net worth investors. It ensures that “no single government can control your destiny,” and that you put your money, business, and yourself where they are treated best.
You should internationalize each of these six aspects of your life, says Giambruno: our assets; your citizenship; your income/business; your legal residency; your lifestyle residency; and your digital presence.
Regarding your assets, you can find better capitalized, more liquid banks abroad, and using international brokerage accounts can provide you access to new investment markets.
To hear all of Nick Giambruno’s detailed tips on how to go global, as well as every single presentation of the Summit, order your 26+-hour Summit Audio Collection now. It’s available in CD and/or MP3 format.
Learn More Here
The article The Broken State and How to Fix It was originally published at Casey Research.
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Friday, October 10, 2014
Yield Hungry Baby Boomers Are on a Death March
By Dennis Miller
Today’s forecast: yield starved investors forced into the market by seemingly permanent low interest rates will continue to be collateral damage. For some, that collateral damage may involve more than the loss of income opportunities… many could be wiped out completely.At the Casey Research Summit last month, I asked the participants in our discussion group: “If there were safe, fixed income opportunities available paying 5 - 7%, would you move a major portion of your portfolio out of the market?”
They all answered a resounding, “Absolutely.”
Participants relying on their nest eggs for retirement income said they felt forced into the market for yield. Their retirement projections weren’t based on 2% yields, the rough rate now available on fixed income investments. They’d planned on 6% or so. What other choice do they have now?
The Federal Reserve knows seniors and savers are collateral damage. Former Fed Chairman Ben Bernanke has openly acknowledged that the Fed’s low interest rate policy is designed to prompt savers to take more chances with riskier investments. In their book Code Red, authors John Mauldin and Jonathan Tepper shine a harsh light on that policy, writing:
Central banks want people to take their money out of safe investments and put them into risky investments. They call it the “portfolio balance channel,” but you could call it “starve people for yield and they’ll buy anything.”
The collateral damage inflicted upon seniors and savers is twofold. First, it’s the loss of safe income opportunities. The Fed’s low interest rate policies have saved banks and the government an estimated $2 trillion in interest alone. $2 trillion added to the balances of 401(k) and IRA accounts would sure bolster a lot of desperate retirement plans.
But there’s no sign the Fed will reverse its low interest rate policies in the foreseeable future. So, yield starved investors, including throngs of baby boomers maturing into retirement age each day, play the market and risk their nest eggs in the process.
The Federal Reserve has succeeded in forcing savers to take billions of dollars out of fixed income investments to hunt for better yields. Take a look at the chart below showing the S&P 500’s performance since 2004. The Index has almost tripled since its 2009 bottom. There hasn’t been a major correction in well over 1,000 days.
When the bubble burst in 2007, the S&P took a 57% drop. I had friends just entering retirement who suffered 40-50% losses. Their stories are not uncommon, and some are now back at work—and not by choice.
This is the second form of collateral damage, and it can be much more devastating. It’s one thing to lose an income opportunity and call it collateral damage, but quite another to lose 50% or more of your life savings. If the market drops radically, as it did less than a decade ago, the life savings of many baby boomers could be destroyed.
No one knows when the next correction will occur. However, many pundits believe a major correction is due. Others say we can continue on the same track, much like Japan has done for 25 years. Here’s what we do know: the Fed has made it clear that it plans to hold interest rates down for quite some time.
When you invest money earmarked for retirement, you risk trying to time the market. Even seasoned investors would be foolhardy to think they’ll have enough time to easily exit their positions and lock in gains.
It never works that way.
Now is the time for caution. Whether you’re a do it yourself investor or work with an investment professional, it’s a good time for a complete portfolio analysis with an eye on this question:
What happens to my portfolio if the market completely collapses?
Be wary of any advisor touting the “buy and hold” philosophy. They’d point to the chart above and note that the market went from 700 to 1,900+ in five years. If investors are patient, it will come back after the next drop. Unfortunately, seniors don’t have time to sit around and wait.
