Central Banks Should Communicate`

In my response to Brad Setzer's post on central bank coordination, with which I have no real objection other than his citation of an article which continues the exceptionally false Target2 risks argument which is not even competent economics, I merely pointed out how difficult, and often impractical, it is to get central banks to coordinate given different situations within their country and that the ECB presents an  even more difficult problem, because it serves a monetary union without fiscal transfer processes and without a fiat currency.  With respect to Lael Brainard's speech on cross

Is Federal Reserve and ECB Monetary Policy Coordination Practical?

Brad Setzer has an interesting post on central bank monetary coordination based on Lael Brainard's recent speech.  I am not convinced the issue is so much correcting "imbalances" or the supply of high quality government bonds in the eurozone.  If eurozone banks are keeping deposits at the ECB at a negative 40 basis points charge, what does that say about the balance sheets of those banks?  The ECB does not publish excess reserve data on a monthly or weekly basis; therefore, we have no timely means to track stock and flows.  Additionally, the ECB Asset Purchase Program is providing bank liquidity, but its operation has created excess liquidity in some surplus countries where the liquidity is less needed and regulatory balance sheet problems in other countries where banks need to hold on to

Does Russia Fear Qatar's Natural Gas?

In April 2017, Qatar announced it was going to increase liquid natural gas (LNG) production despite a three year market slump, which was viewed as not likely to make its major competitor, Russia, happy. Then, in May, Qatar's state news agency website was hacked with a false flag news story attempting to portray the emir pro Iran and Hamas, a growing friend of Israel and of tensions with Trump.  All designed to inflame other members of the Gulf Coalition.  Despite U.S. Intelligence agencies quickly identifying Russian hackers, perhaps mercenaries, as the source of the false flag

Are ETFs a Potential Market Liquidity Problem?

I have previously written are about market liquidity potential problems in responding to a Noah Smith article and put forth the opinion that equity ETFs are more liquid than ETNs, although a financial crisis might cause market liquidity problems when everyone is trying to sell.  I also said they are a second choice to mutual funds holding same basket of stocks, because the transaction costs can be significantly larger for ETFs although their annual fees may be less.  Now, Bank of America is questioning whether large money flows into ETFs is distorting market price-earnings(PE) and  over

Michael Pettis on the Economics of Income Distribution

Michael Pettis has written an important article on whether cutting taxes on the wealthy leads to growth through an analysis, in different economic investment conditions, of the impacts it can have on economic growth and income inequality.  It is an important article, because the public discussion of this issue is obscured by the divisive ideological political debate of politicians

Waiting for Godot or Does Anyone Really Know What Is Going on with eurozone Banks?

I have been researching eurozone banks excess reserves and repo availability for a few weeks trying to work my way through muddled commentary and sort the reality from the assumptions and found myself questioning what I know.  In doing so, I have misstated to others what I am thinking and even the data, facts, and issues about which I am concerned.  Sometimes it is best to just stand back and look for the string that pulls the material together.

I have yet to write that article which will address whether eurozone banking rules to promote solvency of banks is creating a liquidity problem, because  the eurozone banking resolution authorities seem to have so badly mismanaged the Banco Popular resolution to the point of intensifying a bank run despite monitoring bank liquidity on a daily and hourly basis.

Banco Popular was Spain's 6th largest bank having been in existence since the early 20thCentury and one of the more profitable banks until about 2016.  In February 2017, it announced it had a 3.b billion euro loss on asset writedowns and Non Performing Loan sales while maintaining it still had more than sufficient quality assets on its balance sheet.

By the end of May and first days of June reports were circulating that Banco Popular had received only 3.5 billion euro on 40 billion euro collateral rather than the 9.5 billion euro it had expected one month previously and had applied to the Bank of Spain for liquidity support receiving only 10%

Even Bloomberg Fears Financial Advisors

I recently wrote yet another article on the institutional deception of the financial advisor services in the United States which contains links to prior articles of mine on the subject as well as testimony provided to the SEC when they studied the issue a few years ago and did nothing.  That article was linked by Abnormal Returns.


Bloomberg had an article last week on how bad financial advisers are multiplying, how they deceive investors, provide advice while having conflicts of interest, how the new Fiduciary Rule is merely a

Will ETFs Have Liquidity in a Financial Crisis?

Noah Smith has a decent column today asking if it is smart to worry about ETFs.   He appears to be concerned about the liquidity of ETFs which hold bonds, derivatives, and futures.  Personally, I think the concerns also apply to equity ETFs in a Crisis market. 

One means of avoiding liquidity risk is to avoid ETNs which not only are comprised of holdings with significant liquidity risk but also can involve default.

If a individual has an account at Fidelity, Vanguard, T. Rowe Price, etc., they will find that is significantly less expensive to buy/sell an ETF (such as a Vanguard ETF at Fidelity) than a no-load mutual fund (Vanguard fund at Fidelity) with no 12(b)-1 annual expense of another company.  If it cost $75  to buy a mutual fund and only $7.95 to buy an ETF, you are being purposefully discouraged from buying the fund.

It would be imprudent to not investigate ETFs as well as mutual funds depending on where you have your investment accounts. You will look at the bid/ask spread, because the larger the spread the less liquidity. You will look at volume, because the smaller the volume the less liquidity.  You will look at expense, because you want lower expenses.  You will look at the ETF's portfolio for questionable or potentially illiquid or risky holdings.  You would look at performance over different periods of market conditions.  You would look at risk statistics.  You would look at current and historical distributions.  And that would just be the beginning of the investment decision process and choices of investment in comparison or its role within a portfolio.

