I’m sure politicians were once bright eyed…

A thought came to me just now as to why politicians are so lame.

Pretty scathing, but it is true. For so long we’ve had politicians that promise change and then end up being the same as the last.

I mean, the modern day Tory Party is basically New Labour.

Why do they seem to converge to the middle?

They play a game is the simple answer.

You’re always going to have your lifelong voters, but to win at politics, you need those swing voters.

I could be talking absolute nonsense here, but at least it gives something to think about…

Image result for two bell curves overlapping

This is what I imagine occurs.

Consider B as being the swing voter area – I think most people if they could would rather vote for themselves, but there’s relative bipartisanship when it comes to voting outcomes these days, more so in the US.

Then consider the individual standard distributions when the party is in power.

There is the acquisition side of politics, and then there’s the retentive side – the tails towards the middle on the individual curves have to cater to those who are only supporting on a ‘lesser of two evils’ basis.

Whoever wins B wins the election. Just that little area wins it for either the left or the right.

The problem? Policies have to appease these people who are politically indifferent.

This means that policies are always going to reverting towards the mean, or in other words, they’re never really going to be that different from what occurred before.

Generally… I’m not sure I’d apply the same logic to John McDonnell…

This was just an example that I thought of but there are many more.

In trading, many algorithms are based on price reverting to the mean whereby you take a sample of price data and apply buy or sell orders on 1/2 standard deviations from the R^2 of the sample or another benchmark that measures deviation from the mean such as velocity or maybe even volume changes relative to the rest of the sample.

In sales, if you have a big sample, it’s unlikely that you will consistently go long periods of making no sales without a statistical correction happening, as long as you are using the same methods as previously – yes there are external variables but generally there shouldn’t be long term deviation of a massive magnitude (unless the market really changes).

In terms of politics, I guess a change in political party in power shows an example of tail risk, since those at the outer edges of the left and right bell curves are those affecting the change more drastically.

In portfolio management, that’s when a movement of more than 3 standard deviations occurs, which is pretty rare, but has HUGE implications (and which is occurring more and more often).

 

I guess it depends on what the distribution of swing voters are relative to the effect that they can cause is, or in other words, how disenfranchised they are with the current political climate.

Can the Trump and Brexit votes be explained this way?

I think possibly if we consider the elements that go towards creating the desire to want change – in other words, how tail risk is created.

To avoid this tail risk, politicians avoid the outer edges and win by appeasing the majority, reflected in the bell curve distribution… but tail risk in the current environment is always underpriced it seems since multi-standard deviation moves shouldn’t be occurring as much as they are of recent times

 

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$AUDJPY: Can an FX pair signify recession?

I wrote this last June:

Source

AUDJPY: Are We Heading For An Extended Period Of Risk Off Behavior?

Jun. 15, 2017 3:45 PM

Summary

• AUDJPY, if it hits the target I have outlined, signifies that we would likely be in recession.

• Japanese yields steepening putting downside pressure on the pair in the long run.

• China slowing down affects the Aussie hugely.

I use AUDJPY heavily to assess risk sentiment, since AUD is very sensitive to economic conditions surrounding production (more demand for iron ore, copper, etc., means higher GDP, construction indicators, overall happiness) while yen is bid during periods of uncertainty. I have been watching and waiting to see what price does around the ¥80-86 mark.

For me, the future looks quite bleak for the pair.

Take a look at the monthly chart below.

As I said in previous articles, I only consider head and shoulders patterns significant on the weekly and monthly – and looking at the technical context of the pair, this head and shoulders is hugely significant as it provides a target to past the price we have seen during recessionary periods.

Firstly, note the top blue rectangle. Price has tested and retested the financial crisis high and has fallen off pretty harshly. This supply has been consumed, and for me, this indicates that the upside of the overall structure is exhausted. From my experience, the probability of the support structure breaking and heading lower is very high.

Secondly, let’s consider this support structure (middle blue zone) at approximately ¥75.

We’ll look at this on the below candlestick chart.

