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What (Really) Happened in 1995? - Aaron Krowne

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  • #46
    Re: What (Really) Happened in 1995? - Aaron Krowne

    During the 1980s, Prechter won numerous awards for market timing as well as the United States Trading Championship, returning 444.4 on a monitored real-money options account in the four month contest period.

    Ever since winning the United States Trading Championship in 1984, subscribers have asked for a list of 'tips' on trading, or even a play-by-play of the approximately 200 short term trades I made while following hourly market data over a four month period.

    With monetary flows (MVt) it took only one OEX trade in the entire 4 month period to beat Prechter. You knew in Feb 84, that Jun 84 was the market's bottom.

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    • #47
      Re: What (Really) Happened in 1995? - Aaron Krowne

      "the changes that led to an effective elimination of reserve requirement actually began in the 1990-1992 era. Likely in response to the recession at that time, the Fed decided to relax reserve fraction requirements in the manner quoted below...."

      I think a more likely candidate was the fact US banks were poorly capitalized according to new international standards and would have not been able to serve international business needs effectively per the Basel I accord. I believe in 1989 only one US bank would have met the criteria. Thus the Fed helped its clients capitalize by freeing up dead capital at the Fed and maintaining a downward sloping yield curve.

      For a brief discription of the Accord
      http://en.wikipedia.org/wiki/Basel_I

      If you recall in the early 90's, media stories stated the big banks we not extending credit to business. Why? They "rode" the downward sloping US Treasury curve from 1990 to 93/4 or so. Buying 5 year notes, holding for a year and selling. They get a bigger coupon on the 5 year plus cap gain on sale due to the higher coupon than on the current 4 year. Rinse and repeat. The result-- US banks built up capital with much less risk (and more efficiently under the rules) than extending credit to businesses.

      Note. I am writing this from memory and I was a graduate student at the time. I wasn't directly involved in this process so my memory may not serve and I didn't bother to check any data. That's up to you if your curious. I apologize that I can't produce more factual commentary, I just don't have the time.

      Peace
      wst

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      • #48
        Re: What (Really) Happened in 1995? - Aaron Krowne

        http://news.goldseek.com/GoldSeek/1223043197.php

        ...


        Refresher As to What Happened In 1995?



        We need to wind our clocks and calendars all the way back to 1995, in the twilight of the first Clinton Administration. Sir Robert of Rubin was then Treasury Secretary and the U.S. government was facing default on its financial obligations due to a bitter, partisan debate causing delay on raising the debt ceiling. In the words of Robert Rubin himself in his book, In An Uncertain World, on page 170 he states,


        “Without an increase, the federal government would hit the debt ceiling before the end of 1995, possibly as early as October. Default and the President being forced to sign an unacceptable budget were both untenable. We needed to find a way out, rather than simply hoping that at the last minute the opposition would blink and increase the debt limit.”



        The ultimate response to this dilemma is chronicled by Rubin, on page 172, where he reveals,


        “It was Ed Knight, our savvy chief Treasury counsel, who suggested borrowing from the federal trust funds on an unprecedented scale to postpone default.”


        You see folks; as Mr. Rubin was well aware, the federal trust funds DO NOT AND NEVER DID CONTAIN ANY MONEY. These accounts exist in the minds of accountants and lawyers [ledgerdom] only. So here’s what was going on:



        Beginning Nov. 12, 1995, the Treasury started issuing government bonds, IOU’s, and putting them in the Social Security Trust Fund “cookie jar” – with the Fed then PRINTING the corresponding amount of money they needed and called this a ‘legitimate loan’. By accounting for their finances in this manner, the government got to understate their annual budget deficits by the same amount that they were burdening the cookie jar with IOU’s – all the while dramatically increasing the unfunded [off balance sheet] liabilities of the government by the same amount. Where I come from, this is neither savvy nor a loan. It is better described as treasonous, fraudulent and larcenous.



        At the same time, the methodology for measuring inflation was undergoing rigorous fraudulent changes – which made a mockery of ‘then’ Fed Chairman, Alan Greenspan’s claims of a productivity miracle and, through the yeoman’s work of John Williams [www.Shadowstats.com] was exposed for what they really were: deceitful obfuscations to mask profligate monetary policy being pursued by government. This deception was reinforced by the jaw-boning-ruse we know as the Clinton/Rubin/Summers “strong dollar policy”.



        Market rates of interest are historically set at the real rate of inflation plus 250 basis points. The real rate is determined by backing out “inflation” from nominal rates of interest. By understating inflation, interest rates look higher [or more positive] than they otherwise would be.



