Regulators Intensifying Scrutiny of Banks

A recent Wall Street Journal article looked into how U.S. regulators, in recent weeks, have been focusing in on Wall Street boardrooms as the U.S. government has continued to intensify oversight of financial markets. The Federal Reserve Bank and other bank regulators are holding more frequent meetings with individual directors at some of the largest banks in the country. In these meetings, regulators have demanded detailed minutes as well as other official documents from board meetings in order to better oversee and regulate commercial bank operations. In some instances, it has been reported that some bank directors have met more with regulators in 2015 than with their own full boards. However, different banks have different processes. At Goldman Sachs Group Inc., the bank’s lead independent director meets monthly with its primary Fed supervisor. Morgan Stanley allows Fed supervisors to sit in on a portion of each board meeting, where they can listen and ask questions.

In addition, Washington has honed in more on regulators and review information that directors get from bank management. They have been asking about succession planning and inquiring about directors, as well the potential downsides of certain transactions. The Fed and OCC were quoted recently as saying that board oversight helps make the financial system safer, but directors have complained that they are being asked to take too much responsibility.

What do we make of this growing emphasis on bank regulation following the financial crisis? Is it making a difference?

U.S. Stocks Trade Sharply Higher

After a trading lull last week, the markets have had a busy Monday with stocks trading high as a result of some deals in the health care sector. In particular, UnitedHealth Group Inc. announced that it would acquire the pharmacy benefit-manger Catamaran Corp for about 12.8 billion in cash. Catamaran’s shares have since skyrocketed 24% while shares of United rose 2.8%.  Overall, the Dow Jones had a busy morning, rising 1.5% between 9:30am and 10:00am, before settling around 18,000 this afternoon.

Oil Prices Expected to Stabilize Second Half of 2015

File of pump jacks are seen in the Midway Sunset oilfield

Analysts predict that oil prices will stabilize in the second half of 2015 and rise in 2016 and 2017 as consumers increase demand due to lower prices.  Oil prices now are half what they were this time last year as a result of a fall of 60% in oil prices between June 2014 and January 2015.  As a result, motorists and businesses have increased their fuel consumption.  This increasing demand is expected to dampen or eliminate any effect of Iranian oil hitting global markets if a nuclear deal is reached, which would increase supply by approximately 1 million barrels a day.  “Global oil demand will surprise upwards, driven by the United States, China and emerging Asia,” said analyst Daniela Corsini.

Proposed Tax Reform

The tax-writing Senate Finance Committee is giving new consideration to consumption tax ideas in hopes to boost economic growth.  Lawmakers argue that the consumption tax it getting a great deal more respect and discussion.  They hope to create a type of consumption tax known as a value-added tax, and, at the same time, lower business taxes and scrap income taxes for lower-income Americans.  Interviews suggest that both Democrats and Republicans are interested in working towards a more consumption based tax system.  Consumption taxes hit the money people spend rather than the money they earn.  Some economists argue that under the consumption based system, savings and investment are taxed lighter, which could encourage investment and innovation.  The U.S. system already has certain features of a consumption based system, such as tax-advantaged retirement savings accounts and lower rates for investment incomes.  New plans might include a European value added tax, which is a type of sales tax collected on each stage of production, traditional sales taxes, and taxes on carbon-based pollution.  Although discussions are still in their early stages, what do you think of the shift to a more consumption based tax system?



A Strong Dollar: Costs and benefits

As Dollar Heats Up Overseas, U.S. Manufacturers Feel a Chill” a New York Times article by Nelson D. Schwartz, notes that the dollars rise in the past few months coupled with the fall in the value of the euro has caused American companies to feel “the heat” on both sides of the Atlantic. Europeans can no longer afford American goods without some sort of discount, while here in America consumers are demanding lower prices. European countries have been able to use the strength of the dollar to decrease their prices on their exports to United States without reducing profits. Some American companies, such as Mr. Stevenson from the article, have to cut prices and sacrifice profits in order to keep business going strong.

The sharp rise of the dollar threatens to undercut the strong export growth of American companies, which has been seen as one of the main drivers of the economy since the recession. Janet Yellen said that the stronger dollar would have an effect on exports having “a notable drag this year on the outlook.”

Companies like McCormick & Company and Tiffany and Oracle have already seen the consequences of the stronger dollar. Even though the Euro is making a comeback it is currently worth $1.10 compared to the $1.25 of December. However, the fall of the Euro is not the only currency that has experienced a decline. The British pound, the Australian dollar, the Japanese yen, and the Brazilian real, have all fallen over the past few months.