No one can guarantee the market will rebound as quickly as it did in the last decade. It’s not the “buy” in “buy and hold” that concerns me. There are excellent companies out there that pay healthy dividends and will rebound relatively quickly. Depending on your age and financial condition, it’s the indefinite holding that could be a problem.
If you’re not comfortable holding an investment for a decade or more, consider using a stop loss. After all, would you rather suffer a major loss and hope against hope that the market rebounds fast, or be proactive and keep your nest egg intact?
The best way to avoid becoming collateral damage is to take safety precautions before the next big, bad event takes place. One easy (and free) way to start strengthening your financial know how is to read our e-letter, Miller’s Money Weekly. Each Thursday my team I cover hot button financial topics and share the tools income investors need to live rich in today’s low yield world.
Click here to begin receiving your complimentary copy today.
The article Yield Hungry Baby Boomers Are on a Death March was originally published at millers money
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Thursday, October 9, 2014
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Wednesday, October 8, 2014
Gold: Time to Prepare for Big Gains?
By Casey Research
Years of a severe downturn in the gold market have left very few bulls to speak out in favor of the yellow metal. Here are some positive opinions on the future of the precious metal, from the recently concluded Casey Research Fall Summit.David Tice, founder of the Prudent Bear Fund, believes we are heading for a “global currency reset” that will reduce the role of the dollar in global trade. Central banks, he says, don’t possess all the gold they claim to, and the unwinding of the paper gold market probably isn’t far down the road—it could even ignite the next major crisis.
The paper gold market (for example, exchange-traded funds like GLD) has massive leverage, with a ratio of 90:1 or 100:1 of paper claims on gold bullion. If only a small fraction of owners convert their paper to physical gold, says Tice, it will create a “no bid” price environment and cause the price of gold to explode.
He believes that once the paper gold market collapses, gold will be priced on the basis of supply/demand for the physical metal—which means it could be headed for $3,000 to $8,000 per ounce.
Ed Steer, editor of Casey Research’s popular e-letter Gold and Silver Daily, is equally bullish on gold… in the long term, because right now, he believes the gold market to be rigged: “Central banks intervene; that’s what they do.”
They control not only gold, but also silver, platinum, palladium, copper, and oil. He says there are two possible reasons that Germany hasn’t gotten its gold back that it had stored in the U.S. — either the gold doesn’t exist or there’s so much paper written against it that it can’t be moved for collateral reasons.
While there’s not much an investor can do about gold manipulation, Steer believes that the manipulators’ schemes will blow up in their faces sooner than later.
Summit regular Rick Rule, chairman of Sprott US Holdings, isn’t worried about the bear market in gold.
“What matters is your response to the bear market,” he says. “If you have the wits, courage, knowledge, and cash to take advantage of them, bear markets are great.”
He’s keeping his eyes peeled on junior gold mining stocks, which, he says, are hugely attractive right now.
“Our market has fallen by 75% in three years. That means it’s 75% more attractive than in 2010, when we were all in love with it. Within a few years, we’ll look back on today’s low prices as the good old days.”
Louis James, chief investment strategist of Casey’s Metals & Mining division, also welcomes the opportunities to buy low that the current slump in gold prices provides.
He personally owns stock of three of the junior miners present in the Map Room at the Casey Fall Summit. All three of them have exceptionally high-grade projects that are delivering what they promised.
To get all of Louis James’ stock picks (and those of the other speakers), as well as every single presentation of the Summit, order your 26+-hour Summit Audio Collection now. It’s available in CD and/or MP3 format. Learn more here.