Obviously, the least expense purchase is done with a Limit Order, but do not be surprised if it fails and you have to decide whether to make a Market Order.   Investing is a methodical process.  The best portfolios are holding portfolios which have elements which go up and down in different market conditions, because most people buy and sell at the wrong times when reacting to a market and lose return over time.  A knowledgeable investor will have buy/sell rules which they rigorously follow.

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Beware Financial Advisors Who Are Not Conflict of Interest Free Fiduciary Fee-Only Advisors

On June 9. 2018, the new "fiduciary" rule will take effect requiring financial advisors to "act in the best interest" of the client with respect to retirement account advice.  Unfortunately, in the United States financial advisors are allowed to say they are fiduciary if they attempt to "act in the best interests" of the client despite being financial salespeople  and/or having conflict of interest relationships with financial service companies from which they receive software, services, and incentives or compensation to use them.  A real fiduciary financial advisor is a fee-only financial advisor who works only for the client,. sells no financial products at any time in any capacity, and has no conflicts of interest.

You are going to see media recommendations that you use Broker Check, which is only going to tell you you are finding a licensed salesperson.  They may be able, under current US law, to call themselves fiduciary despite conflicts of interest, but a true fiduciary has NO conflicts of interest.  You will want to use the SEC Advisors page, which will tell you if the individual is just an investment advisor or an Investment Advisor and Broker (salesperson).  You only want an Investment Advisor who is not a Broker. 

When you first see an Investment Advisor, you will first want to see their Form ADV Part II which explains how they do business and how they are compensated.  You want a fee-only advisor who never sale financial products, because the US Securities law allows Investment Advisors to call themselves fee-only when they allow the client to decide if they want products sold to them and not just advice.  Beware.  Watch out for fee-only financial advisors who have a relationship with any person, subsidiary, company, or firm which provides financial products, including insurance, whether commissioned or not for the product placement.  A relationship is a conflict of interest.

The United States is still a predatory frontier where the regulatory authorities only debate how wolves may dress themselves as sheep dogs and profitably feast.  In a civilized society like the United Kingdom, financial advisors must be fee-only with no conflicts of interest period as I have written before and as I have submitted testimony to the SEC previously.  As I have written, the educational and designation standards in the United States are inadequate and purposefully deceptive with no existing financial designation requiring enough education which would equal a true Masters Degree in Finance (the Financial Planning degrees are totally inadequate and designed to bring university revenue not well educated professional fiduciary financial advisors). Even NAPFA is intrinsically linked to the CFP, which is a designation predominately held by, and membership dependent on, salespeople, and just another designation requiring an professionally inadequate education. (Attorneys, CPAs, and medical doctors all require rigorous professional education as well as licensing.)  I have publicly written, as you can see in the links above, that fiduciary fee-only advisors need to be regulated by am independent regulatory body which is salesperson free to avoid the continued deception of who is truly fiduciary.  Meanwhile the SEC is again asking for comment on a fiduciary standard.  They will just ask and, if under enough pressure, design a new sheep dog uniform for wolves who have all that gold in their lairs.


 Look to the ADV Form Part II and ask pointed questions.

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Understanding U.S. Private Debt Data

As I have written in the past, private debt is an important indicator of economic bubbles, but the data is not just nominal, but also historical, and  composed of trends.  While the recent U.S. private household debt report showed nominal debt levels higher than the 2008 Peak level, the debt level ratio is actually less when compared with disposable income and not deserving, when thoroughly analyzed, of scary debt level headlines.

The current report data does show continued upward trends in student loan debt and auto loan debt with a small uptick in credit card debt.  While delinquencies 90+ days are still above pre-2008 levels, the levels are actually historically low or close to historically low.  Auto loan delinquencies have been driven by subprime used car loan originators and more recently by auto manufacturers trying to move stock in a period of slowing motor vehicle sales.  The student loan problem is the result of poor governmental administration and financial aid support, rising tuition, and poor governmental oversight of private student providers who have been particularly predatory in trying to collect payments despite an established legal process.  All three private providers have similar complaints, but Navient (formerly Sallie Mae) is the largest, sued not only by the CFPB but also by two state attorney generals, and, as the largest, is currently favored by the Trump Administration to be the vendor in creating a single entry point website for student loan application and administration which would defeat the Obama Administration attempt to create a transparent, streamlined single entry point and form.  The student loan debt levels and delinquencies are a serious trend which has saddled the millennial generation with historically high student debt in a stagnant, low growth economy which has slowed marriages, home buying, and putting off having children. 

If you are going to look at household private debt, you also need to look at corporate debt and you will see the nominal levels are up, but lower when viewed as a percentage of market value and credit market debt as a percentage of net worth is also lower and close to pre-2008 levels.

There is no debt crisis.  The U.S. data is very available and current and, if you inspect the nominal, historical, and trend date, you see the student loan and auto loan trend problems which the U.S. government has failed to correct.  After all, the 1% do not have these problems, which may be why so many young adults, with respect to student loan debt, are not happy with government and the prospect they will not have the quality of life their parents have.  At some point incumbent politicians and political candidates are going to have to start listening to the current young adult generation no matter who is financing their campaigns and demanding their loyalty.


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