Counterparties

My colleague and erstwhile nemesis Gonzalo Lira posed the question above in a recent essay, and it is indeed a most puzzling one.  Given that the world’s central banks — joined most recently by a shockingly reckless Switzerland — are waging all-out economic war by inflating their currencies, shouldn’t gold be soaring?

Or what happens when Wall Street Muppet A is vewy, vewy angwy with Wall Street Muppet B and desperately needs a ratings boost.

We have discussed Dallas Fed's Richard Fisher's money-where-his-mouth-is perspective on the world before and the (sadly) non-voting member is among UBS' Art Cashin's most respected and candid of the FOMC. A glance through the transcripts that Art highlights below should both make readers sick at the constant pollyanna-ish nature of Fisher's comrades and perhaps more confident that his insights will be listened to more astutely 'the next time' as he noted at the time "No amount of rewriting of history will exonerate us". Once again, after reading these transcripts, do we really believe that central bankers are omnipotent? or incompetent?

MARTIN SMITH: Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?

LANNY BREUER: Well, I think I am pursuing justice. And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case, there’s some huge economic effect — if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly — it’s a factor we need to know and understand.

“Here we go again”

1.  We came to understand that our government is powerless over its spending - that our nation's debt had become unmanageable.

A week ago, when Wells Fargo unleashed the so far quite disappointing earnings season for commercial banks (connected hedge funds like Goldman Sachs excluded) we reported that the bank's deposits had risen to a record $176 billion over loans on its books. Today we conduct the same analysis for the other big two commercial banks: Wells Fargo and JPMorgan (we ignore Citi as it is still a partially nationalized disaster). The results are presented below, together with a rather stunning observation.

Tthe biggest news of the day comes from the official Buba announcement that, in its official capacity as a prudent central bank, it - as first of many - is looking to repatriate some 300 tons of gold from the New York Fed. That, however, is not today's news - that was Monday's news. What is news is that courtesy of the supplied calendar of events in the Buba statement, it will take the Fed some seven years to procure Germany's 300 tons of gold. This is the same Fed that, in its own words, holds some "216 million troy ounces of gold" or some 6720 tons, in its vault 80 feet below ground level. Putting the above in perspective, the amount of gold that Germany will have to wait 7 years for is shown in red. The amount of gold the Fed supposedly holds, is shown in yellow with a shade of tungsten. Why it will take the Fed 7 years to part with an amount of gold that is less than 5% of its total holdings is anyone's guess.

Bailing out the corrupt Greek elite or stockholders, bondholders, and counterparties of putrid banks, or privileged speculators is one thing, but....

AIG shareholders aren't just paying interest on its own bailout, they are paying (paid) hefty interest charges on the bailout of the most connected entity in the history of finance, the VAMPIRE SQUID, Goldman Sachs!

2012 is the year the student loan bubble finally popped. While on one hand the relentlessly rising total Federal student debt crossed $956 billion as of September 30, and was growing at a pace that will have put it over $1 trillion by the end of 2012, the one data point confirming the size, severity and ultimately bursting of this latest debt bubble was the disclosure in late November by the Fed that the percentage of 90+ day delinquent loans soared from under 9% to 11% in one quarter. Which is why we were not surprised to learn that the Federal government has now delivered yet another bailout program: this time focusing not on banks, or homeowners who bought McMansions and decided to not pay their mortgage, but on those millions of Americans, aged 18 to 80, that are drowning in student debt - debt, incidentally, which has been used to pay for drugs, motorcycles, games, tattoos, not to mention countless iProducts. Which also means that since there is no free lunch, all that will happen is that even more Federal Debt will be tacked on to replace discharged student debt loans, up to the total $1 trillion which will promptly soar far higher as more Americans take advantage of this latest government handout. But when the US will already have $22 trillion in debt this time in four years, who really is counting? After all, "it is only fair" that the taxpayer funded "free for all" bonanza must go on.