        The budding fraud depicted in the graph above shows that interest rates were behaving as they should but the gold price reacted counter-intuitively?



        ...

        Comment


        • #49
          Re: What (Really) Happened in 1995? - Aaron Krowne

          The graph referenced above is below



          Another graph from the same articles and comments below




          In the chart above, mathematician Mike Bolser employs ‘statistical regression analysis’ to depict what amounts to forensic statistical accounts of how an ‘invisible participant’ involved in the trade whose actions dictate they are not motivated by “profit maximization”.

          “Preemptive selling, which is a fraud detection algorithm, measures very aggressive COMEX gold market selling when compared to the London gold market (LBMA). Table 1 displays the percentage of days per month in which the COMEX gold price falls 300% more than the London gold price. The probability of changing macroeconomics being the cause for such extreme New York price drops is highly diminished because the two markets trade the same commodity on the same day. Preemptive selling should not be confused with price volatility or rate of change, which are measures of rapid price fluctuation. In addition, preemptive selling is a measure of relative activity between two markets. Recall also that it does not measure the volume of comparative selling, only its effect as measured by gold market prices.”

          With the gold price effectively “dead and buried”, there was still a problem that needed to be tended to – to prevent or stem the “Bond Vigilantes” from selling bonds in sufficient quantities to “FORCE” interest rates higher.

          The solution to this part of the problem [rising rates] is where J.P. Morgan’s [now] 93 Trillion Derivatives Book swung into action.

          Embedded in every interest rate swap is a bond trade. In simple terms, the greater the volume of interest rate swaps – the greater is demand for bonds to hedge them. Ergo, if enough interest rate swaps are transacted – they serve as a “VACUUM CLEANER”, sucking up ALL MEDIUM TERM BONDS [3 – 10 yrs.] in their path.

          In this respect, bond trading volume originating from the interest rate swap derivatives complex overwhelmed and supplanted traditional bond market participants. The motivations and risk tolerances between these two classes of “traders” are not necessarily consistent with one another – and in the extreme - manipulatively opposite to one another. We have been witness to the same type of phenomena in the precious metals arena where futures [COMEX and LBMA] prices have served to “trump” or suppress those which would be dictated by physical supply or demand. This is now manifesting itself in bifurcation of our capital markets – banks are now refusing to lend money at Libor [an interest rate futures derived price] because it is not reflective of their costs of funds and owners of physical metal are refusing to part with their precious at COMEX prices, because it costs more in many cases to mine it. This is evidenced by stiff and increasing premiums being paid for physical metal.

          What’s more, interest rate swaps being “off-balance-sheet items” – an untrained eye [or Bond Vigilante, perhaps?] was none-the-wiser as to why yields were counter-intuitively falling or remaining at low levels despite demonstrable inflationary pressures. According to the Office of the Comptroller of the Currency’s [archived] Quarterly Derivatives Fact Sheets:

          “J.P. Morgan’s Interest rate swap book grew from 12.716 Trillion Notional at Q4/1995 to 14.7 Trillion at Q2/1996.”


          Back in those days a couple of Trillion used to buy a lot of love, or respect.

          Against this backdrop, bond vigilantes quickly joined the ranks of the “extinct” – acquiescing or losing their jobs - while interest rates, the primary efficient arbiter of capital – became fallacious and meaningless.

          It was this GROSS mis-pricing of Capital and associated market rigging practices that facilitated ALL THE ASSET BUBBLES - from the contorted Dot Com Boom to the Real Estate debacles that followed.

          Comment


          • #50
            Re: What (Really) Happened in 1995? - Aaron Krowne

            This is a great article and I just finished reading it for the 1st time! ...oh little pearls everywhere.

            Comment


            • #51
              Re: What (Really) Happened in 1995? - Aaron Krowne

              Originally posted by LargoWinch View Post
              This is a great article and I just finished reading it for the 1st time! ...oh little pearls everywhere.
              Holy smokes, I remember reading this when it was first posted ...... 5 years ago !!!!

              I may be a bit better off economically than I was then, but must have aged 15 yrs watching all the shit that has happened since then.

              Not enough yoga maybe.

              Comment


              • #52
                Re: What (Really) Happened in 1995? - Aaron Krowne

                Looks like I'm about five years late to the discussion, but while I agree that changes in banking regulation affected money supply growth in the early and mid-1990s, I suspect that the change in reserve requirements was a secondary factor. It seems to me that the more likely factors were the implementation of minimum capital requirements and significant changes in bank profitability during that period.

