Financial Markets

Wall Street Pushes Back on Trading Tax

“Wall Street is mobilizing against proposals to tax financial transactions as the idea gains attention on the campaign trail and in Congress,” The Hill reports.

“The idea already has one high-profile supporter, Democratic presidential candidate Bernie Sanders, who has proposed legislation in the Senate for a tax on the trade of stocks and other securities.”

“Supporters say a financial transaction tax (FTT) would deter market speculation. But the industry and other critics are expanding efforts to stop the proposal, saying it would weaken markets and hurt small investors, especially Americans trying to save for retirement. Retirement money is often invested in mutual funds that trade frequently to maximize returns.”

Obama’s Financial Reforms: Half a Loaf?

Paul Krugman: “A lot of the debate over the Sanders insurgency hinges on whether you see Obama-era reforms as trivial, utterly inadequate to the problems, or as a half loaf that’s a lot better than none.”

Krugman argues that when it comes to financial reform, “it partly depends on what you consider the problem … too-big-to-fail is not the key issue, so that the fact that big banks remain big is, um, no big deal. The real question — or so I’d argue — is leverage within the financial sector, and in particular the kind of leverage with no safety net that characterizes shadow banking.”

“So Matt O’Brien weighs in with evidence that leverage has in fact declined substantially, and continued to decline even as the economy expanded — probably because of Dodd-Frank. This is certainly right; the same decline shows up in other measures, as in the chart above showing financial sector debt securities as a percentage of GDP.”

“Dodd-Frank’s rules — especially, I think, the prospect of being classed as a SIFI, a strategically important institution subject to tighter constraints, have had a real effect in reducing risk … The reality of the Obama era, for progressives, is a series of half loaves. But after all the defeats over the previous 30 years, aren’t those achievements something to celebrate?”

Did the Fed Make a Big Mistake?

Matt O’Brien in The Washington Post: “Markets sure seem to think that the Federal Reserve has made a big mistake.”

“It hasn’t just been stocks selling off 10 percent to start the year. It has also been bonds saying that they don’t think the Fed will come close to hitting its target of 2 percent annual inflation anytime in the next 10 years. Markets, in other words, have done everything short of holding a boom box outside of Fed Chair Janet Yellen’s window to beg her not to raise interest rates any more after the Fed hiked them in December for the first time in nearly a decade. And it just might work. After all, there’s no such thing as an atheist in a foxhole or an inflation hawk in a stock market crash, especially when prices were barely rising to begin with.”

“The fact, then, that the S&P 500 seems to be saying that the recovery is falling apart should make even the most committed inflation-fighter wonder whether there is actually anything to fight.”

“So will the economy fall into recession? On the one hand, it’s hard to see how the economy could be heading that way when it’s been adding an average of 284,000 jobs the last three months … On the other hand, though, things still seem fragile enough that it wouldn’t take a lot of bad news to turn our slow-and-steady recovery into none at all.”

Ylan Q. Mui: “Central banking is a long game. The Fed’s decisions take months — even years — to influence the economy. That’s why officials insist that they do not react to every hiccup in the markets. In a speech about a week ago, New York Fed President William C. Dudley said his outlook for the economy ‘has not changed much’ despite the volatility on Wall Street. Though some data have been weaker than anticipated, the job market has been stronger, he said.”

The U.S. 2016 Economic Outlook: Strong But Shaky

Bloomberg: What will 2016 bring for the world economy? Financial markets are sending a mixed message: There’s reason to believe that the U.S. will outperform other major developed nations, but also to be wary about the health of American companies.

“One big question is which economies will expand fast enough to justify [a rate] increase. As of Wednesday, traders in futures markets were putting their money on the U.S.: They expected the three-month dollar deposit rate to reach 1.24 percent by December 2016, a gain of about 0.64 percentage point.”

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At the same time, though, markets for credit derivatives — which provide a sort of insurance against defaults — are displaying mounting concern about the finances of U.S. corporations. As of Wednesday, the cost of five-year insurance on $10 million in debt issued by a basket of investment-grade U.S. companies stood at almost $89,000, up more than $22,000 from a year earlier.