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The dollars increased strength means that unless American manufacturers adjust their prices their good cost approximately 15-20 percent more than last year. Economists do not suspect the dollar to fall anytime soon, so they expect that the euro and dollar could realistically reach parity for the first time since 2003. The dollar is continuing to surge due to the fact that the United States “remains an island of relative strength in the global economy.” This coupled with the expectation that the Fed will increase the interest rate at some point this year, even though the ECB is keeping interest rates low to stimulate the long-dormant economy.

Discuss both the shortcomings and the positive effects of the stronger American dollar. The article noted that economic benefits can be seen as cheaper imported goods, limiting threat of inflation giving the fed more time before a rate rise kicks in, and travel abroad is cheaper/more affordable for Americans. Do the costs outweigh the benefits? If it does what should be done?

The Changing Bond Landscape

A recent Bloomberg feature traces how bond markets have changed since their glorydays in in the 1980s. Money managers have increasingly replaced traditional dealers, shifting the balance of power and making trading more difficult.

Traders used to be able to move $40 million of Treasuries in one move. Now, orders must be spread out in batches over longer periods of time. Whereas liquidity can often leave banks and dealers with little room to benefit from trading, the current situation also has proven tough on earnings. Deutsche Bank, Morgan Stanley, Credit Suisse, and RBS have all reduced their fixed-income desks over the past couple of years.

The question becomes: what are the implications for the health of the financial system? Liquidity normally is a signal of strength – yet, in this case, perhaps the illiquid landscape is merely a sign of a more evenly distributed financial system.

Australia to Join China-led Bank

On Sunday, Australia announced it would join the Asian Infrastructure Investment Bank (AIIB), reversing a previous decision to not participate.  Earlier this month, the UK, France, Germany, Italy, and South Korea have decided to join the AIIB despite American cautions against joining the bank.  Privately, US officials have cautioned allies to refrain from joining the bank due to concerns over bank standards pertaining to governance and transparency, specifically concerning the role of the board of governors and government control over the bank.  Some see China’s launch of the AIIB as a direct threat to undermine the influence of the World Bank.

“This marks a very sobering moment for Australia as until now we have subcontracted to the US our policy in relation to how to respond to China’s rise,” said professor Hugh White of strategic studies at Australian National University said. “This gives real for pause for thought in how Australia positions itself for the future.”



Oil, Dollar Appreciation, and Ecuador

We have been discussing the global oil price and dollar appreciation. To continue the trend, I want to present an interesting article from Bloomberg that analyzes the impact of falling oil price and stronger greenback on Ecuador’s economy.

Ecuador is the seventh largest economy in South America. According to EIA, its oil sector accounts for more than half of the country’s export earnings and approximately two-fifths of public sector revenues. Accordingly, current decrease in oil price has negatively affected its economy as the country’s rate of growth slowed for a third year in 2014. Whereas the government predicted 4 percent growth rate, GDP only rose 3.8 percent in 2014 from a year earlier.

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Ecuador also uses U.S dollar as its official currency. As dollar appreciates, its domestic goods became relatively more expensive, making its other exports more expensive. Meanwhile, maintenance on Ecuador’s biggest oil refinery has cut cut local fuel output by 48 percent since July last year due to declining profit from oil export. This necessitated the government to spend more on subsidized imports to meet demand. This imbalance in export and import has caused CA deficit.

Fortunately, growth in non-oil industries have been strong. During his weekly speech to the nation, President Rafael Correa stated that agriculture, shrimp farming and electrical output, helped underpin growth. However, even this gain gets offset by the falling crude oil prices.

New Jobs and Distance

Screen Shot 2015-03-27 at 2.45.15 PMJob creation is on the upswing. However, according to the Brookings Institute they are getting further away from where unemployed Americans are living. In february 295,00 jobs were created. However, jobs that are within a typical commute for residents in a major metropolitan area dropped 7% between 2000 and 2012. Job proximity is important especially when commutes become expensive and moving is not feasible for cash poor citizens. Frictional unemployment is exasperated in these situations which leads to welfare dependence for longer periods of time than may be necessary. Cleveland has had the largest decrease in job proximity at negative 27% while Atlanta metro area job proximity decreased while the number of jobs actually increased by 2%. This has a lot to do with metro areas becoming more spread out. Job matching is harder when both jobs and jobless individuals are less concentrated in the cities and are spread throughout the suburbs.

It looks like initiatives need to be made not only for the creation of jobs but for job matching programs to help make sure that able bodied residents are being left out of the job market because of where they reside. 