The blue zone has been touched 5 times now with no price breakthrough.

The 2010 low of the range ¥71.91) is still very much intact. What is vital to understand here is that longer term traders are likely to still have stops under this support level.

The market is going to want to target these if we start to probe around ¥72-75. If the conditions would allow, then we could see a slip to ¥68-¥69 and an upside retest of that ¥70 level.

Now, speaking of conditions, Japan’s monetary policy has been relatively unwavering – there has been stability from the BoJ and in terms of being a risk off currency, this is hugely attractive to traders looking for safety or a long term position trade (the only problem with shorting this is that carry will be paid when holding a position overnight).

One aspect that you can add to being bearish AUDJPY is that the Japanese 10YY is pushing to above 0% again.

Chart from Bloomberg

The BoJ are also looking to steepen the long end of the yield curve in order to satisfy Japanese financial institutions.

It is also mentioned that the Japanese may pursue ‘stealth tapering’ so as not to affect the financial markets akin to the US in 2013.

This can provide certain confidence to traders being long yen vs. commodity backed currencies such as the Aussie.

Consider also the Chinese situation.

Below is Chinese GDP.

Chart from Trading Economics

Remember previously I said that the Aussie is heavily affected by productive demand? China is a huge importer of Aussie copper, gold and iron ore.

China is Australia’s best customer with $45bn being exported there annually. China is currently experiencing a slowdown and I do not believe the full effects are yet apparent, not just in the Aussie, but globally (Chinese credit bubble in the shadow banking sector has been named one of the biggest tail risks to the financial system).

If the Chinese slowdown proliferates, then I’d expect certain effects on the Aussie long term.

Note the first chart again. I think it’s important to note what occurs to AUDJPY during downturns.

I have noted 1 (early 90s recession), 2 (Asian crisis – yen bid in risk off environment) and 3 (financial crisis of 2008 – again, yen bid in risk off climate).

The head and shoulders target measure of taking the length of the neckline to head, and mirroring that from the neckline to the downside identifies that ¥50 is a potential target if the support at ¥70 breaks.

I’d be almost certain to argue that we would be in a recession if this were to occur if we examine history, and history, in the end, does repeat itself especially in the financial markets.

Image result for its happening gif

I am adding to my short AUDJPY position

I’ve been short AUDJPY for a fair while now since 86.80.

This was based on deteriorating Chinese conditions, which affect demand for Aussie commodities such as iron and copper, and the evident risk off situation we faced through January and February, and arguably are still facing.

For this trade I’m just looking at taking some cash and covering the rest of my position that I have running – this is pretty high probability in my view, so I’m confident about changing my stop loss criteria and upping risk to 3%.

Let’s see how this plays out.

The elephant in the room that no politician talks about

It puzzles me as to the various conversations surrounding house prices.

Last night on Question Time, structural engineer Roma Agrawal (and the others, so it doesn’t sound like I’m picking on her) mentioned that a solution to the nation’s housing issues is to build more houses.

Build more houses? All I see are houses being built.

The issue purely lies in property speculation and is not an issue of building activity. In fact, we have an oversupply of housing in the UK. In 2014, there were 28 million dwellings in the UK and only 27.7 million households. London’s dwellings increased more than the number of households between 2001 and 2015.

Of course it’s multifactorial, with social housing stock being low and there being a culture of property (land) being the ultimate investment for Brits, but no politician has mentioned the longer term trend.

The Lady of Threadneedle Street.

I’ve banged on about this on Twitter a million times but I want to have something here that expresses my views about this explicitly and more comprehensively than however many characters Twitter allows you to.

Here is the UK house price index.

United Kingdom House Price Index

And here is the UK 10 year bond yield over the same period (read as a proxy for interest rates).

Historical Data Chart

Can we not see a correlation here? Is it just me that’s going crazy or do I not understand something?

It is absolutely insane – when you have low rates, where are you going to put your money? Into investments that are likely to yield more than the base rate. If it’s assumed that the base rate is going to decrease year on year then why would you be partial to simply saving? Why wouldn’t you enter the property market?

