Archive - May 22, 2012

Here are a few prominent questions that George W. Bush might want to consider answering before slinking off back to Crawford:

1. Why did you ignore the CIA’s warnings in the summer of 2001 that al-Qaeda could strike “imminently”?
2. Why did you pledge in the 2000 election debates that you were against nation building, and then embark on not one but two nation-building programs in Iraq and Afghanistan?
3. You increased the Federal debt by 86%; to what extent do you accept the blame for America’s debt troubles?
4. You reappointed Alan Greenspan as the Fed Chairman;  to what extent do you accept that his easy money policies caused the bubble that burst in 2008?
5. Were the 2008 bailouts of well-connected banks and financial corporations engineered by your administration compatible with a supposedly “free-market” “capitalist” system? Doesn’t bailing out banks create dangerous moral hazard?
6. How can a nation simultaneously claim to be a liberator while also practising torture?
7. You swore to uphold the Constitution, yet passed the PATRIOT Act that authorised warrantless wiretapping, and mass surveillance in contravention of the Fourth Amendment. Do you realise that you violated your oath of office?

If anyone ever asks WTF is Visual Combat, show them this...

With the inevitable chatter of further easing from the ECB and the 'Fed must act soon surely' to monetize Facebook shares, this chart via UBS shows the longer-term support channel suggesting, at least for those who follow technical analysis, that gold's dip may be over...

We have not been shy to point out the potential (and now proven) flaws in the Euro experiment (here, here, and here for example) over the past year or so but UBS reminds us that while most people remain fixated on the absence of a fiscal transfer union in so large a monetary union (to offset incidents of inappropriate monetary policy) as Eurobonds and Federalism come back to the fore; it is the second flaw - the absence of an integrated banking system (backed implicitly by a credible lender of last resort) - that should be getting front-page headlines. As Niall Ferguson noted at Zeitgeist this morning, "Structural reforms will work but will not work this week" and in the meantime, TARGET2 balances grow out of control and the longer the 'problem' remains, the worse it becomes leaving an implicit infinitely supported firewall as the only interim solution. While most who foresaw the Euro as implicitly leading to federalism were right, it seems the link to a German dominance (of ECB rulings and general fiscal and monetary decisions) has been the ultimate outcome. While an integrated banking system would do nothing to change the relative competitiveness or growth issues that plague Europe, the 'essential' internal capital flows would be sustained. Is this sort of integration a realistic prospect? The politics is not especially propitious.

For anyone who had doubts that the JPM CIO debacle was only just starting, the just broken news by Bloomberg that the firm has hired former SEC enforcement chief William McLucas "to help respond to regulatory probes of the firm’s $2 billion trading loss" should put all doubts to rest. Because the last thing JPM needs now is to be perceived as engaging in even more regulatory capture (its current general counsel was also previously a head of enforcement at the SEC) . Yet because it is doing precisely this, means that the offsetting cost, namely the fallout that will be associated with the CIO unwind if and when completed (and we will know for sure when the Q2 earnings are released at the latest), will be fast and furious.

My sense is that the government has been watching the number of expatriates rise over the years, and simultaneously watching the value of the exit tax fall… and they’ve been looking for an excuse to make sweeping (i.e. retroactive) changes. Eduardo Saverin is the perfect excuse. The Facebook co-founder’s recent renunciation of US citizenship has become a rallying cry for politicians to go back in time and steal money from former citizens retroactively…plus establish a larger base for future tax revenues. This is a truly despicable thing to do considering that these former citizens followed the appropriate rules at the time, paid the tax, and moved on with their lives. Now Uncle Sam wants to go back in time to unilaterally change the deal, and expect everyone to abide even though they’re not even citizens anymore. The arrogance is overwhelming. More importantly, this bill is also a major deterrent for people who are thinking about renouncing US citizenship today.

The following chart from Dylan Grice does a good job of demonstrating, once and for all, what is going on in the bond market. And speaking of bond markets, a few hours ago the German debt agency announced that it will for the first time ever, issue zero coupon 2 year bonds, which as the name implies will pay zero cash interest. In other words, Germany, sick and tired of being the only good cash collateral in Europe, is gradually halting the payment of any cash interest on its paper. After all: why should it? Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral. This is not a joke.

