Could bank stress tests push US back into recession?

The latest round of bank stress tests could actually do more harm than good to the fragile financial system – even pushing the US back into a recession, a prominent bank analyst believes.


Mandated by the Dodd-Frank regulations, the Federal Reserve’s annual tests require that the largest banks be able to survive 13% unemployment, another 21% drop in home prices and a 52% plunge in the stock market.


Those are conditions that mimic not only the financial crisis conditions in 2008 but also on some levels

5 things to be grateful for this Thanksgiving

With stocks in Europe and the US falling to 7-week lows and plenty of gloom around, investors may be hard-pressed to find cheer this Thanksgiving. But if you were forced, in between turkey bites, to list some reasons to be thankful for, we`re offering you five.


1. No Currency Crisis, Yet: Even as Europe grapples with a fiscal and banking sector crisis, the euro has shown surprising resilience. Axel Merk, the President of Merk Investments, points out that the euro has been one of the least volatile major currencies of 2011.


But Callum Henderson, the head of global FX strategy at Standard Chartered Bank, believes the euro will eventually tumble. “When the crisis attacks the core and that`s Germany and France, you`ll see foreigners repatriate their holdings of European investments and when that happens the euro will fall a lot further,” he said.


2. Forced Reforms: Surging government bond yields have been a key factor behind the global stock selloff. But on the upside, bond market vigilantes are forcing reforms that politicians have failed to make for decades. In the case of Italy, political and sexual scandals couldn`t end Berlusconi`s 17-year rule, but the bond markets took care of that in a matter of weeks.


“The only language policy makers are listening to is the language of the bond market,” says Merk. “In Europe, the bond markets are forcing policy makers to engage in dramatic reform. In the US, the bond market is behaving. As a result, we don`t have any reform.”


3. Lower Inflation: Commodities have not been spared in the flight from risk, and the lower prices are helping to ease inflation, especially in emerging markets. Shane Oliver, Chief Economist at AMP Capital in Australia, expects inflation in China to fall further to 4.5-5% in October, from a 37-month peak in July.


Renowned investor Jim Rogers has predicted a 1970s-style stagflation for the US economy, citing the massive amount of money being printed by the Federal Reserve. Thankfully that hasn`t happened, yet.


4. China has Bullets: Investors were especially spooked after the PMI data on Wednesday showed that China`s manufacturing sector is slowing. And analysts CNBC spoke to say the figures will prompt China`s central bank to eventually ease monetary policy by cutting bank reserve requirement ratios (RRR).


The key takeaway: China still has ammunition to fire if its economic environment sours further. Fraser Howie, managing director at CLSA, believes the policy makers could announce a mixture of measures including boosting domestic consumption, easing monetary policy and unleashing fiscal stimulus.


5. There`s Always Treasurys: If all hell breaks loose, there`s always Treasurys as a safe haven. The latest stock market selloff has once again led to a rally in government bonds, with yields on the 10-year now at 1.88%. Some predict that the US could face a Japan-style lost decade, which would boost the case for even lower yields.


Robert Kessler, CEO of The Kessler Companies, says Treasurys have outperformed commodities and stocks over a 30-year period, and he expects them to continue to do well as consumers and banks deleverage.



Copyright 2011 cnbc.com

India especially vulnerable to global slowdown: Experts

With Indian stocks dropping to a 2-year low on Thursday, analysts say the country – which was relatively sheltered during the last financial crisis in 2008 – is looking especially vulnerable this time around.



The Bombay Stock Exchange Index is down more than 24% since the beginning of the year and the rupee has fallen 17% against the dollar during the same period, hitting an all-time low earlier this week.


Renowned investor and China bull Jim Rogers told a CEO Power Session at the Asia Business Leaders Awards in Singapore, that he was short on Indian stocks.


Rogers said the country would find it hard to grow, given a debt to GDP ratio of over 90%. India`s debt picture could get worse. Earlier this week, Montek Singh Ahluwalia, the head of India`s Planning Commission told CNBC-TV18, the budget deficit for the current financial year could be as high as 5.5% of GDP.


He also said the economy was likely to grow just 7-7.5% in the fiscal year ending March 2012 – a far cry from the government`s original target of  9-9.5%.