                The first international agreement on minimum bank capital levels ("Basel I") was agreed in 1988 and phased in from 1990-1993. During this timeframe, banks were forced to increase their ratio of equity to assets (i.e., loans and securities), and they had three ways to accomplish this: raising capital by issuing shares, retaining earnings, and shrinking their loan portfolios. Banks are generally hesitant to dilute their existing investors through share issuance except in the context of an acquisition, and so there were really only two viable ways for the banks to increase their capital ratios.

                Unfortunately for the banks, the phase-in of these increased capital requirements occurred during the tail end of the S&L crisis and the early 1990's Latin American debt crisis. Loan credit losses peaked in 1992 at their highest levels since 1935.

                Bank Losses Capital.png

                These events reduced aggregate bank profitability to the lowest levels since the Great Depression, constraining their ability to build capital through earnings.

                ROAA.png

                As a result, banks were forced to limit loan growth in order to improve their ratio of equity / assets (and the loan losses resulting from the various crises at that time contributed to this loan runoff as well.) For some weaker institutions, regulators including the FDIC explicitly prohibited new loan issuance so that the banks would be forced to build up capital. As loan growth was constrained, so was the growth in the money supply.

                By 1994, bank profitability had recovered tremendously, improving to historical peak levels and remaining there for the rest of the decade. The average bank equity / asset ratio had increased from below 6% in 1988 to nearly 8% by that point. Having met the new capital targets, banks were then able to lever up their balance sheets, and could generate the equity to support accelerated loan growth. As loan growth accelerated, the various monetary aggregates began to grow faster as well. Certainly the growth of the GSEs, securitization, and other financial "innovations" contributed to the growth in overall debt and the money supply as well.

                While we do of course have a fractional reserve banking system, capital requirements rather than reserve requirements have been the main limiting factor affecting credit and money supply growth since at least the late '80s.

                Comment


                • #53
                  Re: What (Really) Happened in 1995? - Aaron Krowne

                  Originally posted by mmreilly View Post
                  Looks like I'm about five years late to the discussion, but while I agree that changes in banking regulation affected money supply growth in the early and mid-1990s, I suspect that the change in reserve requirements was a secondary factor. It seems to me that the more likely factors were the implementation of minimum capital requirements and significant changes in bank profitability during that period.

                  The first international agreement on minimum bank capital levels ("Basel I") was agreed in 1988 and phased in from 1990-1993. During this timeframe, banks were forced to increase their ratio of equity to assets (i.e., loans and securities), and they had three ways to accomplish this: raising capital by issuing shares, retaining earnings, and shrinking their loan portfolios. Banks are generally hesitant to dilute their existing investors through share issuance except in the context of an acquisition, and so there were really only two viable ways for the banks to increase their capital ratios.

                  Unfortunately for the banks, the phase-in of these increased capital requirements occurred during the tail end of the S&L crisis and the early 1990's Latin American debt crisis. Loan credit losses peaked in 1992 at their highest levels since 1935.

                  [ATTACH=CONFIG]3830[/ATTACH]

                  These events reduced aggregate bank profitability to the lowest levels since the Great Depression, constraining their ability to build capital through earnings.

                  [ATTACH=CONFIG]3831[/ATTACH]

                  As a result, banks were forced to limit loan growth in order to improve their ratio of equity / assets (and the loan losses resulting from the various crises at that time contributed to this loan runoff as well.) For some weaker institutions, regulators including the FDIC explicitly prohibited new loan issuance so that the banks would be forced to build up capital. As loan growth was constrained, so was the growth in the money supply.

                  By 1994, bank profitability had recovered tremendously, improving to historical peak levels and remaining there for the rest of the decade. The average bank equity / asset ratio had increased from below 6% in 1988 to nearly 8% by that point. Having met the new capital targets, banks were then able to lever up their balance sheets, and could generate the equity to support accelerated loan growth. As loan growth accelerated, the various monetary aggregates began to grow faster as well. Certainly the growth of the GSEs, securitization, and other financial "innovations" contributed to the growth in overall debt and the money supply as well.

                  While we do of course have a fractional reserve banking system, capital requirements rather than reserve requirements have been the main limiting factor affecting credit and money supply growth since at least the late '80s.
                  nice addition to this discussion. thx. you in the banking industry? you seem to know a lot about it... more than the original author, anyway.

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