Here’s a chart of UK savings from 1952.

United Kingdom Household Saving Ratio

If you draw a line of best fit from 1980 to now, it shows progressively lower highs and lower lows. A trader would call that a downtrend. It makes sense since interest rates have been falling progressively since then. And where has that savings potential gone? Into property at progressively higher prices.

Back to the headline: why do politicians not want to acknowledge this?

Well firstly, it’s a global phenomenon. The same thing has happened across the world where property is seen as a speculative investment rather than an object of utility. If we look at most of Europe, they have an entirely different culture of investment – and especially do not consider housing as being a speculative asset as much as we do.

Here is a chart of Germany’s personal savings ratio.

Germany Personal Savings Ratio

What we can deduce here is that even since they’ve has the Euro and the real base rate has been negative, they still have a savings rate almost double of ours (UK chart is household savings ratio, the German is personal but should average out to be the same).

German homeownership was 51% this year – ours was 63%.

But this is due to Germans actually increasing in homeownership – their rate was 41% in 2004 – the increase most probably caused through ultra low rates and ECB’s penchant for asset purchases post crisis; ours has gone the other way – in 2003, our homeownership rate was almost 71%.

A final chart shows wage growth in the UK.

United Kingdom Average Weekly Earnings Growth

Compare again with house price increases – those who own hard assets end up seeing property price appreciation, charge higher rents which means the capability for firms to pay people decreases. It’s all about slimmer margins. What’s more, those who have a skinny and seemingly stagnant pay packet can’t buy since their outlay is on rent, and property prices keep going up.

Politicians don’t want to speak about this because it would also call into question the independence of the Bank of England.

The Bank’s QE programme is government debt cancelling – private interests love QE. The government loves QE; it cancels their debt after all. When the bank buys a government bond, it effectively pays interest to the Treasury until maturity. Which government doesn’t like that while being able to service the big banks and hand out tax breaks to their mates?

That’s for another day.

The final bit is that they actually probably don’t want to slump into irrelevancy and make it seem like it’s none of their faults – how will they include a huge manifesto push if there is no issue with regards to housing? What an awful situation that would be if everything were fine.

The solution to house price rises is to prevent this speculation; tax the value of land. This would create a society that looks to invest productively rather than sitting on land and seeing it grow just because everyone else and their nan are buying.

At the end of the day though, this is a central bank problem. It has happened again and again. In the 90s, loose Keynesian policy where interest rates didn’t match the credit requirements of the economy, led to margin being taken out to buy these super amazing dot com stocks that ended up being absolute turds. Loose interest rate policy gives rise to that great term irrational exuberance.

Debt based expansions lead to huge mis-allocations of resources in the economy, and Mr Can’t Do, Governor at the Bank of England, has come from Canada and caused the same issues here as he did there.

I still laugh when no politician mentioned the base rate cut in August 2016 but blame the fall in GBP entirely on Brexit as if exchange rate dynamics suddenly flew out of the window.

As Michael Caine said ‘you’re only meant to blow the bloody doors off,’ but the BoE has caused another bubble where the doors, windows, Laura Ashley furniture, dog, cat and roof are going to be blown off or away when we finally unravel this mess.houses

 

 

 

 

Is it better to rent or buy? The big question.

Image result for london house

This is a question that I have seen various times on social media. I’ll get to the point. My feeling is that buying is an idea that has been pushed heavily over the years by those who have bought their house for very cheap and who have seen it appreciate heavily. In addition, the majority of retail banks’ business is in the mortgage market where they glean interest through mortgage provision. You only have to look to the most recent financial crisis to see how far reaching the mortgage business is.

I wrote a recent article on London house pricing and why they have increased so heavily. A basic summary is that a combination of banks allowing less leverage & therefore a bigger initial deposit has increased rate of renting while low interest rate policy, quantitative easing and low housing stock has caused the price rise. This has caused people to rent more, yet it seems their real goal is to own a home. Why?

