Archive - May 15, 2013

In this part, we discuss stocks vs. flows, how prices are formed in a market, a broad concept of arbitrage, spreads, and how money comes into and goes out of existence.

Is the runup in the Nikkei the result of effective central bank intervention or the spasms before the collapse?

After the Libor rigging scandal in 2012, authorities have sharpened their act, deeply scrutinizing company financial records, and implementing stricter regulations. This has led to a new investigation which has led European authorities to raid the offices of Shell, BP, and Statoil, in what is suspected to be one of the largest international actions since Libor. The Commission has "concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products."

In Chapter 12 of David Stockman's new book The Great Deformation, the outspoken truth-sayer discusses the realities of the end of the gold standard - from the the Bank of England's 'default' in 1931 to the 1960 London Gold panic (a shot across the Keynesian bow) and on to Nixon and Bretton Woods, Stockman explains how we are constantly deferring the day of reckoning... "...worse still, severing the link to gold paved the way for the T-bill standard and a vast multi-decade spree of central bank debt monetization and money printing. Since a régime of floating-rate paper money had never been tried before on a global basis, the Keynesian professors and their Friedmanite collaborators can perhaps be excused for not foreseeing its destructive consequence. The record of the next several decades, however, eliminated all doubt."

The debate over what actions actually constitute “terrorism,” we believe, will become one of the defining ideological battles of our era. Terrorism is not a word often used by common people to describe aberrant behaviors or dastardly deeds; however, it is used by governments around the world to label and marginalize political enemies. That is to say, it is the government that normally decides who is a “terrorist” and who is a mere “criminal,” the assertion being that one is clearly far worse than the other. The more naïve subsections of our society will accept unConstitutional methods against the “radicalized” out of fear and conditioning, without realizing that the machinations of bureaucracy being used against those they hate could just as easily be used against them in the future.

When the Fed extended its guidance for extremely low rates to 2014 and later, none of the Chinese government's measures to deter property speculation could deter 'homebuyers' from bidding up prices. However, as the chart below shows, the disconnect between home prices (extreme highs) and home sales (near lows) has never been greater and with the Chinese looking to further control speculation at the same time as a Fed that is increasingly jawboning a slowing to its easy money policy, the prices of Hong Kong property has begun to drop in recent weeks. As Bloomberg notes, prices have fallen 4.2% from a record reached in mid-March, compared with a 77% contraction in sales from their post-global financial crisis peak in 2010.  The prices of property is explicitly deterring the 'urban dream' that we explained here, but any sustained drop in property prices (given the shadow lending and collateralization this bubble represents) leaves China once again between a bubble-pricking rock and an inflationary (social unrest harboring) hard place.

It’s amazing what people can trick themselves into believing and even shout about when you tell them exactly what they want to hear. It was disappointing to see Brad DeLong’s latest defense of Fed policy, which was published this past weekend and trumpeted far and wide by like-minded bloggers. If you take DeLong’s word for it, you would think that the only policy risk that concerns hedge fund managers is a return to full employment. He suggests that these managers criticize existing policy only because they’ve made bad bets that are losing money, while they naively expect the Fed’s “political masters” to bail them out. Well, every one of these claims is blatantly false. DeLong’s story is irresponsible and arrogant, really. And since he flouts the truth in his worst articles and ignores half the picture in much of the rest, we’ll take a stab here at a more balanced summary of the pros and cons of the Fed’s current policies. We’ll try to capture the discussion that’s occurring within the investment community that DeLong ridicules. Firstly, the benefits of existing policies are well understood. Monetary stimulus has certainly contributed to the meager growth of recent years. And jobs that are preserved in the near-term have helped to mitigate the rise in long-term unemployment, which can weigh on the economy for years to come. These are the primary benefits of monetary stimulus, and we don’t recall any hedge fund managers disputing them. But the ultimate success or failure of today’s policies won’t be determined by these benefits alone – there are many delayed effects and unintended consequences. Here are seven long-term risks that aren’t mentioned in DeLong’s article...

Major central bank activism and some sporadically good economic data in the U.S. have lifted equity markets and also helped the credit markets continue their rally. Central bank policy has been focused on an emergency bailout footing to stave off sudden panic and is also is aimed at stimulating economic activity. This has involved incentivizing households and businesses to expand and take some more risk. But no new policy initiative is perfect – not in implementation nor is it precise in its impact. Some in the markets and even in the Fed itself worry that the massive and unprecedented easing could be causing its own distortions and perverse side effects. It has clearly triggered a chancy search for yield that may yet lead to new asset bubbles and financial instability. There are numerous examples as Abraham Gulkowitz's PunchLine (chart extravaganza) shows. While the liquidity provided by key central banks -- including the move by the Bank of Japan to initiate massive monetary easing -- will likely continue suppressing yields, there is a serious argument to be made that the rallies have moved beyond fundamentals... This increases the likelihood of more surprises, not less...

Like an infectious disease without a cure, the contagion within Europe widens its grasp…

Elizabeth Warren is one of the few Senators out there pushing to understand why the federal government has created an untouchable class of criminals in America that can do whatever they want whenever they want and, not only get away with it, but also get bailed out when they make mistakes. Now she has written a letter to Ben Bernanke, Eric Holder and Mary Jo White.  My favorite line is: “If large financial institutions can break the law and accumulate millions in profits and, if they get caught, settle by paying out of those profits, they do not have much incentive to follow the law.” Indeed, which is why they don’t.  Full letter embedded below.

This was not your grandfather's hearing. The air was thick with partisanship already but when Darrell Issa began by playing audio of Thomas Perez, assistant attorney general for civil rights and President Barack Obama's nominee to become the next Secretary of Labor, in which he confirms that he is arranging for details relating to the St. Paul case not to be disclosed. "Do you think it's appropriate for someone to -- at a federal level -- to try to keep information out in order to disguise what's actually going on?" Issa asked. "There are a whole variety of reasons why people, why we as a government and Justice Department, decide not to become involved in qui tam cases," Holder replied. Holder and Issa went back and forth until Holder lost it... "It is inappropriate and too consistent with the way in which you conduct yourself as a member of Congress," Holder said. "It is unacceptable. It is shameful."

The first scapegoat is out, and contrary to expectations, no it was not Fabrice Tourre and Bruno Iksil:

• IRS ACTING COMMISSIONER HAS RESIGNED
• OBAMA SAYS IRS ACTING COMMISSIONER GAVE RESIGNATION TO LEW

Goodbye Steven Miller: we hardly knew thee. No really. It is unclear as of this writing what Steve's severance package, and how big his (tax-free of course) lifetime public pension will be.

With the president so busy with teleprompted appearances, one is almost reminded of the presidential campaign when this was an hourly event, although since that is not the case and since the president is engaged in now seemingly endless damage control, one wonders if Ben Bernanke is able to govern the country entirely on his own. So far so good, if the country is just the Stalingrad & Poor 500 of course. As for Obama, he will next speak, following a customary delay, on the "situation regarding the internal  [and less than impartial] revenue service." Let's listen in.

Moments ago, as the WSJ reported that "the White House succumbed to mounting pressure Wednesday and decided to publicly release the chain of administration emails surrounding the controversial Benghazi talking points. The move came a week after public interest in last year's terror attack unexpectedly rebounded with testimony by three State Department employees that reopened lingering questions about the assault. The documents were being released late Wednesday afternoon. While many of the emails have already leaked out, the release of the complete set of communications paints a fuller picture of an administration struggling with how much to disclose about an attack that eight months later remains a focus of partisan division." Courtesy of CNN, the full 100 page pdf of all alleged Benghazi emails is enclosed below (pdf link).