“The mixed signals illustrate the complexity of the task facing the Fed. A robust U.S. expansion is crucial for the rest of the world, given decelerating growth in China and a painfully slow recovery in Europe. Yet the planet’s largest economy is still showing signs of weakness, and may be unusually vulnerable to rate increases. As Bloomberg View has noted, this means the central bank will have to act cautiously, and be ready to change course if 2016 doesn’t go according to plan.”

Despite Cheap Fossil Fuels, Renewables Building Binge Projected for 2016

Joby Warrick in The Washington Post: Wind and solar power appear set for a record-breaking year in 2016 as a clean-energy construction boom gains momentum in spite of a global glut of cheap fossil fuels.

Installations of wind turbines and solar panels soared in 2015 as utility companies went on a worldwide building binge, taking advantage of falling prices for clean technology as well as an improving regulatory and investment climate. Both industries have seen stock prices jump since Congress approved an extension of tax credits for renewables as part of last month’s $1.14 trillion budget deal.

Orders for 2016 solar and wind installations are up sharply, from the United States to China to the developing economies of Africa and Latin America, all in defiance of stubbornly low prices for coal and natural gas, the industry’s chief competitors.

Energy analysts say the boom is being spurred in part by improved technology, which has made wind and solar more competitive with fossil fuels in many regions. But equally important, experts say, is better access to financing, as major Wall Street investment houses adopt a more bullish posture toward an industry that was once considered financially risky. In November, Goldman Sachs announced it was quadrupling its investments in renewables to $150 billion.

They Mystery of Missing Inflation

“Federal Reserve officials this week are expected to raise interest rates for the first time in nine years on the expectation that employment and inflation will hit targets reflecting a healthy U.S. economy,” the Wall Street Journal reports.

“But Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, a figure close to estimates of full employment, while inflation remains stuck at less than 1%, well below the Fed’s 2% target.”

“Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.”

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Why the Bank Bailout was a Big Mistake

Michael Lewis, author of The Big Short, appeared on the Late Show to talk about the new movie based on his book.

Said Lewis: “I think what they failed to appreciate is that when the resuscitated these places, like let them stay in business, that they would proceed then to not only get bigger, even bigger — that’s the amazing thing — but also to start to meddle in the process to reform them, and to sort of like throw their political clout into preventing any kind of change. It would have been much easier to reform the system if the banks weren’t there paying lobbyists, paying politicians to stop it from happening.”

Krugman: The U.S. Economy Doesn’t Look So Bad

Paul Krugman says “the U.S. Economy isn’t doing too badly. So what did we do right?”

“The answer, basically, is that the Fed and the White House have mostly worried about the right things. (Congress, not so much.) Their actions fell far short of what should have been done; unemployment should have come down much faster than it did. But at least they avoided taking destructive steps to fight phantoms.”

“The result of these not-so-bad policies is today’s not-so-bad economy. It’s not a great economy, by any measure: Unemployment is low, but that has a lot to do with a decline in the fraction of the population looking for work, and the weakness of wages ensures that it doesn’t feel like prosperity. Still, things could be worse.”

“Fed officials believe that the solid job growth of the past couple of years — which happened, by the way, as Obamacare, which conservatives assured us would be a job killer, went into full effect — will continue even if rates go up. I’m among those who believe that America is facing growing drag from the weakness of other economies, especially because a rising dollar is making U.S. manufacturing less competitive. But those officials could be right, in which case waiting to raise rates could mean some acceleration of inflation.”

Climate Change Risk Becomes an Investment Issue

CBC News: “Climate change risk has arrived as an investment issue, according to the world’s largest institutional investment manager. BlackRock Inc., with $4.5 trillion US under management, has begun watching carbon risk on all its portfolios.”

“In a new report, it warns a raft of new rules to curb carbon emissions out of the climate change summit in Paris may have a significant effect on investment returns in the years ahead.”

“This so-called ‘regulatory risk,’ meaning the impact of climate change regulations, is an impact that all corporations will be seeking to manage, says Ewen Cameron Watt of BlackRock.

“Long-term asset owners worry about ‘stranded’ assets, such as coal or oil that may have to be left in the ground to keep the world from warming by two degrees Celsius [and] there is the impact on the insurance industry of paying for repairs after extreme weather and the potential for growth among clean-energy companies.”