This article was taken from here.

Dear Emily,

I’m 30 years old, and my husband and I are thinking about buying a house. He’s all for it, but frankly, I’m terrified of the idea of taking on a mortgage. I know a number of people who lost their homes during the financial crisis. The housing market seems like it isn’t the sure thing everyone said it was. And we have significant student loan debt as it is. So my question is—is homeownership really all it’s cracked up to be? And what should young people do when they’re already swimming in debt as is?

Dear Renter:

I distinctly remember the time in 2006 when a relative told me I should “definitely” buy a house because “the housing market always goes up.” This was obviously not good advice, though it certainly reflects prevailing wisdom at the time. And I can see why in the wake of the housing crisis, you’d fear that the housing market always goes down. Which is also not true.

There is one unambiguous argument in favor of buying a house: Sometimes it is hard to rent the house you want. In most places, if you want to live in a single-family detached house, there are not many rental options, certainly not long-term ones. So you may find yourself coming up short on good rentals, and buying may be the only way to get what you want.

However, let’s assume that you are happily renting someplace and your only motivation to buy is financial. Is it cheaper to rent or buy? In equilibrium, the answer is: The price to rent or buy should be about the same. Why is that?

Imagine that rents were so high that you could buy a place and rent it out and still have loads of money left over—even after paying the mortgage, maintenance, and everything else. If that happens, the market will adjust. People will start coming in, buying properties, and renting them out. But as apartment-hunters have more options to choose from, rental prices will fall. And they’ll fall to the point where the rental price just about covers the cost of owning.

Alternatively, if rents were so low that owners would lose money renting houses, they’d stop doing it. But as the number of available rentals goes down, the prices will go up. And they’ll go up to the point where the rental price will cover the cost of owning.

This is an example of what economists call “equilibrium” and it means that ultimately, it will likely cost you about the same to rent or to buy.

You can also try to do this calculation directly. Think about what it costs you to rent. Then think about what it would cost to buy the same quality house. Take into account the mortgage, of course, but also insurance, maintenance, foregone interest on the down payment, and the value of your time spent fixing things that the landlord would fix in a rental. I suspect you’ll find that the costs are about the same.

Given this reality, the only other strong argument for buying a house is the view that the “housing market always goes up,” so when you sell, you’ll make money. But you don’t have to go very far back in history to see that isn’t true, so it’s probably not a great argument. The housing market also doesn’t always go down, so that’s not a great argument, either.

As to your debt question: Student debt may limit your ability to get a mortgage, but it shouldn’t keep you from buying a house if you want to. Your housing debt is collateralized by your house, so unless the value of your house goes down so much that you’re underwater on your mortgage, it’s not debt in the same sense that your student debt is.

A final note: Time horizon matters. There are a lot of fixed costs with buying a house: you pay the realtor, closing costs, etc. If you are going to own a house for 30 years, these do not matter much. But if you’re planning to sell in a few years, they significantly raise the effective buying price. And if you rent, so much the easier to flee the coming war with Australia.

There are various reasons why someone may want to buy a home as seen above. I am of the opinion that the initial outlay of a down payment could be better invested elsewhere. Note that any 20 year period of investing (and reinvesting dividends) in the SP500 has only led to a profit. See here:

If the rationale for buying is that you have an investment in the end then in my opinion, it holds up as pretty weak. If you add in the costs associated with being a mortgage borrower (interest payments, maintenance, insurance, renovation etc), would you be able to achieve a 246% return in a 20 year period? This is one huge opportunity cost, as well as being a very illiquid one.

I understand the above is great hindsight analysis, but the fact is that no one has ever lost money over a 20 year period while investing in the SP500 (as long as we are calculating purely from the principle investment, and with dividends reinvested). Many people have lost money on home ownership due to it being an illiquid asset.

Of course, you are able to release equity in your home to finance other investments, however this is not necessarily a given investment strategy in the future due to no knowledge of future house price appreciation or viability for remortgaging. And this brings me onto the next point.