China Shelves Shale Gas Project

The China National Offshore Oil Corp (Cnooc) decided not to go forward with a shale gas project in the Anhui province.  This move comes as other international oil companies are cutting expenditures as a result of the slide in crude oil prices- Cnooc announced it would slash spending by 35% this year.  Beijing had targeted domestic oil production, namely shale oil projects, in a bid to decrease foreign oil dependence and to reduce use of coal.  However, Chinese shale oil projects have so far had disappointing results, in part due to geographical complexity.  Furthermore, the decision by Cnooc is the latest indication that the American success with shale oil exploration may not translate to Chinese success.

Cavalier Regulation?

New York’s Department of Financial Services (DFS) is the body that issues all-important licenses to banks wishing to operate in New York. It was created in 2011 by merging two different regulating bodies. And while it is usually the Fed, the FDIC, and federal prosecutors that regulate banks, DFS and its head, Benjamin Lawsky have gone on a crusade, collecting $5.3B in just three-and-a-half years. Overreaching into the areas traditionally regulated by other bodies. Lawsky is a former Chief of Staff for New York Governor Andrew Cuomo. He is almost certainly earning himself a reputation for going after the big banking bad guys to put himself in a good position to advance his political career with populist voters.

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Sources: Shock therapy

Oil Prices Beginning to Affect Real Estate Markets

Despite their recent jump, the fall in oil prices has been effecting real estate markets. Since the end of last year, many energy companies have had to reduce capital spending and layoff major numbers of employees (falling oil prices have been responsible for 39,621 job cuts in the first two months of the year according to a prominent outplacement firm). This has been felt throughout the economy, as new evidence shows that rental markets are now taking a hit. A study done by Zillow shows that the median estimated monthly rental price for single-family home, condominiums and apartments in oil-dependent metropolitan areas is rapidly falling. Zillow breaks down the most oil and gas dependent Texas metros as Midland-Odessa, Beaumont-Port Arthur, Houston and Corpus Christi. These markets were booming before they began to rapidly cool off at the end of last summer as the oil market took a hit. In august, rents were growing by about 8% a year, compared to 6% now in oil dependent markets. The graph below from Zillow shows the rent per square foot in Texas cities, percent change from a year ago in both oil/gas dependent areas and less dependent areas.


Strong Welfare Produces More Entrepreneurs

According to The Atlantic, entrepreneurs are more likely than other Americans to receive public benefits, after accounting for income. The argument in this article is that expanding these benefit programs helps increase new business creation.

In 2014, Harvard Business School’s Gareth Olds studied the link between entrepreneurship and food stamps. He found that the expansion of the program in some states in the early 2000s increased the chance that newly eligible households would own a startup business by 16 percent. The Atlantic explains that expanding this program provided a threshold for entrepreneurs, by reassuring them that if their venture failed, they could fall back on food stamps.

In another study, Olds looked at the creation of the Children’s Health Insurance Program, which provides publicly funded health insurance for children whose families do not qualify for Medicaid. In order to estimate the program’s impact on new business creation, Olds compared the rate of entrepreneurship of those who barely qualified for CHIP to those whose incomes barely made the cutoff. He found that the rate of startup ownership for the eligible households just below the cutoff was 31 percent higher than for families that barely made the cutoff. Similarly, CHIP eligibility increased immigrant household’s chances of owning an incorporated business (startup) by 28 percent.

The article explains that taxes are also often a threat to entrepreneurship. A lower capital gains tax rate is associated with a greater supply of entrepreneurship, however the article explains that this system can often be inefficient. A better change would be to implement an entrepreneur-friendly tax reform, by shifting the tax code away from its current bias for debt over equity, while also preserving or expanding key tax credits such as the exemption for long-term investment in small businesses.

Do you all agree with the argument that when the government provides citizens with economic security, they use it to take business risks?

US Jobless Claims Fall

In an indication of an improving economy, the number of first-time unemployment benefits claims fell last week by 9,000 to a seasonally adjusted 290,000, according to the Labor Department.  These claims have been falling since the end of the 2008 recession and hit a 14 year low in October 2014.  Since then, these figures have fluctuated due to seasonal factors but indicate that the American economy is on net creating jobs.  In February, 295,000 jobs were created, and the unemployment rate hit 5.5%, the lowest level since May 2008.

However, other factors indicate that the economy has not yet fully recovered from the 2008 recession- wages have largely stagnated, many Americans are employed only part time, and a historically high number of working age people have left the labor market.