Ironically, the very success of stock market manipulation only thins the market of legitimate participants and thus increases the probability that risk that has been suppressed for years will erupt uncontrollably. That the stock market is manipulated is no longer in question. One explicit goal in the Fed's zero-interest rate policy (ZIRP) is to drive capital into risk assets such as stocks. That is a first-order, transparent policy of manipulation, i.e. a centrally managed policy aimed at managing markets to meet a key central-planning goal: creating an illusion of prosperity via an elevated stock market and the resultant "wealth effect" for the 10% who own enough stocks to matter. Indirect manipulation is hidden from public view lest the rigging of the market taint the perception that a rising market is "proof" that Federal Reserve and Administration policies are "succeeding." Indirect manipulation is achieved via Federal Reserve quantitative easing operations, unlimited liquidity and lines of credit to fund bank speculations and masked buying of market futures. This multilevel manipulation creates a Boolean either/or for any Bear market: either it is a planned "panic" that profits the banks or a systemic failure of the orchestrated campaign of market manipulation.

We are happy to announce that starting today, and going forward every week, as part of a new feature dubbed, appropriately enough, FleeceBook, we will introduce our readers to one, previously largely unknown member of the ruling banker aristocracy: an individual who is as far from the glamor of the daily media headlines as possible: just the way they like it, and just the way the co-opted media will agree to have it. We hope that by the end of the series, these individuals - all of them perfectly law abiding citizens of their various jurisdictions, at least under conventional legal terms - will form a tapestry of what really happens behind the scenes, especially in a context such as that presented yesterday, where we found that no matter how guilty beyond a reasonable doubt a member of the political-financial elite is, hell would have to freeze before any legal action is taken (for reference, please see the very underrated movie The International). For our inaugural edition on FleeceBook, which will compile various public profiles already posted elsewhere, we present Benoît Gilson, Head of Foreign Exchange & Gold, which he describes as "a really special place to work because it is a link between the markets and the central banks." In other words if confused why gold is imploding on any/every given day, and/or why the EUR is soaring on news of a failed ECB sterilization, now you know who to thank.

Perhaps one of the most startling and telling charts of the New Normal, one which few talk about, is the soaring difference between bank loans - traditionally the source of growth for banks, at least in their Old Normal business model which did not envision all of them becoming glorified, Too Big To Fail hedge funds, ala the Goldman Sachs "Bank Holding Company" model; and deposits - traditionally the source of capital banks use to fund said loans. Historically, and logically, the relationship between the two time series has been virtually one to one. However, ever since the advent of actively managed Central Planning by the Fed, as a result of which Ben Bernanke dumped nearly $2 trillion in excess deposits on banks to facilitate their risk taking even more, the traditional correlation between loans and deposits has broken down. It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! But that's just the beginning - the rabbit hole goes so much deeper...

Bloomberg's William Cohan released a provocative piece last night, headlined by the even more provocative "UBS Libor Manipulation Deserves the Death Penalty." We can only assume that Cohan is being metaphorical - after all, despite the rare occasional recent criminal charge no one has still gone to prison for the biggest coordinated manipulation of a benchmark fixed income market for years: something previously relegated to the fringes of crackpot conspiracy theories - after all, so many people were in on it, how can they possibly all keep their mouths shut - you know, the usual excuse against massive conspiracy theories, at least until they become conspiracy fact. Yet one wonders: will current and future ongoing market manipulations ever cease when there is no real deterrent: after all spending a few years in jail is certainly worth a few million in ill-gotten proceeds, even assuming the termination of a career in finance. Is Cohan being rhetorical? Or has the time for some true vigilante justice finally come? Because in a world increasingly best portrayed by the 2009 movie "The International" where one has to "go outside" a captured legal system to get real justice, is vigilantism eventually coming to every town near you, once the money illusion ends? And a bigger question - is this the main preemptive reason for the gun control push seen so vividly in recent days and months?