The article Gold: Time to Prepare for Big Gains? was originally published at casey research
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Tuesday, October 7, 2014
New Video: Obama’s Abandoning the Saudis for Iran and Dooming the Petrodollar
By Alex Daley, Chief Technology Investment Strategist
I sat down with Jim Rickards, author of many best selling economics and investing books, including his latest, titled The Death of Money. In this exclusive interview, Jim shares his view on the changes in U.S. foreign policy—the newly announced partnership with Iran to help fight ISIS and recent moves away from the petrodollar deal with Saudi Arabia—and what they mean for the dollar, gold, and investment markets in general.This interview just scratches the surface of the topics Jim covered in his speech at the most recent Casey Research Summit in San Antonio. You can grab a complete recording of that speech, and all 25 of the others, in the Summit Audio Collection, which is on sale with a juicy preorder discount for just a few more days.
Alex Daley
Chief Technology Investment Strategist
Casey Research
The article Jim Rickards: Obama’s Abandoning the Saudis for Iran and Dooming the Petrodollar was originally published at casey research
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Monday, October 6, 2014
War, Peace, and Financial Fireworks
By Casey Research
Politics has long been a driver of international markets and fickle financial systems alike. Everything is connected. Here are some voices from the just concluded Casey Research Fall Summit talking about cause, effect, and war.James Rickards, senior managing director with Tangent Capital Partners and an audience favorite at investment conferences, says the Middle East, Russia, and China are all working against the U.S. dollar and for gold.
America’s recently improved relationship with Iran is actually bad for the petrodollar, he claims, because the Saudis and the Iranians are bitter enemies. The Russians, for their part, aren’t sitting idly by while the US imposes sanctions on them—aside from Putin being able to freeze US assets in Russia, Rickards believes that Russian hackers may already have the ability to shut down the New York Stock Exchange.
China does want a strong dollar because it still holds over $1 trillion in dollar-denominated assets. But Beijing is aware that eventually the dollar will depreciate, so it’s buying gold to hedge against a decline in the value of the US currency. Current gold reserves are estimated to be between 3,000 and 4,000 tonnes of gold; the ultimate target may be 8,000 tonnes.
Rickards thinks that we are approaching a period of extreme volatility in the U.S. markets and recommends allocating 10% of one’s portfolio to physical gold.
Bud Conrad, chief economist at Casey Research, also is a petrodollar bear. For the past 40 years, he says, the petrodollar has bestowed extraordinary privileges on Americans, but that era is now coming to an end.
Dozens of countries have already set up bilateral trade agreements that circumvent the US dollar. Dollars as a percentage of foreign reserves have declined from 55% in 1999 to 32% today—and could reach 18% by 2019, says Conrad. Ultimately, the petrodollar will fail, which will lead to a rise in sought-after commodities, especially gold.
Conrad thinks the greatest danger we face may be a combined financial and political collapse. Current geopolitical problems are even worse than economic problems, he says, and the trend is toward more, not less, war. Wars, on the other hand, often precipitate financial collapse.
Grant Williams, portfolio and strategy advisor for Vulpes Investment Management in Singapore and editor of the hugely popular newsletter Things That Make You Go Hmmm…, wholeheartedly agrees.
War and financial turmoil have always been inextricably linked, says Williams. Both occur in natural cycles, and one often causes the other. He believes that we’re in an extended period of economic peace because the Federal Reserve has used monetary policy “to abolish the bottom half of the business cycle.”
Although that may sound like a good thing, it is not. The business cycle, argues Williams, is inevitable and natural; we need it to cleanse the economy. But the Fed has leveraged to such unsustainable levels to “keep the peace” that the inevitable fallout will be that much worse.
He foresees serious wars to accompany the coming financial turmoil. Today’s geopolitical setup, he says, is similar to 1914’s. In 1914, France was a fading former giant (that’s Japan today); Britain was a waning superpower, no longer able to guarantee global security (that’s the US now); and Germany was an emerging industrial power huffing and puffing and making territorial claims (today, that’s China).
Rather than all out war, Marin Katusa, Casey’s chief energy investment strategist, believes the new “Colder War” will be fought by economic means, specifically through domination of the energy markets.
