Starting from 2007, the US Federal Reserve has been funding banks and institutions with dollars via dollar liquidity swaps. Last year saw a huge spike in Libor rates as well as the TED spread. This was accompanied by a sudden withdrawal of funds from money market funds. To alleviate the pain, the Federal Reserve started swapping dollars with foreign central banks. After the failure of Lehman Brothers, the market for US dollars froze up. What followed was a huge spike in new FX swaps and an eventual no-limits FX swap market – on October 13, the Federal Reserve announced unlimited swap lines with the ECB, SNB and BoE. Unlimited swaps with the BoJ followed on October 14.

This year has been relatively calm – foreign central banks have unwound their swap lines as credit markets have come back to life due in part to relaxed accounting standards. This has been accompanied by a falling dollar, which is exactly what one would expect. A calmer FX swap market means that the demand for dollars is falling. From the beginning of this year, the FX swap lines have shrunk over 80%, as can be seen from the chart. I’ve been collecting the FX swap data for a while now (if you want the raw data, send me a line at kvelbri[at]gmail[dot]com) and I thought I’d share it with you. The source for the data is the Federal Reserve. The data for the last weeks of 2008 and the first weeks of 2009 is not (yet) available from the Federal Reserve for some reason (if you have the data, please let me know).

I will be releasing a complete overview of the 2008 financial crisis and how it relates to the dollar FX swap market in less than two weeks. Stay tuned!

Stories of cities and other, smaller infrastructure projects built to boost GDP or hand out government funds to lobby groups are always interesting, especially if those projects turn out to be a complete waste of money. In May, the BBC reported on a few abandoned airports in South Korea, but Al Jazeera English topped that just a few days ago with their story on an empty city in China. Enjoy.

It has been evident for a while that local governments in the US have to cut back on spending. While the federal government can run  huge deficits (last year it was around $1.4 trillion), states have to balance their budgets. Although states are reliant on creative accounting and to some extent, illegal practices, they cannot hope to balance their budgets using the same old tricks for much longer because states’ revenues are down dramatically. According to a new report by the Pew Center “the same economic pressures that pushed California to the brink of insolvency are wreaking havoc on other states”.

The first state that comes to mind when talking about fiscal problems is California with its 49% budget hole and a 16.2% drop in revenue. But there are other states out there whose fiscal problems come eerily close to California: Illinois’ budget is off by 47% while Oregon’s revenue has fallen 19%, which is even worse than California. According to the law, states have to balance their budgets just like every enterprise interested in survival (companies can rely on debt, but they have to service that debt and eventually pay it off, unlike the federal government or the government of Japan, for that matter).

What to expect from all of this?

Well, first off, states will most likely use every possible means to raise revenue – meaning more traffic tickets, higher fees, giving out casino licenses (some states are seriously thinking about legalizing gambling to collect taxes) and downright stupid requirements like the one that New York just imposed on its vehicle owners by requiring them to buy new license plates for no other reason than to collect funds. But aside from collecting more taxes, states will start cutting back on vital public services like the maintenance of roads, bridges, waterfronts, levees, railroad crossings – all the while infrastructure is in a terrible shape and needs immediate fixing. This is very sad indeed – while I remain critical of the way the country is run, I am still very much fond of America. I would like to see America recover as much as Americans themselves, but given the current trends I don’t see that happening. It is indeed a sad chapter in American history.

I stumbled across a pretty disturbing news piece today which talks about how states auction off ‘unclaimed’ property in safety deposit boxes. This is not from some ‘alternative news media channel’ or from Alex Jones. One San Fransisco resident discovered the content of her safety deposit box had been auctioned off by the state to balance their budget. Carla Ruff was a loyal customer and had always paid her safety deposit box fee. The state took the property claiming it was ‘unclaimed property’ and therefore the property of the state. The state should have notified the owner of an impending confiscation and it could’ve done it – inside the box were papers with the owner’s name and address. The state did no such thing.

“Her great-grandmother’s precious natural pearls and other jewelry had been auctioned off. They were sold for just $1,800, even though they were appraised for $82,500.

These things were things that she gave to me,” Ruff said. “I valued them because I loved her.”"

The article goes on to cite numerous cases where states have taken the liberty to sell or auction off people’s assets without even notifying the real owners. One state (guess which one?) has been particularly keen on seizing its citizens’ assets. If fact, it has been so good at it that it now owes $5.1 billion dollars for all the things it has confiscated.

“California law used to say property was unclaimed if the rightful owner had had no contact with the business for 15 years. But during various state budget crises, the waiting period was reduced to seven years, and then five, and then three. Legislators even tried for one year. Why? Because the state wanted to use that free money.”

This is the kind of stuff that usually happens in third world countries or places that don’t have an established code of law. The fact that this is happening in America is a big disappointment.

Source:
ABC News :How Safe Is Your Safe-Deposit Box?
by Elisabeth Leamy

Russell 2000, the market index for small cap stocks signaled a clear sell signal today as moving averages confirmed the breakdown of the uptrend that I’ve been talking about (here and here). On daily charts, I use the 19 and the 39 day exponential moving averages, which give way better signals than the all too often used 20 and 50 combination (the 20-50 combination is good, but it has a nasty time lag, which I don’t like, I prefer to be in the know when change happens, not weeks after something has already taken place).

I know that a new trend has been started when the 19 and 39 day EMAs cross below the 50 day EMA. So far this hasn’t happened. Keep in mind that moving averages don’t always work. Back in July, they gave a sell signal but the market continued moving upward (they didn’t remain in the ’sell zone’ for long, though). Moving averages are a great way to recognize new trends or the breakdown of old trendlines, but they should not be used in isolation. The high probability way to go is to use trendlines and a small handful on customized indicators. By customized I mean that you should tune the time periods to your own taste. I don’t find it very useful to use default settings.

Where to from here?

Well, first I would like to see the S&P 500 perform a similar EMA breakdown. Then, for confirmation, I would like to see both the 19 and 39 day moving averages of both the S&P 500 and Russell 2000 cross below the 50 day EMA. That would be a strong confirmation of a new downtrend. Here’s a 3 year chart of Russell 2000 with 19 and 39 day EMAs to give a little perspective of the effectiveness of the signals (note that the ’sell’ and ‘buy’ markers on the chart are not on the spot where the price was at the time the signal was initiated, they are a bit off). Remember, not one trader is right all of the time. But you don’t need to be right all of the time, you need to be right most of the time, which is exactly what this combination of EMAs offers. Used with indicators, they are a charm.