Tag Archives: Dodd-Frank Wall Street

The FED`s “Adverse Scenario” and the major shift in the economy

The stock market has been in a euphoric rally since Donald Trump won the election in November last year. This is something that Janet Yellen and the FED has monitored. Not only that. They also monitored strong economic data which have strengthened the case for a rate hike.

As you may know, the FED raised the rates a few days ago, and normally after a rate hike, the stock market drops. Thats the case right now, but the market didnt fall much. Janet Yellen said the FED will continue to raise the rates. What will happen then?

The FED came out with Scenarios for annual stress test required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule on February 10, 2017. It is just a forecast; an Armageddon forecast, which is called «Adverse Scenario» Report, and the scenarios are not forecasts of the FED.

The adverse and severely adverse scenarios describe hypothetical sets of conditions designed to assess the strength of banking organizations and their resilience to adverse economic environments. The baseline scenario follows a profile similar to the average projections from a survey of economic forecasters.

We must be prepared for higher long-term interest rates. What is that suppose to mean? First of all; that is good for banks with retail customers, simply because retail customers usually have checking accounts with zero interest on them.

So, if the rates rise, the spread in the banks rise simply because the banks will make more on their lending. About 2,000 banks has disappeared the last seven years, which means the competition among the rest is not that big anymore.

We can also see a steeper yield curve and regionally concentrated episodes of deflation. More pronounced in Japan, but less severe in the Euro zone and Asia and absent in the UK and US.

This is the major shifts we will see in the FED`s «Adverse Scenario» for 2017, and U.S banks will be stress-tested again. The apocalyptic scenario means that the level of U.S real GDP will decline in the first quarter of this year.

The US economy advanced an annualized 1,9 percent on quarter in the three months of 2016, slowing from a 3,5 percent growth in the previous period and matching earlier estimates. Consumer spending rose faster than anticipated while business investment was revised lower. Last year, the GDP expanded 1,6 percent, which is the lowest since 2011.

Check out next GDP number at 2017-03-30 at 12:30 PM.

In the scenario, the unemployment rate increases to 10 percent, by the third quarter of 2018, and short-term treasury rates fall and remain near zero. House prices will also decline by about 25 – 35 percent, through the first quarter of 2019, and so will equity prices.

In the same scenario, we will se a slowdown in Asia, severe recessions and the dollar will appreciate against euro, the pound sterling and the currencies of developing Asia.

I think the next big think to look at now is the election in France. If Le Pen and the populist wins, it can turn things upside down, and start a new international crisis. Until then, trade in small caps are profitable when rates rise, and higher rates doesn`t stop tech stocks like Alphabet, Apple and Amazon from surging. This is the bull market that everyone hates.

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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The goal to end “too big to fail” and protect the American taxpayer by ending bailouts is only a goal

It was a great day for banks on Wednesday, while all the big banks were up, leading the financial sector as the big winner. Up +2,27%. All the banks on my screen is in green, and the most active bank shares are JPMorgan Chase & Co, Bank of America, Citigroup Inc and Wells Fargo & Co.

JPMorgan Chase & Co reported a quarterly profit that topped low market expectations. The drop in profit was the first in five quarters, but investors was focusing on the positives and pushed the bank stocks up. Not only JPMorgan Chase & Co, but also its competitors.

Banking regulators like Federal Reserve and the Federal Deposit Insurance Corporation gave a failing grade to five big banks on Wednesday, on their plans for a bankruptcy giving them until October 1 to make amends or risk sanctions.

 

bailout

 

According to Reuters, this could end with braking up the banks, and it underscore how the debate about banks being «too big to fail» continues to rage in Washington. This is the first time regulators have issued joint determinations flunking banks` plans, commonly called «living wills».

If the banks do not correct serious «deticiencies» in their plans by October, they could face stricter regulations, like higher capital requirements or limits on business activities.

The requirement for a living will was part of the Dodd-Frank Wall Street reform legislation passed in the wake of the 2007-2009 financial crisis, when the U.S government spent billions of dollars on bailouts to keep big banks from failing and wrecking the U.S economy.

The plans they have are separate from the Fed`s stress tests, where banks demonstrate stability by showing how they would withstand economic shocks in hypothetical scenarios.

«The FDIC and Federal Reserve are committed to carrying out the statutory mandate that systemically important financial institutions demonstrate a clear path to an orderly failure under bankruptcy at no cost to taxpayers,» FDIC Chairman Martin Gruenberg said in a statement.

«Today`s action is a significant step toward achieving that goal.»

Thomas Hoenig said the plans show that no firm is «capable of being resolved in an orderly fashion through bankruptcy.»

«The goal to end «too big to fail» and protect the American taxpayer by ending bailouts remains just that: only a goal.»

The biggest banks doesn`t have any plans for themselves if a new financial crisis are turning into panic and chaos, which means, if the panic hit the market today, the government need to prop up the banks called «too big to fail» if they want to avoid financial chaos.

Democratic president candidate Hillary Clinton said regulators need to break big banks apart if they don`t fix their living will problems over time. Bernie Sanders, said on Twitter that many banks have only gotten bigger since they were bailed out during the financial crisis.

One of them is obviously not Citigroup. They have cut more than 26% of its assets since its peak in 2007. Citiygroup was the largest U.S bank but is now ranked number 4 (ranked by assets).

The regulators continue to assess plans for four foreign banks labeled «systemically important» and that is Barclays PLC, Credit Suisse Group, Deutsche Bank AG, DBKGN.DE, and UBS Group AG. Citigroup`s living will did pass, but regulators noted it had «shortcomings.»

I will look for Citigroup`s report on Friday.

 

sam

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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