While Europe is using less oil than it did over a decade ago, says Katusa, it’s depending more on Russia for its energy. North Sea oil and gas production is in decline, and Norway’s production has reached a plateau and is dropping. Russia, on the other hand, owns 40% of the world’s conventional oil and gas reserves.
The solution, Katusa says, is the “European Energy Renaissance.” As Putin tightens the thumbscrews on his energy trading partners, more and more EU countries are waking up to the fact that they will have to produce their own energy to gain independence from Russia. As the best ways to play this new paradigm, Katusa recommends three undervalued North American companies that are in the thick of the action.
To get Marin Katusa’s timely stock picks (and those of the other speakers), as well as every single presentation of the Summit and all bonus files the speakers used, order your 26+-hour Summit Audio Collection now. They’re available in CD and/or MP3 format. Learn more here.
The article War, Peace, and Financial Fireworks was originally published at casey research
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Sunday, October 5, 2014
How Low Can Crude Oil Go?
Our trading partner Mike Seery is laying out his bearish view on crude oil. How low can it go?
Crude oil futures in the November contract are down $1.50 a barrel currently trading at 89.53 right near two year lows with extreme choppiness over the last several weeks with many rallies and sell offs as I’ve been sitting on the sidelines but now the trend clearly is to the downside, however the chart structure is terrible at the current time so I am not taking a short at this time, however if you are interested in selling this market I would sell a futures contract at today’s price of 89.53 while placing my stop above $95 risking around $5,500 per contract.
The chart structure is very poor as volatility is extremely high but I am certainly not recommending anybody to buy this market as I do think prices are headed lower and if the chart structure improves in the next couple of days I will take a shot at the downside as we are awash in supplies worldwide plus the fact that the U.S dollar hit 2 year highs today as I see oil prices possibly heading down to the $80 level here in the next couple of months due to the fact of low demand and the fact that many of the commodity markets continue bearish trends as deflation is a problem not inflation.
The fact that prices are not rallying with havoc over in the mid East as oil used to rally sharply on problems in the Middle East but now the U.S is an exporter of oil so these ISIS events are not as important as they used to be so continue to sell any type of rally while placing your stop loss properly risking 2% of your account balance on any given trade.
TREND: LOWER
CHART STRUCTURE: TERRIBLE
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Crude oil futures in the November contract are down $1.50 a barrel currently trading at 89.53 right near two year lows with extreme choppiness over the last several weeks with many rallies and sell offs as I’ve been sitting on the sidelines but now the trend clearly is to the downside, however the chart structure is terrible at the current time so I am not taking a short at this time, however if you are interested in selling this market I would sell a futures contract at today’s price of 89.53 while placing my stop above $95 risking around $5,500 per contract.
The chart structure is very poor as volatility is extremely high but I am certainly not recommending anybody to buy this market as I do think prices are headed lower and if the chart structure improves in the next couple of days I will take a shot at the downside as we are awash in supplies worldwide plus the fact that the U.S dollar hit 2 year highs today as I see oil prices possibly heading down to the $80 level here in the next couple of months due to the fact of low demand and the fact that many of the commodity markets continue bearish trends as deflation is a problem not inflation.
The fact that prices are not rallying with havoc over in the mid East as oil used to rally sharply on problems in the Middle East but now the U.S is an exporter of oil so these ISIS events are not as important as they used to be so continue to sell any type of rally while placing your stop loss properly risking 2% of your account balance on any given trade.
TREND: LOWER
CHART STRUCTURE: TERRIBLE
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Friday, October 3, 2014
Bonds....the Fourth Quarter Trade of 2014
If you have been paying close attention to the stock market, market internals/breadth, and bonds for the past three months, you’ve likely come to the same conclusion that I have.
The US stock market is showing signs of severe weakness with the market breadth and leading indicators pointing to a sharp correction for stock prices.
With fewer stocks trading above their 50 and 200 day moving averages each week, while the broad market S&P 500 index continues to rising, this bearish divergence is a red flag for long term investors.