Oil Prices Jump due to African Conflict

Oil prices rose sharply in trading amid concerns that fighting between Saudi Arabia and Yemen could disrupt global oil supplies.  Wednesday, Saudi Arabia announced it would participate in airstrikes in coordination with other countries against Houthi rebels, a group which is taking over the country with support from Iran.  However, with oil having recovered 10% of its price since its recent low due to increased demand, traders have begun to pay attention to the effect of geopolitical instability on oil supply.  “The importance of this is perhaps that the market has begun to react to geopolitical supply risks once again, a trend that has been absent in recent months,” analysts at Energy Aspects noted.  Traders are particularly worried about Yemen’s proximity to the Bab el-Mandeb Straits, a vital shortcut to the Suez Canal- if tankers were unable to pass through this straight, they would have to go around Africa, which would increase cost.

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The Recession

On March 4th the Federal Reserve published the complete transcripts of the 11 policy-making meetings the Fed held during 2009. During the early part of the year, the Fed continued with the bold measures it initiated in 2008 to arrest the financial crisis, and by the summer it had mostly succeeded. Economist determined later that the economy had stopped shrinking in June, and the next major task was how the Fed could support and help the economy recover. The transcripts have been released, after the normal 5 year delay, and give an account of the deliberations by former chairman Ben Bernanke, Janet Yellen, the current chairwomen, and all branch presidents. Here is a link containing the brief overview of what have been deemed the important decisions/minutes.

UK Inflation Falls to 0%

In February in the UK, the inflation rate fell to 0% from 0.3% the month before.  Lower costs for food and computer goods are responsible for the decline.  February’s rate is the lowest seen since the Consumer Price Index estimates began in 1988.   “It looks likely the rate will drop below zero at some point in the coming months, and hover around zero for most of the year,” predicted senior economist Ben Brettell at Hargreaves Lansdown.Screen Shot 2015-03-25 at 7.12.31 PM

Many economists predict that the drop in the inflation rate will have positive effects on the UK’s economy as long as it does not presist in the long term.  “Together with higher earnings, lower inflation is boosting people’s spending power, and will contribute to economic growth in the year ahead,” said British Chambers of Commerce David Kern.

ECB Raises Cap on Emergency Funds For Greece

The European Central Bank has increased the limit of emergency funds available to Greek lenders. The move comes ahead of a Monday deadline for Greece to submit reform proposals to the ECB in order to continue receiving aid. It is not yet clear whether the ECB move was motivated by any immediate capital flight risks or as a negotiating/signalling tool ahead of Greece’s proposal. The prospect of a “Grexit” seems mildly less frightening than it did a couple months ago, now that Germany and the rest of the EU have had time to take certain precautionary measures. Germany – with its stern approach – seems to be using Greece to signal to other European countries like France that the EU is not a “blank check” organization. Altogether, Monday seems likely only buy us a temporary solution, as the struggling Mediterranean tries its best to stall any austerity measures.

Inflation and Housing

NA-CF146_INFLAT_16U_20150324114209The United States Labor Department reported that the consumer price index rose for the first time in four months this past February.  Overall prices were up 0.2% from January, despite being flat from a year ago.  At the same time, newly built home sales surged 8% this February, which is the highest level since early 2008 according to the Commerce Department.  Sustained pickup could encourage builders to increase construction.  This touches on two areas that the Fed is monitoring closely: the housing market, which policy makers view as slow despite cheap mortgage rates; and inflation, which has been below the Fed’s target for the past three years.  The Fed has suggested it will raise interest rates later this year if the labor market and inflation strengthen.  Inflation is expected to remain low in the short-run, as a strong dollar lowers the price of imports and low energy prices.  Core prices, which exclude food and energy, have climbed 1.7% over the past year.  The rise in core prices has been driven largely by higher costs for housing.  What do you think about this information in context of the Fed’s inflation concerns?


Silicon Valley Migration

Morgan Stanley’s chief financial officer Ruth Porat announced she would be leaving the firm to work at Google.  Porat follows in the footsteps of other East coast big shots such as former Whie House spokesman Jay Carney ( and White House aide David Plouffe (Uber) to accept jobs in Silicon Valley.  Porat’s move comes at a time when both Wall Street and Silicon Valley are having difficulty retaining and promoting female employees, leading to gender balance issues in both places.

This news also comes at a time when talent from top universities is shifting to Silicon Valley from Wall Street.  At MIT, for example, 31% of grads took jobs on WS and 10% went into tech in 2006.  In 2014, only 10% went into finance and 28% went into tech.