JPMorgan, Madoff, And Why No One Dared Ask "The Cult" Any "Serious Questions As Long As The Performance Is Good"Submitted by Tyler Durden on 01/07/2014 19:02 -0400
JPMorgan: "[t]here are various elements in the story that could make us nervous," including the fund managers "apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.... personnel at one feeder fund seem[ed] very defensive and almost scared of Madoff... They seem unwilling to ask him any difficult questions and seem to be considering his 'interests' before those of the investors. It's almost a cult he seems to have fostered."
Collectively, the world’s Central Banks have put more than $10 trillion into the financial system since 2008. To put that number into perspective, it’s equal to roughly 15% of global GDP.
Unintended consequences may have developed from QE policies that are not fully understood. They may materialize more clearly during the withdrawal process. Any of a number of obstacles could push the Fed ‘off course’ from the smooth landing that its baseline scenario suggests:
- Certainly, expanding the balance sheet by over $3 trillion has had a significant impact on valuations, market functioning, and asset allocation, so those effects could cause some market turbulence as they revert back to normal.
- Emerging markets, which benefited heavily in the early years of QE, have recently shown some disruptions, such as, slowing economic growth, weakening currencies, and capital outflows.
- Political and social concerns about income and wealth inequalities have grown due to the use of asset prices as a policy tool.
- Structural unemployment from long-term joblessness and technological advancement cannot be addressed through easy money.
- Politics is still polarizing, which in turn creates on-going economic headwinds.
Nothing lasts forever (as we've shown before) - except perhaps gold as a store of value it would appear. Central banks around the world are increasingly diversifying their currency reserves away from the US Dollar. Even as overall holdings soar to a record $11.4 trillion, the US Dollar accounted for 61.44% (down from well over 65% at the peak of the crisis in 2008). With China outspokenly concerned at the US Dollar's future status, we suspect this will only become more 'diversified'.
"Paper and digital markets levitate, central banks pull out all the stops of their magical reality-tweaking machine to manipulate everything, accounting fraud pervades public and private enterprise, everything is mis-priced, all official statistics are lies of one kind or another, the regulating authorities sit on their hands, lost in raptures of online pornography (or dreams of future employment at Goldman Sachs), the news media sprinkles wishful-thinking propaganda about a mythical “recovery” and the “shale gas miracle” on a credulous public desperate to believe, the routine swindles of medicine get more cruel and blatant each month, a tiny cohort of financial vampire squids suck in all the nominal wealth of society, and everybody else is left whirling down the drain of posterity in a vortex of diminishing returns and scuttled expectations."
It’s ironic that in a day and age where Keynesian economics is the “accepted view” we still don’t pay enough attention to what Keynes said about inflation: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some..." The problem today is that some people believe inflation is lower than it actually is. The Consumer Price Index CPI is used to measure the cost of maintaining a certain standard of living. Now it measures the cost of maintaining a certain level of satisfaction. You can argue the magnitude of the inflation understatement but you can’t argue that the official numbers are accurate. Under reporting inflation has led to many predictable outcomes.
- 'Life-threatening' cold bites Midwest, heads east (Reuters)
- Gold Analysts Get Most Bullish in a Year After Rout (BBG)
- Asian Stocks Fall Most in Three Weeks on China Services (BBG)
- Angela Merkel in skiing accident, cancels visits (Reuters)
- High-Speed Traders Form Trade Group to Press Case (WSJ)
- Toyota and Honda post record China sales (FT)
- China Shadow Banking Risks Exposed by Local Debt Audit (BBG)
- J.P. Morgan to Pay Over $2 Billion to U.S. in Penalties in Madoff Case (WSJ)
- Corruption trial of Trenton, N.J., mayor starts Monday (Reuters)
- Car Makers at Consumer Electronics Show Tout Ways to Plug Autos Into the Web (WSJ)
The "polar vortex" (no, really) which is about to unleash even record-er cold temperatures upon the US may be the greatest thing to happen to the economy: after all once Q1 GDP estimates miss once again, what better scapegoat to blame it on than cold winter weather during... the winter. However, for the overnight markets, the weather seems to have had an less than desired effect following both much weaker Services PMI data out of China, and after the entire USDJPY ramp achieved during Bernanke's late Friday speech evaporated in the span of two hours in Japanese Monday morning trading, sending the Nikkei reeling lower by 2.35%. One reason for this may be that like in the early summer when both the Yen and the Nikkei froze in a rangebound formation, South Korea has vocally started t0 complain about the weak Yen, which as readers may recall was one of the catalysts to put an end to the surge in the USDJPY and EURJPY. This time may not be different, furthermore as Goldman forecast overnight, it now expects a BOK rate cut of 25 bps as soon as this Thursday. Should that happen expect the JPY coiled-short spring to pounce.