When a handful of large-cap stocks are the only things propelling the stock market higher while the majority of small-cap stocks are falling you should keep new position sizes smaller than normal and start moving your protective stops up to lock in gains/reduce losses in case the market rolls over sooner than later.
Small cap stocks are typically a leading indicator of the broad market. The Russell 2000 index is what investors should keep a close eye on because it’s the index of small-cap stocks. Since March of this year, the Russell 2000 been trading sideways and actually making new lows. This tells us that big money speculative traders are rotating out of the stock market and into other investments like high dividend paying stocks, blue chips, and likely bonds.
Looking at the chart below I have overlaid the S&P 500 index and the price of bonds. History has a way of repeating itself; although it may never feel the same and the economy may be different, price action of investments have the tendency to repeat.
In 2011 we saw the stock market and bonds form specific patterns. These patterns clearly show that money was rotating out of the stock market and into bonds. During times of uncertainty in the stocks market money has the tendency to move into bonds, as they are known as a safe haven. Bonds tend to reverse before the stock market does, so if you have never tracked the price chart of bonds before, then you should start.
From late 2013 until now bonds and the stock market have repeated the same price patterns from 2011. If history is going to repeat itself, which the technical and statistical analysis is also favoring, we should see the stock market correct 18% to 30% in the near future. If this happens bonds will rally to new highs.
It’s important to realize the chart above is weekly. Each candle represents five trading days, and four candles represents one month. So while this chart points to an imminent selloff from a visual standpoint, keep in mind this could take 2 to 3 months to unfold or longer. The market always has a way of dragging things out. If the market can’t shake you out, it will wait you out.
So if you are short the market or planning to short the market be very cautious as it could be choppy for the next several weeks and possibly months before price truly breaks down and we see price freefall.
To get my pre-market video analysis each day, and trade alerts visit: www.the gold and oil guy
Chris Vermeulen
Founder of Technical Traders
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The US stock market is showing signs of severe weakness with the market breadth and leading indicators pointing to a sharp correction for stock prices.
With fewer stocks trading above their 50 and 200 day moving averages each week, while the broad market S&P 500 index continues to rising, this bearish divergence is a red flag for long term investors.
When a handful of large-cap stocks are the only things propelling the stock market higher while the majority of small-cap stocks are falling you should keep new position sizes smaller than normal and start moving your protective stops up to lock in gains/reduce losses in case the market rolls over sooner than later.
Small cap stocks are typically a leading indicator of the broad market. The Russell 2000 index is what investors should keep a close eye on because it’s the index of small-cap stocks. Since March of this year, the Russell 2000 been trading sideways and actually making new lows. This tells us that big money speculative traders are rotating out of the stock market and into other investments like high dividend paying stocks, blue chips, and likely bonds.
Looking at the chart below I have overlaid the S&P 500 index and the price of bonds. History has a way of repeating itself; although it may never feel the same and the economy may be different, price action of investments have the tendency to repeat.
In 2011 we saw the stock market and bonds form specific patterns. These patterns clearly show that money was rotating out of the stock market and into bonds. During times of uncertainty in the stocks market money has the tendency to move into bonds, as they are known as a safe haven. Bonds tend to reverse before the stock market does, so if you have never tracked the price chart of bonds before, then you should start.
From late 2013 until now bonds and the stock market have repeated the same price patterns from 2011. If history is going to repeat itself, which the technical and statistical analysis is also favoring, we should see the stock market correct 18% to 30% in the near future. If this happens bonds will rally to new highs.
It’s important to realize the chart above is weekly. Each candle represents five trading days, and four candles represents one month. So while this chart points to an imminent selloff from a visual standpoint, keep in mind this could take 2 to 3 months to unfold or longer. The market always has a way of dragging things out. If the market can’t shake you out, it will wait you out.
So if you are short the market or planning to short the market be very cautious as it could be choppy for the next several weeks and possibly months before price truly breaks down and we see price freefall.