Recently “three new climate change indexes, which measure carbon exposure to individual companies, have been developed for the Toronto and New York markets. In addition BlackRock partnered with FTSE to create a Fossil Fuels Index Series that excludes companies linked to extraction and sale of fossil fuels.”

Watt: “The bigger the carbon footprint to start with, the greater the mitigation effort can be.”

The GOP’s Hard-Money Orthodoxy

Paul Krugman comments on what he sees as something relatively new on the GOP policy front: “an increasingly unified Republican demand for hard-money policies, even in a depressed economy.”

“Republicans have turned their back on [Milton] Friedman, whether they know it or not, and draw their monetary doctrine from ‘Austrian’ economists like Friedrich Hayek … when they aren’t turning directly to Ayn Rand.”

“This turn wasn’t driven by experience. The new Republican monetary orthodoxy has already failed the reality test with flying colors: that ‘debased’ dollar has risen 30 percent against other major currencies since 2011, while inflation has stayed low … But years of predictive failure haven’t stopped the orthodoxy from tightening its grip on the party. What’s going on?”

“My main answer would be that the Friedman compromise — trash-talking government activism in general, but asserting that monetary policy is different — has proved politically unsustainable. You can’t, in the long run, keep telling your base that government bureaucrats are invariably incompetent, evil or both, then say that the Fed, which is, when all is said and done, basically a government agency run by bureaucrats, should be left free to print money as it sees fit.”

How Those Credit Card Mailings Are Designed to Exploit Consumers’ Financial Mistakes

Washington Post: “Credit card companies have become increasingly sophisticated — and specific — about soliciting new customers. They have also learned to be savvy about wringing profits from their cardholders, even if that means taking advantage of people’s behavioral weaknesses.”

“The game happens before our very eyes. Recently, MIT economists Hong Ru and Antoinette Schoar analyzed over a million credit card mailings collected by Mintel, a company that pays people to read their junk mail. The economists scanned the terms of these offers, and noted the income and education levels of recipients.”

“Richer people were more likely to get cash-back, point-reward, or mileage offers. Poor people were more likely to get offers that advertise a low introductory APR.”

“Mileage cards tended to be marketed at college graduates, while cards with teaser APR rates were sent to the less educated. Cash-back and point-reward cards were offered to equally to people at every education level.”

Even though frequent-flyer credit cards are “targeted at a rarefied clientele, mileage cards tended to have much higher interest rates … They also had lower late fees and other gotcha features. The kinds of cards aimed at rich, educated people did not seem interested in making money off financial mistakes like the occasional late payment.”

“In contrast, the card offers sent to poorer, less educated people were often loaded with risky features: Low introductory APRs, high late fees, and penalty interest rates that kick in if you break the rules.”

The Difference Between Extreme and Moderate GOP Candidates? Not Much.

Paul Krugman asks when it comes to the more extreme Republican candidates – Trump, Carson and Cruz (“the triumverate of crazy,” in his words) – why don’t GOP voters “realize that these are crazy people? Maybe because the things they say aren’t all that different from what supposedly reasonable Republicans say.”

“A case in point: The Donald has just come out with a monetary conspiracy theory: the reason the Fed hasn’t raised rates has nothing to do with low inflation and global headwinds, Janet Yellen is just doing Obama a political favor. Crazy, right?”

“But how different is this, really, from Paul Ryan and John Taylor claiming that quantitative easing wasn’t a good-faith effort to support a weak economy, but an attempt to “bail out fiscal policy”, preventing the fiscal crisis Obama’s policies were supposed to produce?”

“The difference between establishment Republicans and the likes of Trump, in other words, isn’t so much the substance of what they say as the tone.”

Midwest Leads in Financial Well-Being; South Lags

Gallup: “Hawaii residents had the highest financial well-being in the nation in 2014, followed closely by Alaska residents. Mississippi residents had the lowest financial well-being, with Tennessee not far behind.”

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“Midwestern states earned six of the 10 highest financial well-being scores, while Southern states accounted for all of the 10 lowest financial well-being scores. Differences in income, employment and age — all of which are linked to financial well-being — could help explain the regional pattern.”

“While they avoided being among the bottom 10 states for overall financial well-being, New Jersey had the lowest percentage of residents reporting that they did not worry about money in the past week, and Rhode Island had the lowest percentage of residents saying they were satisfied with their standard of living.”