Since quantitative easing (QE) became the policy of the world's major central banks, capital is being herded into fewer and fewer asset classes. With such huge volumes of money at play, very crowded trades in assets like stocks and housing have resulted - bringing us back to familiar bubble territory in record time. The key for the individual, as Pretti emphasizes in this excellent interview, is risk management. The safety many investors believe they are buying in today's markets is not real... "this comes down to individual families making an assessment of how much risk they can afford to take. Below that line, they do not allow it to happen. It may sound trite but: You have every day of your life to get back into the market, but sometimes you do not have a second chance to get out."
As we enter 2014 mainstream economists relying on inaccurate statistics, many of which are not even relevant to a true understanding of our economic condition, seem convinced that the crises of recent years are now laid to rest. If we objectively assess the state of the labour markets in most welfare-driven economies the truth conforms to a continuing slump; and if we take a realistic view of price increases, including capital assets, price inflation may even be in double figures. The corruption of price inflation statistics in turn makes a mockery of GDP numbers, which realistically adjusted for price inflation are contracting. This gloomy conclusion should come as no surprise to thoughtful souls in any era. These conditions are the logical outcome of the corruption of currencies and the effect of unsound money... and two conclusions for 2014...
A look at the technical condition of the fx market, interest rate differentials, central bank developments and the data due out in the week ahead.
With Bernanke's term due to expire in January, Jim Rogers warns Mineweb that the Fed-head will be remembered as "the guy who set the stage for the demise of the Central Bank in America. We've had three central banks in America. The first two disappeared. This one's going to disappear too in the next decade." With precious metals, bonds, and stock markets obsessing over Fed actions, Rogers says, in the next 10 years or so, "People will realise that these guys have led us down a terrible path," and collapse is "not a possibility," he adds, "it's a probability."
2013 Was A Year Of Calm In The World Of Finance ... 2014 May Not Be So Calm ... Highlights Of Year - German Gold Repatriation, Record Highs In Yen, Huge Chinese Demand - Lowlights Of Year - Massive Paper Sell Offs in April/June and First Deposit Confiscation and Capital Controls ...
Ever since President Nixon broke the US dollar's last link to gold, the world has been set adrift on a sea of fiat currencies that have been increasingly debased, serving the interests of governments and financial elites. While crypto-currencies remain insulated from central bank manipulation, governments have thus far been tolerant, perhaps because their capability to track transactions is more advanced than Bitcoin believers admit. Nevertheless, the advent of crypto-currencies represents the increasing popular demand for a currency insulated from political debasement and bank profiteering. Crypto-currencies represent a legitimate attempt by private citizens to reassert their sovereignty over such government actions. We appreciate the effort, and we believe it holds much promise. But for now, we will stay with the traditional store of value, gold.
The start of 2014 was less than exuberant as the markets turned in the steepest loss for the first trading day of a new year since 2008. What does this mean for the rest of 2014? Likely not much. The old Wall Street axioms of "the first 5 trading days" and "so goes January, so goes the year" tend to be statistically more important. However, it did get me thinking about the new year from a more macro perspective. This weekend's "Things To Ponder" is a collection of ideas to get you to do the same.