Buying may be seen as more attractive, but what % of your income does your mortgage take up? Rent may be £1500 and a mortgage £1300, but would your emergency fund be able to cover mortgage payments if you lost your job? What if you’re utilising 60% of your income paying a mortgage plus home ownership costs? Renting provides a certain flexibility in an economic climate where the future is very uncertain. If you lose your job, you can quickly move to somewhere with lower payments, and avoid a very big mess.

At the end of the day, there are personal circumstances that come into it. But always bear in mind opportunity cost and longer term costs that may not be associated with renting.


‘I refuse to pay someone’s mortgage’

But you don’t mind giving banks interest payments? Interesting (ha).

Remember, mortgage in French means ‘death pledge’. Obviously death in this sense means until the loan obligation ends, but there are funny connotations with it as well.

A mortgage is classes as a liability until it’s paid off. A house is not an asset until that obligation is fulfilled. In addition, considering buying a home as an investment is poor, since house prices have barely outpaced inflation over the last 60 years. This does not make it a poor purchase, however.


The following video gives a roundup of what I have said:

Note, the mortgage calculation equation is wrong. It should be E = P×r×(1 + r)n/((1 + r)n – 1),  where E = monthly payment owed to the bank, P$ = loan amount, r = interest rate of loan, n = amount of months loan is for

 

Let me know your thoughts in the comments, on Twitter and below.

The UK property market is a bubble.

Image result for london house

For the last 10 years, London has been experiencing a massive rise in house prices. It’s practically impossible for a first time buyer to get on the ladder – banks don’t want to lend with as much leverage (the money borrowed relative to salary, credit rating and initial down payment) and this is seriously pricing out buyers young and old.

The issue is certainly countrywide, however, London buyers face the biggest hit as seen by the following chart.

hometrack

Source: Hometrack.com

The dashed line is the UK housing price index; the filled line is London’s housing price index. There is roughly a 75% difference between the two measures (at current levels).

But why has this happened? If we note the above chart we see that the recent acceleration began from about 2009/10. During this period, the Bank of England had decreased interest rates to their lowest level ever and had introduced something known as Quantitative Easing. I won’t go too deep into the intricacies of it*, but they end up increasing the amount of money in circulation to boost consumer spending and increase inflation to try and normalise the economy after the 2008 crash. If you can’t get a good return on your money by leaving it in a bank account (interest rates are too low) then where is the next best place? Property. London is the draw for these people with cash holdings in the UK.

*For those who may understand this part: during QE, the central bank purchases bonds from institutions (banks, pension funds, hedge funds) in order to stimulate the economy. This suppressed bond yields and incentivises the desire to seek yield. Therefore, we have stock markets hitting all time highs, and cheap financing of housing which pushes prices up.

So what happens when you can’t afford to buy? You’re forced to rent. Home ownership last year dropped to its lowest rate in 30 years. In February 2016, it had fallen to 58% in London. London’s peak ownership during the housing boom of the early 2000s was 64% and England’s was 71%. Peak ownership and the new ownership as of Feb last year is shown by the following chart.

home2

Source: The Guardian (data from The Resolution Foundation)

I don’t want to get too political/ideological here, but what this shows is a transfer of wealth to the ‘haves’ (landlords, pension funds who own property etc) from the have nots (first time buyers, young people). Additionally, remember Margaret Thatcher’s ‘Right to Buy’ scheme? People were able to buy their council houses at a massive discount – 20 years later they’re worth 4/5 times more. This disturbance of the supply/demand dynamic has not helped with the velocity of long term price increases.

Additionally, foreign investors have caused a massive rise in London house prices especially. Above I mentioned investors using property as cash holdings, but why else? Well, the appreciation of London property far outweighs the rate of inflation in a relatively short time horizon. This means that the cash they have used on the property appreciates by the difference between inflation and annual appreciation, minus any costs from taxes/solicitors etc. For them, it’s merely a bank account which is going to give a better rate of return than a traditional account, be less risky than investing in stocks or shares and much of the time, and they can get around capital controls in their countries (see RussiaChina etc).

