Fail

Buried deep in the newsflow from Ben Bernanke is the following piece of very critical news for anyone who is still long Italian bonds: namely that Italy may not be Spain, or Uganda, but Sicily is about to become San Bernardino. From Reuters:  "Italian Prime Minister Mario Monti said on Tuesday he expected the governor of Sicily to resign following a growing financial crisis that has pushed the autonomous region close to default." Because the resignation of Sicily Governor Lombardo will somehow allow all those who care about the fundamentals of Italy to stick their heads in the sand... at least until Sicily is followed by Calabria, Campania, Lazio, Abruzzo, Tuscany, Lombardy, Umbria, Liguria, Veneto and so on. At least the governors of those respective provinces now have an advance warning what the endgame is.

Folks, the political game has changed in the US. The Fed is no longer invulnerable. In this climate more QE cannot possibly happen. End of story. Indeed, if the Fed were to launch QE at any time between now and the election, Obama is DONE. The last possibly chance for QE without it being a clear hand-out to Obama (and a gift from the political gods to Romney) was June. The Fed passed on that.

Do the good citizens of the Wall Street establishment broadly defined understand the risks taken by the House of Morgan?

So when you see Citi’s Q2 2012 earnings, remember that about ¼ of the number will come from non-interest bearing deposits covered by FDIC's TAG program.

In the US and Europe we have slowly come to the realization that traditional accommodative economic policies leave, and have left, the real economy limp.  Wildly divided governments don't help, but beyond the fact that western decision making bodies are polarized, it is abundantly clear that the panacea for the global economy is not even on the table right now.  The western world has been thrown into a bout of sovereign game theory, and by the constructs of game theory itself, one country will "win," while everyone else will lose to varying degrees.  But that we are such a highly integrated global economy--the reason the whole world is heading towards recession right now--means that a solution must incorporate every economy around the world.  The current game Europe is playing is bound to fail because if one country gets their way, others lose by definition.

Scandal After Scandal, Lie Upon Lie ... What's Going On?

In lieu of the election of Socialist President Francois Hollande and a Socialist Party collision as the majority in France’s Parliament, the New York Times recently asked “what does it mean to be a Socialist these days, anyway?”   According to The Grey Lady, socialism today is “certainly nothing radical” and simply meant the “the emancipation of the working class and its transformation into the middle class” during its heyday.  Essentially the article categorizes the contemporary socialist as one who is a rigorous defender of the welfare state.  The piece quotes French journalist Bernard-Henri Levy as saying “European socialists are essentially like American Democrats.”  It even accuses center-right political parties in the West of being quite comfortable with socialism’s accomplishments. So is the New York Times correct?  Is socialism just a boogeyman evoked by the “fringes” to scare the public into questioning the morality and efficiency of the welfare state?

Duration mismatch is when a bank (or anyone else) borrows short to lend long.  It is fraud, it is unfair to depositors (much less shareholders) and it is certain to collapse sooner or later. This discussion is of paramount importance if we are to move to a monetary system that actually works. By taking demand deposits and buying long bonds, the banks distort the cost of money.  They send a false signal to entrepreneurs that higher-order projects are viable, while in reality they are not.  The capital is not really there to complete the project, though it is temporarily there to begin it. Capital is not fungible; one cannot repurpose a partially completed desalination plant that isn’t needed into a car manufacturing plant that is.  The bond on the plant cannot be repaid.  The plant construction project was aborted prior to the plant producing anything of value.  The bond will be defaulted.  Real wealth was destroyed, and this is experienced by those who malinvested their gold as total losses. Note that this is not a matter of probability.  Non-viable ventures will default, as unsupported projects will collapse. Unfortunately, someone must take the losses as real capital is consumed and destroyed - and these losses are caused by government’s attempts at central planning, and also by duration mismatch.

Back on May 30 we wrote "The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps" in which we made it abundantly clear that due to the Over The Counter nature of CDS one can easily make up whatever marks one wants in order to boost the P&L impact of a given position, this is precisely  what JPM was doing in order to boost its P&L? As of moments ago this too has been proven to be the case. From a just filed very shocking 8K which takes the "Whale" saga to a whole new level. To wit: 'the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm's reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end."

"Should Goldman Sachs go out of business" [Reuters] and who will save the JP Whale?

Whether Technology Imprisons Us Or Frees Us Remains To Be Seen … The Result Is Largely Up To Us: Scientists, Engineers And We The People As A Whole

The ideological brand of so-called progress that we call “collectivism” relies heavily on the notion that the values of the past are inadequate to the requirements of the future.  We are taught by the peddlers of collectivist propaganda that our beliefs and our principles must evolve along with the perceived growth of our species as a whole.  They see themselves as visionaries and prophets foretelling a grand reinvention of the world that we laymen are unequipped to imagine or understand.  We cling to the old ways because we are “afraid of change”, or too ignorant to fathom the beauty of their Utopian beyond… Pretentious bile?  Absolutely.  However, within the rhetoric and strategies of the collectivist agenda there are treasures to behold; reoccurring themes and indicators that can be found in nearly every modern tyranny and most ancient tyrannies that have ever existed.  Words and actions that warn us of the true intent of the elite.  The fact is, collectivists drive so hard to admonish respect for the past because every lie they tell us now has been told before a thousand times, to build a thousand gruesome empires.   

Prepare to have your minds blown courtesy of what is easily the most astounding chart we have seen in a long, long time, prepared by the economists at the, drumroll, New York Fed, which finds that absent what the Fed calls "Pre-FOMC Announcement Drift", or the move in the S&P in the 24 hours preceding FOMC announcements, the S&P 500 would be at or below 600 points, compared to its current level over 1300. The reason for the divergence: the combined impact of cumulative returns of in the S&P on days before, of, and after FOMC announcements. But, but, fundamental, technical, coffee grinds, Finance 101, Oprah Winfrey, Jim Cramer and Econ 101 analysis (in declining order of relevance and increasing order of voodoo) all tell us this is im-po-ssible? Because if the Fed is right about the Fed induced drift, it is all about, you guessed it, easy money. 

The stock market is precariously close to slipping into a landslide. If the economy and stock market both continue declining into late October, the presidential election could also turn into a landslide--against the incumbent. There is nothing particularly partisan about this possibility; people who vote tend to vote their pocketbooks, and a re-election campaign that boils down to "hey, it's not as bad as The Great Depression" is unlikely to inspire great loyalty in voters who are already culturally predisposed to tire quickly of presidents, wars and a tanking economy. If the economy and stock markets are both slip-sliding away, the opponent need only be "not the incumbent" to win. Presidents facing re-election in deteriorating economic conditions find their support in the critical non-partisan middle is a mile wide and an inch deep. A recessionary economy acts like a drought on that shallow lake of support, and when it dries up then the incumbent loses, and often loses big.

Who Are the Biggest Manipulators of All?