Archive - Oct 2013

JPMorgan Chase has had a bad year. Not only has the bank just reported its first quarterly loss in more than a decade; it has also agreed to a tentative deal to pay $4 billion to settle claims that it misled the government-sponsored mortgage agencies Fannie Mae and Freddie Mac about the quality of billions of dollars of low-grade mortgages that it sold to them. Other big legal and regulatory costs loom. JPMorgan will bounce back, of course, but its travails have reopened the debate about what to do with banks that are “too big to fail.” We now have a global plan, of sorts, supplemented by various home-grown solutions in the US, the UK, and France, with the possibility of a European plan that would also differ from the others. In testimony to the UK Parliament, Volcker gently observed that “Internationalizing some of the basic regulations [would make] a level playing field. It is obviously not ideal that the US has the Volcker rule and [the UK has] Vickers…” He was surely right, but “too big to fail” is another area in which the initial post-crisis enthusiasm for global solutions has failed. The unfortunate result is an uneven playing field, with incentives for banks to relocate operations, whether geographically or in terms of legal entities. That is not the outcome that the G-20 – or anyone else – sought back in 2009.

The Chinese yuan has reached 20-year highs versus the U.S. dollar. It's a significant development with potentially huge ramifications for China and the world.

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With the debt ceiling debate/government shutdown now behind us, at least until the end of the year, we can now return to normal programming.  Next week will be a rash of economic data that was pent up by the government shutdown from employment to inflation data.  However, in the meantime, here are four things to ponder over this weekend...

To summarize Goldman:

• All upside is multiple expansion-driven, i.e. relentless Fed pumping of risks as the final bubble grows to unprecedented proportions,
• A market which even tenured economists say is a disaster waiting to happen.
• But hey, the music is still playing so everyone must dance all the way until Goldman's 2100 target... in 2015.

All of this has come and gone before, but since this time will be different, one can just ignore the recurring past.

The public sphere has been effectively stripped of everything but corny, irritatingly hammy political theater. The players, bereft of talent and inspiration, chosen for their blind obedience to those benefiting from the eradication of ideas and the replaying of tiresome charades, are blind to the poverty of their performance and political theatrics. Will the audience ever tire of this cheesy Theater of the Absurd? It seems the appetite of the American public for this sort of play-acting entertainment is essentially bottomless. As a result, so too is our poverty.

Overview of the price action in the fx market.

The Fed's capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve. However, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness. Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP)...

College graduates are twice as likely to find employment... but at what cost?

While 20-year highs for the CNY may be enough for many to question the USD's ongoing reserve status, it is clear that there are many other plans afoot that undermine the dominance of the greenback. On the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar.  You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely. Unfortunately for us, the U.S. debt spiral cannot go on indefinitely.  Our debt is growing far, far more rapidly than our GDP is, and therefore our debt is completely and totally unsustainable. The Chinese understand what is going on, and when the dust settles they plan to be the last ones standing.

The Fed has painted itself into an almighty corner with QE, and it looks as though we are finally getting to the point in the process where that fact begins to (a) occur to people and (b) matter. Bill Fleckenstein has often spoken about the Fed's reaching the point where it "loses control of the bond market", and it is quite possible that we are rapidly approaching that point (the signs have certainly been strong in Japan). We may be there already. But, as Grant Williams notes in his most recent note, we won't know until we can look in the rearview mirror; but the nonvirtuous circle the Fed has created is extremely clear...

For every man, woman, and child in America, the country's debt load amounts to over $50,000 each. As Bloomberg BusinessWeek notes, the national debt has not always been the hot-button issue it is today. In the Kennedy, Johnson, Nixon, and Carter administrations, inflation-adjusted debt per capita dropped. Let's revisit this chart afer 3 more years of hope-and-change, when total US debt is over $20 trillion.

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The common meme goes something like... "if it wasn't for the Fed, we'd be..." [insert any and all apocalyptic counterfactual scenario]" However, on closer inspection of the "facts" - those things bloggers are so prone to hide behind - it would appear that the Fed has been a failure across the board...