What this also shows is another massive longer term issue which is low wage growth. Relative to our (I was born in 1992 so pretty much anyone from 1988-1999) parents, we earn 20% less on average.

home3

Source: Trading Economics

You can see that the marginal weekly increases in wages over the last 16 or so years have been in constant decline. We have not been above 4% since 2010.

This is where a slight bitterness comes in, since it is the baby boomers (those born just after the war) and our parents who have kind of gotten us into this situation (more so the baby boomers though)! Now if we combine that with rising house prices, do we really stand a chance of getting onto the ladder.

So what can be done about this problem?

Many say that building more houses will fix the issue. This is merely my opinion, but this is not a long term solution. What needs to be done is for global central banks to re-assess their strategies of programmes such as Quantitative Easing and increase their respective base rates. By increasing the base rate, you are simply increasing the cost of investment by restricting the supply of credit. You may say this is a very bad idea since growth is still quite low, but I think that has been equally as bad is the no interest rate policy that has been followed post 2008, where the majority of people have not been able to save while cheap money has been given to the ‘haves’.

Alternatively, we could introduce a land value tax. This is the main overriding feature of something called Georgism.

This is an economic system whereby all taxes are abolished for one single tax on land.

The reasoning behind this is that no one created land. No one created natural resources. Land should be everyone’s within a state and therefore we should have the ability to argue for optimum use of this land.

I am right leaning centrist but this is not a left nor a right issue. The reason being is that we would have no corporate tax, VAT or tax on income. In my view, that is freemarketeering in as best and most efficient way that we can reach, since other taxes impose large inefficiencies on the payer.

In simple terms, imposing a tax on land focuses all members of a society towards conducting activities that are individually productive. Being a rentier (landlord) is not a productive activity, since there is a lot of deadweight loss.

Just to let you know, half of the value of the U.K. is made up of land, at roughly £5 trillion.

The same occurs when one borrows from a bank for 20 years. No real value is made and there is huge deadweight loss in interest payments, maintenance and exogenous factors that may even make your house not a good investment at the end (I have certain thoughts on that as well, which you can view here: https://davidbellefx.com/2017/02/14/is-it-better-to-rent-or-buy-the-big-question/).

Here’s a quote from Daniel Ricardo, a famous economist and social scientist from a few centuries ago…

”A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every quality.
—David Ricardo, On the Principles of Political Economy and Taxation

This essentially means that the landlord cannot offset an increase in rent to balance his costs. That’s a win win for those who wish to rent, and one of the ways in which house prices will be lowered in general.

We must remember that this housing issue is not just a UK problem. Scandinavian cities, Vancouver, Toronto, San Francisco, New York, Hong Kong, Singapore, Tokyo are all experiencing the same problems. When you see such a correlation, you have to begin to wonder as to what is causing it, and since most central banks in the developed world have been following the same monetary policy process, or are highly interdependent on each other’s economy, some bells have to start ringing.

Follow me on Twitter @_db______

Thanks for reading.

 

Is Trump totally mental to dismantle Dodd-Frank?

Image result for dodd frank

Dodd Frank was introduced after the financial crisis to prevent excessive and dangerous banking practices that partly caused the 2008 meltdown and the requirement of taxpayers to bail out large investment banks and other institutions.

I think to answer the above question, the mechanism by which the 2008 crash occurred must be explained. Here is a very simple note on why it happened. 

I won’t go through all of the terms of the legislature because there are so many, and quite frankly, I don’t have the relevant experience to comment on some parts of it, but the parts that I do understand I will do my best to explain and evaluate.

In short, Dodd Frank is there to increase moral hazard on banks to protect the end consumer.

Moral Hazard – lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance.

