Test Results Are In

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DOW + 7 = 17,817
SPX + 5 = 2069
NAS + 41 = 4754
10 YR YLD – .01 = 2.31%
OIL – .81 = 75.70
GOLD – 3.80 = 1199.30
SILV + .02 = 16.57

The S&P 500 has gained 11% since bottoming out in a slump that stretched from mid-September to mid-October. The rally has been driven by a belief that central bank actions in Europe, China and Japan will help invigorate global economic growth. On Friday, China’s central bank lowered a key interest rate and European Central Bank President Mario Draghi said he was willing to step up the bank’s efforts to stimulate the Eurozone, which has been struggling.

Speaking of European investors that sell assets to the ECB moving into other, more risky, assets that would help accelerate the euro area’s growth, Draghi said that higher prices for European assets might encourage some foreign holders to switch away from the euro, with “investors rebalancing portfolios away from euro-denominated assets towards other jurisdictions and currencies providing higher yields.”

Just to make sure that listeners got the message, he added there was evidence that the asset-purchase programs of the U.S. Federal Reserve and the Bank of Japan “led to a significant depreciation of their respective exchange rates, even in a situation in which long-term yields were already very low, as in Japan.” You have been warned; the euro, like the yen, is heading lower.

You have low interest rates and despite talk in the US about the Fed raising rates, that is a long way off, maybe another year; meanwhile long-term rates continue to grind lower in most parts of the world. If you want to find a quick and easy profit, borrow money in Germany, where the 10-year bund yields 0.8%, and put it in the US 10-year Treasury at 2.31%, plus you get the increase in the dollar. The euro looks set to continue its downward path, propelled by the strong desire of the weaker governments in the monetary union to see a further devaluation to aid Europe’s very patchy growth prospects. And if you feel a bit more risky, borrow money in Germany and put some in US stocks.

So, the markets are betting on global stimulus, or if you prefer, free money from the central bankers, but does that really help? Well, it certainly helps the financial markets, but the economy? … Not so much. Jens Weidmann, Germany’s central bank president delivered a speech today where he said that monetary policy alone can’t create growth, and must be based on higher productivity and policy reforms.

Weidmann says: “Central banks are not able to deliver growth. Whenever we meet, this is always the first question, there is the conception that there is this silver bullet and this is distracting our attention from the main problem.”

Where does growth come from? Well, perhaps you saw the 60 Minutes story on infrastructure. According to the American Society of Civil Engineers “investing in infrastructure is essential to support healthy, vibrant communities. Infrastructure is also critical for long-term economic growth, increasing GDP, employment, household income, and exports. The reverse is also true – without prioritizing our nation’s infrastructure needs, deteriorating conditions can become a drag on the economy.”

By the way, the ASCE reports the US grades out at D+ on infrastructure. The U.S. ranks #16 globally for infrastructure, according to the World Economic Forum. In case you missed it here are some other notable stats from the 60 Minutes story:

One out of every 9 bridges in America, more than 70,000 across the country, is considered deficient. Almost one-third of the major roads in the U.S. are in poor condition. Only 2 of 14 major ports on the eastern seaboard will be able to accommodate the super-sized cargo ships that will soon be coming through the newly expanded Panama Canal. There are more than 14,000 miles of high-speed rail operating around the world, but none in the United States. U.S. air travel is the world’s most congested, due to “a shortage of airports runways and gates along [with] outmoded air traffic control systems.”

And in case you were wondering, the engineers estimate we need to spend $3.6 trillion on infrastructure by 2020. The engineers do not offer a financing plan. Which brings us around to one of the great debates between those who see depressions as the result of inadequate demand, implying that inflation will fall and that printing money does nothing unless it boosts employment, and those who see depressions as the result of mal-investment, and who predict that running the printing presses will lead to runaway inflation.

To test the opposing sides of the debate you would need to run economic tests where central bankers respond to a massive downturn with aggressive monetary stimulus. Which has been going on for a few years now, and everywhere you look inflation is low and threatening to jump over to deflation. So, running the printing press does not lead to inflation or hyperinflation, and it does a poor job of increasing demand. Monetary stimulus tends to concentrate on the financial markets but it never seems to trickle down. We’ve run that test and it does not work. Demand comes from higher productivity, and higher productivity can be achieved by investing in infrastructure.

It’s time now for another edition of “Banks Behaving Badly.” We all know that Wall Street analysts play a crazy game, it has been going on for a long time. More than 10 years ago, prosecutors cracked down on research analysts who served the interests of investment banks over the investing public. Seems not all the analysts and investment banks got the memo. Today, the Financial Industry Regulatory Authority, or Finra, fined Citigroup $15 million for failing to adequately supervise its research analysts’ interactions with the bank’s clients.

In one example cited by Finra, Citigroup hosted “idea dinners” for institutional clients at which some of the bank’s equity research analysts discussed stock tips that differed from their published research. In another, an analyst helped the bank’s investment banking clients with their investor “road show” presentations ahead of a public offering. Even when Citigroup discovered problems with its analysts’ communications with clients, Finra says the bank’s disciplinary actions “lacked the severity necessary to deter repeat violations.’’ Citigroup agreed to settle the case with Finra without admitting or denying the charges.

A $15 million fine? That is embarrassingly small for a mega bank like Citi. What other mischief have they been up to? Well, the European Central Bank kicked Citigroup out of its foreign-exchange market liaison group after the Citi was fined for rigging the ECB’s own currency benchmark. The ECB removed Citigroup from the panel, which advises the central bank on market trends, after regulators fined the lender $1 billion for rigging currency benchmarks including the ECB’s p.m. fix. Citigroup was one of six banks fined $4.3 billion by U.S. and U.K. regulators last week and is the only one that also sits on the ECB Foreign Exchange Contact Group. Citigroup is the world’s biggest foreign-exchange dealer, with a 16 percent market share.

While 49 state treasuries were submerged in red ink after the 2008 financial crash, one state’s bank outperformed all others and actually launched an economy-shifting new industry. So reports the Wall Street Journal this past week, discussing the Bank of North Dakota and its striking success in the midst of a national financial collapse led by the major banks. The article states: “It is more profitable than Goldman Sachs, has a better credit rating than JPMorgan Chase and hasn’t seen profit growth drop since 2003. Meet Bank of North Dakota, the U.S.’s lone state-owned bank, which has one branch, no automated teller machines and not a single investment banker.”

The reason for its success? As the sole repository of the state of North Dakota’s revenue, the bank has been one of the biggest beneficiaries of the boom in Bakken shale-oil production from hydraulic fracturing, or fracking. In fact, the bank played a crucial part in kick-starting the oil frenzy in the state in 2008 amid the financial crisis. And that may be partially true, however, the oil boom did not actually hit North Dakota until 2010. Yet it was the sole state to have escaped the credit crisis by the spring of 2009, when every other state’s budget had already dipped into negative territory. According to Standard & Poor’s, the BND’s return on equity was up to 23.4% in 2009 – substantially higher than in any of the years of the oil boom that began in 2010.

The real reason for the Bank of North Dakota’s success is much more simple: profits, rather than being siphoned into offshore tax havens, are recycled back into the bank, the state and the community; costs are low – no exorbitantly-paid executives; no bonuses, fees, or commissions; the bank’s mission is promoting economic development, not competing with private banks.

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