India is also facing a worsening current account deficit, which widened to USD 14.1 billion in the April to June quarter from USD 5.4 billion in the March quarter. Numbers for more recent quarters haven`t been released but they could show a deterioration given the debt crisis affecting Europe.



Piyush Gupta, the CEO of Southeast Asia`s largest bank believes Asian economies are going to slow down by one to two percentage points over 24 months because of weakening exports.


According to Gupta, even though exports make up around 30% of China`s GDP, compared to just 19% for India, China has more ammunition to weather the global economic slowdown than India over the short term.


“China has the capacity to press the accelerator….it can spend half a trillion dollars…(to stimulate the economy), where as it is difficult for India to do that with a fiscal deficit of 10%,” said Gupta, referring to the fiscal deficit of both the central government and all the states.


He however, added that 10 years down the road, India could be in a better position than China because capital allocation and financial institutions work better in the country.


In addition, he points out that domestic consumption makes up 67% of the economy, while in China it makes up 34%, giving India a greater cushion from a troubled global economy.



Copyright 2011 cnbc.com

Bank stress tests nothing to worry about: Dick Bove

The Federal Reserve announced Tuesday it plans to stress test US banks-including the six largest-against a hypothetical market shock, such as an escalation of the European debt crisis.


But noted banking analyst Dick Bove said there is nothing for investors to get upset about because the stress tests are pro forma and are not an indication that the Fed has any particular concerns about the state of American banks.


“It was really required by the Dodd-Frank law that they have a stress test,” the Rochdale Securities analyst told Larry Kudlow. “So every year at about this time you have the Fed setting up a new stress test for the banking industry.”


The six big banks to be tested are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.


While the Fed`s stress tests will see whether US banks can withstand any further deepening of the European debt crisis crisis, Bove isn`t worried about contagion from the EU.


“If [the European banks] run into significant difficulties, it is not going to create a massive crisis in American banks,” he said. “American banks are benefiting meaningfully as a result of the European banking crisis and it`s showing up in their earnings.”


That`s because European banks are selling American assets to American banks at discounted prices.


However, Bove thinks it`s highly unlikely that the European banks will collapse. He believes the European Central Bank will ultimately bail them out.


Copyright 2011 cnbc.com

Decline in commodities is ‘artificial’: Jim Rogers

The recent decline in commodity prices has little to do with fundamentals and everything to do with the collapse of brokerage firm MF Global, says renowned investor Jim Rogers, who described the sell-off as artificial.


“With MF Global going bankrupt – which was a gigantic commodities firm – there was a lot of artificial forced liquidation of commodities. People have to sell whether they like it or not. It`s artificial selling right now,” Rogers told CNBC on Wednesday.


The CRB Jefferies Index – which serves as a measure of the broad commodities complex – has fallen 4% since MF Global declared bankruptcy nearly 4 weeks ago. Agricultural commodities have been the hardest hit, with rice futures falling more than 14% and wheat futures down 9% in the period.


Rogers says the drop isn`t surprising. “This happened before in 2008, when Lehman and AIG went bankrupt, they were both huge in commodities and everybody had to sell,” he said, referring to the onset of the global financial crisis in late 2008, when the CRB Index fell by half in a matter of months. Prices have rebounded since, climbing nearly 60% from March 2009 to May this year, when the sector took a hit again on concerns over the headwinds facing the global economy.


Rogers remains bullish on the sector, saying investors will benefit whether the global economy improves or not.


“I`m long commodities and currencies, because if the world gets better, the shortages in commodities will make sure I make money; if the world economy doesn`t get better, I`d rather own commodities because they`re going to print money,” he said, referring to the easy monetary policy central banks have taken in the last few years to stimulate anemic growth.


“Throughout history, when things have gone wrong, they print money…when they print money, you should own silver, you should own rice, you should own real assets.”



Rogers says he is using the recent drop in prices to accumulate agricultural commodities, and is waiting to add positions in gold. While he expects the yellow metal to reach USD 2,400 sometime in the next five to twenty years, he believes its run-up in the last 11 years has been “unusual” and needs a “rest”.


“Gold could go down a fair bit more…but I`m certainly going to buy more gold if it goes down and silver.”


This not a time to buy stocks, Rogers added, and says he is shorting the asset class.


“This is like the 1970s, in the 1970s stocks did nothing. Commodities went through the roof. I`m short stocks and long commodities for the most part.”


Copyright 2011 cnbc.com