Banks were deemed too big to fail. They knew that the taxpayer would have to bail them out. Dodd Frank’s introduction makes them more susceptible (in theory, but I’ll come onto this later) to accountability. The introduction of The Financial Stability Oversight Council and Orderly Liquidation Authority and Consumer Financial Protection Bureau 1) force banks to increase capital base (increase liquidity) if they are deemed to hold too much systematic risk and also break up banks for the same reason (ha, as if that would ever happen) and 2) the CFPB prevents mortgage brokers from earning high commissions via predatory practices (giving out subprime mortgages like they’re sweets) whereby they earn higher interest payments but the assets end up having a higher default risk.

What could Trump possibly benefit from by deregulating these areas? Well, he has quite a few ex Goldman executives around him. He has some of the biggest tech firms and conglomerates on his advisory team. These firms need access to capital and credit. Trump is a believer in trickle down economics (stupidly) whereby firms who provide jobs will eventually have their wealth trickle down to the workforce that they have created jobs for. This is absolute rubbish and has been proven not to work – look at the increasing disparity between executive pay and lowest paid workers in the majority of large firms.

The issue here is that repealing Dodd-Frank may mean rejecting the accountability measure that should be placed on banks when dealing with a product such as mortgage backed securities where everyone who owns a home or is renting from a landlord can be affected when they are traded – or when the system fails.

I think there has been too much emphasis placed on Dodd-Frank being the main development in banking regulation and process, however. Basel III has been a far greater and more far reaching introduction. Whether you want to attribute the following to Dodd-Frank or Basell III is negligible, because all that is really apparent about the following quote is that systematically, the risk is essentially the same if not subjectively worse:

Just how much has bank capital increased since the passage of Dodd-Frank?  It all depends on what you mean by capital.  According to the FDIC, at the end of 2015, commercial banks had “total equity capital” of $1.8 trillion.  This is certainly higher than the $1.5 trillion that existed at the time of Dodd-Frank’s passage.  But bank assets also increased.  What matters is the ratio of bank capital to total bank assets.  At the passage of Dodd-Frank that ratio was 11.1.  At year-end 2015, it was 11.2.

Some apparent increases in bank capital relative to risk-weighted assets are due to the fact that banks have massively shifted into low risk-weight assets.  Under a system of risk weighted capital, the required capital is a function of the target capital level times the risk weight of the volume of the asset.  For example whole mortgages have historically had a risk weight of 50%.  So if one holds $100 million in whole mortgages and the target capital is 8%, then actual capital is not $8 million but rather $4 million (8 x 0.5).  Needless to say the risk weights have come under considerable scrutiny, especially since assets like Greek government debt were given risk weights of zero.

Since Dodd-Frank, commercial banks have more than doubled their holdings of U.S. Treasuries, which require zero capital.  Banks have also increased their holdings of mortgage-backed securities and municipal debt, which also have low risk weights.  The point is that banks haven’t really raised lots of new capital as much as they’ve gamed the risk-weights to appear to have more capital.

https://www.alt-m.org/2016/03/18/did-dodd-frank-increase-bank-capital/

So the argument that repealing Dodd-Frank based on reducing systematic risk actually vanishes pretty quickly, since nothing has really changed when looking at the books. I would argue it has actually been made worse, except the introduction of Dodd Frank has simply allowed a veneer of respectability and accountability to be placed onto banks.

If this is the case, then Dodd Frank is merely protecting consumers via bureaucracy – which in this case isn’t necessarily bad. I would argue that the necessity to prevent practices such as being able to buy naked credit default swaps on failing assets while selling that failing asset to someone else (imagine being able to buy insurance on your neighbour’s house, setting fire to it, then collecting the insurance money – Goldman were doing that with collateralised debt obligations), which only Europe have done is necessary. Increasing pre and post trade transparency and reporting on bank risk is vital to be able to monitor systematic risk.

But let’s think of this. Has Dodd-Frank prevented Deutsche Bank or Santander from repeatedly failing stress tests in the US? Nope.

I think that repealing Dodd Frank won’t make much of a difference to systematic risk at all by looking at the last paragraph of the quote. So Trump is a madman, but this isn’t really a time which is going to absolutely wreck the world.