Dismissing the propaganda-like vision of growth and jobs that is now at the forefront of any and every word from the status-quo seekers that are the European Elite, England's Nigel Farage notes the hypocrisy of the forthcoming summit's agenda. The Euro itself was supposed to create growth and jobs and yet it is actively destroying both of those things - more of the same - as the medicine is killing the patient. He attacks the idea that the world will end if Greece were to exit the Euro - "European leaders say if Greece leaves the sky will fall in - it won't!" - though notes that there will indeed be a difficult few weeks - and when challenged by a Greek politician (who questions what will happen when gas prices for Greeks rise on Farage's suspected 50% devaluation in the Drachma), Nigel, offering the other side of the coin related to real growth, investment, and innovation to compete with expensive imports pointedly remarks: "Give Greece a chance because stuck inside the Euro, you are going to be literally destroyed".

Wondering why PCX is plummeting, and slowly taking the entire energy complex lower? It is due to the following report from DebtWire as of last night, and reposted this morning.

All you need to read.

From Egan-Jones: "Spain will inevitably be faced with sizable payments to support its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP. We are slipping our rating to "BB"; watch for requests for support from the banks."

"Economists today primarily serve the needs of powerful interests at the expense of society in general" is how Robert Johnson - the frighteningly honest Executive Director of INET - describes the self-indoctrinating field of study that remains in such seemingly high regard in the nation. In an excellent and forthright brief interview with Stifterverband, Johnson notes that "Economists are very much accused of 'only seeing the economy through the eyes of the model' as opposed to seeing the economy and building a model as a map of what reality is." And while "when the people become anxious they want the expert to tell them what's going to happen. And they feel good when their anxiety is relieved because they think they understand the future. But if the expert instead of telling the truth is selling snake oil - a false story - when that is unmasked the expert becomes the scapegoat." Overall he believes 'economists' did a great disservice to mankind and suggests a number of approaches to "cleaning up after that". Sadly, he opines, "At the core, economics is about politics and about power, and the question for the economists is whose power are you going to serve as an expert."

Back on March 21, Goldman's Peter Oppenheimer released the "Long Good Buy, The Case For Equities", which was Goldman's subversive attempt to rally equity into buying all the stocks that Goldman had to offload, as well as buy all TSYs that GS clients had to sell. Needless to say, Goldman top ticked the market and stocks have tumbled ever since, even as the 10 Year soared from 2.5% to the current ~1.75%. So what? Well, this morning the same analyst, precisely two months on the anniversary of his "once in in a lifetime" stock buying opportunity, has released a new report with the paradoxical header: "Near-term risks are to the downside." But, but... Anyway, that's all the market needed to grasp that Goldman's prop desk is now buying every piece of risk not nailed down hand over fist as the June FOMC meeting is now the D-Day. Futures have soared ever since.

Asking "what is wealth?" seems needless because we all know what wealth is: never having to work again, endless leisure, endless consumption of the "good things of life," being waited on hand and foot, luxurious belongings, vehicles and homes, a life of travel and sport, trust funds, stacks of secure gold, and so on. All this is "obvious," but is that certainty illusory? There are many people with $2 million in net worth, a significant number with $20 million, and more than a few with $200 million. All would be considered wealthy by the average household earning $63,000 annually with a total net worth of less than $100,000, not to mention the 61 million American wage-earners who pull down less than $20,000 a year who own negligible net worth. Those with a mere $2 million may not reckon themselves wealthy, if their eyes are fixed on those with $20 million. But if a wealthy person suddenly discovers they are riddled with fast-growing cancer, then they quickly lose interest in financial wealth except in terms of what medical treatment it can buy. There really isn't much more modern medicine can do for someone worth $200 million than it can for someone worth $2 million; once one's life and health are at risk, then conceptions of "wealth" are drastically reordered: health is wealth, and nothing else matters.

Translating Germany's standard line on joiontly-backed European bonds is simple: "We don't want to pay" - it is as simple as that so you can ignore the rest of the rhetoric. France at the next EU summit is going to push for Eurobonds and Germany will resist in what may be a quite unpleasant stand-off. From Germany’s perspective we can easily understand their feelings about this matter because the consequences of Eurobonds are very negative for them. Eurobonds are quite clearly a “transfer union” where Germany is the primary source of funding then for the rest of Europe. If Eurobonds are ever enacted we would suggest selling any/all of the “AAA” countries and buying the periphery ones as the correct play in the intermediate term. In fact, Eurobonds are the crux where Federalism comes head to head with Nationalism and where the rhetoric gives way to actualization.