To get my pre-market video analysis each day, and trade alerts visit: www.the gold and oil guy
Chris Vermeulen
Founder of Technical Traders
Get our latest FREE eBook "Understanding Options"....Just Click Here!
Why the Fed Is So Wimpy
By John Mauldin
Another in what seems to be a small parade of scandals involving secretly recorded tapes of Federal Reserve regulators emerged last week. What a number of writers (including me) have written about regulatory capture over the past decade was brought out into the open, at least for a while. My brilliant young friend (40 seems young to me now) Justin Fox, editorial director of the Harvard Business Review and business and economic columnist for Time magazine, published a thoughtful essay this week, outlining some of the issues surrounding the whole concept of banking regulations.
Yes, the latest scandal involved Goldman Sachs, and it took place in the US, but do you really think it’s much different in Europe or Japan? Actually, there are those who argue that it’s worse in those places. This does not bode well for what happens during the next crisis (and there is always a next crisis, hopefully far in the future, though they do seem to come more frequently lately).
Writes Justin:
The point here is that if bank regulators are captives who identify with the interests of the banks they regulate, it is partly by design. This is especially true of the Federal Reserve System, which was created by Congress in 1913 more as a friend to and creature of the banks than as a watchdog. Two-thirds of the board that governs the New York Fed is chosen by local bankers. And while amendments to the Federal Reserve Act in 1933 shifted the balance of power in the Federal Reserve System from the regional Federal Reserve Banks (and the New York Fed in particular) to the political appointees on the Board of Governors in Washington, bank regulation continues to reside at the regional banks. Which means that the bank regulators’ bosses report to a board chosen by … the banks.
I’m in Washington DC today at a conference sponsored by an association of endowments and foundations. They have a rather impressive roster of speakers, so I have found myself attending more sessions than I normally do at conferences. Martin Wolf and David Petraeus headline a very thoughtful group of managers and economists, accompanied by an assortment of geopolitical wizards. I’ve learned a lot.
No follow-on note today. I need to get back to my classroom education….
Your loving the fall weather analyst,
John Mauldin, Editor
Outside the Box
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Each day, you get the three tech news stories with the biggest potential impact.Why the Fed Is So Wimpy
By Justin FoxHarvard Business Review HBR Blog Network
September 26, 2014
Regulatory capture – when regulators come to act mainly in the interest of the industries they regulate – is a phenomenon that economists, political scientists, and legal scholars have been writing about for decades. Bank regulators in particular have been depicted as captives for years, and have even taken to describing themselves as such.
Actually witnessing capture in the wild is different, though, and the new This American Life episode with secret recordings of bank examiners at the Federal Reserve Bank of New York going about their jobs is going to focus a lot more attention on the phenomenon. It’s really well done, and you should listen to it, read the transcript, and/or read the story by ProPublica reporter Jake Bernstein.
Still, there is some context that’s inevitably missing, and as a former banking regulation reporter for the American Banker, I feel called to fill some of it in. Much of it has to do with the structure of bank regulation in the U.S., which actually seems designed to encourage capture. But to start, there are a couple of revelations about Goldman Sachs in the story that are treated as smoking guns. One seems to have fired a blank, while the other may be even more explosive than it’s made out to be.
In the first, Carmen Segarra, the former Fed bank examiner who made the tapes, tells of a Goldman Sachs executive saying in a meeting that “once clients were wealthy enough, certain consumer laws didn’t apply to them.” Far from being a shocking admission, this is actually a pretty fair summary of American securities law. According to the Securities and Exchange Commission’s “accredited investor” guidelines, an individual with a net worth of more than $1 million or an income of more than $200,000 is exempt from many of the investor-protection rules that apply to people with less money. That’s why rich people can invest in hedge funds while, for the most part, regular folks can’t. Maybe there were some incriminating details behind the Goldman executive’s statement that alarmed Segarra and were left out of the story, but on the face of it there’s nothing to see here.
The other smoking gun is that Segarra pushed for a tough Fed line on Goldman’s lack of a substantive conflict of interest policy, and was rebuffed by her boss. This is a big deal, and for much more than the legal/compliance reasons discussed in the piece. That’s because, for the past two decades or so, not having a substantive conflict of interest policy has been Goldman’s business model. Representing both sides in mergers, betting alongside and against clients, and exploiting its informational edge wherever possible is simply how the firm makes its money. Forcing it to sharply reduce these conflicts would be potentially devastating.
Maybe, as a matter of policy, the United States government should ban such behavior. But asking bank examiners at the New York Fed to take an action on their own that might torpedo a leading bank’s profits is an awfully tall order. The regulators at the Fed and their counterparts at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation correctly see their main job as ensuring the safety and soundness of the banking system. Over the decades, consumer protections and other rules have been added to their purview, but safety and soundness have remained paramount. Profitable banks are generally safer and sounder than unprofitable ones. So bank regulators are understandably wary of doing anything that might cut into profits.
The point here is that if bank regulators are captives who identify with the interests of the banks they regulate, it is partly by design. This is especially true of the Federal Reserve System, which was created by Congress in 1913 more as a friend to and creature of the banks than as a watchdog. Two-thirds of the board that governs the New York Fed is chosen by local bankers. And while amendments to the Federal Reserve Act in 1933 shifted the balance of power in the Federal Reserve System from the regional Federal Reserve Banks (and the New York Fed in particular) to the political appointees on the Board of Governors in Washington, bank regulation continues to reside at the regional banks. Which means that the bank regulators’ bosses report to a board chosen by … the banks.
Then there’s the fact that Goldman Sachs is a relative newcomer to Federal Reserve supervision – it and rival Morgan Stanley only agreed to become bank holding companies, giving them access to New York Fed loans, at the height of the financial crisis in 2008. While it’s a little hard to imagine Goldman choosing now to rejoin the ranks of mere securities firms, and even harder to see how it could leap to a different banking regulator, it is possible that some Fed examiners are afraid of scaring it away.
All this is meant not to excuse the extreme timidity apparent in the Fed tapes, but to explain why it’s been so hard for the New York Fed to adopt the more aggressive, questioning approach urged by Columbia Business School Professor David Beim in a formerly confidential internal Fed report that This American Life and ProPublica give a lot of play to. Bank regulation springs from much different roots than, say, environmental regulation.
So what is to be done? A lot of the classic regulatory capture literature tends toward the conclusion that we should just give up – shut down the regulators and allow competitive forces to work their magic. That means letting businesses fail. But with banks more than other businesses, failures tend to be contagious. It was to counteract this risk of systemic failure that Congress created the Fed and other bank regulators in the first place, and even if you think that was a big mistake, they’re really not going away.
More recently, there’s been a concerted effort to take a more nuanced view of regulatory capture and how to counteract it. The recent Tobin Project book, Preventing Regulatory Capture: Special Interest Influence and How to Limit It, sums up much of this thinking. While I’ve read parts of it before, I only downloaded the full book an hour ago, so I’m not going to pretend to be able to sum it up here. But here’s a thought – maybe if banking laws and regulations were simpler and more straightforward, the bank examiners at the Fed and elsewhere wouldn’t so often be in the position of making judgment calls that favor the banks they oversee. Then again, the people who write banking laws and regulations are not exactly immune from capture themselves. This won’t be an easy thing to fix.
update: The initial version of this piece listed the Office of Thrift Supervision as one of the nation’s bank regulators. As David Dayen pointed out (and I swear I knew at some point, but had totally forgotten), it was subsumed by the OCC in 2011.
Justin Fox is Executive Editor, New York, of the Harvard Business Review Group and author of The Myth of the Rational Market. Follow him on Twitter @foxjust.
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The article Outside the Box: Why the Fed Is So Wimpy was originally published at Mauldin Economics
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