Fisher

On October 21^st, 2012, Ambrose Evans-Pritchard wrote a note titled “IMF’s epic plan to conjure away debt and dethrone bankers”, on UK’s The Telegraph. The article presented the International Monetary Fund’s working paper 12/202, also titled “The Chicago Plan revisited“. I will begin the discussion on this working paper with two disclosures: a) my personal portfolio would profit immensely if the Chicago Plan, as presented by the IMF’s working paper 12/202, was effectively carried out in the US. The reason I write today, however, is that to me, it is more important to ensure that my children live and grow in a free and prosperous world, and b) I have not read the so called Chicago Plan, as originally proposed by H. Simmons and supported by I. Fisher. My comments are on what the IMF working paper tells us that the Chicago Plan proposed, without making any claim on the original plan.

• China May Forgo Easing as Economy Rebounds, Survey Shows (Bloomberg)... or as food and house inflation has never gone away
• China Edges Out U.S. as Top Foreign-Investment Draw Amid World Decline (WSJ)
• Fed to keep buying bonds despite firmer U.S. growth (Reuters)
• Bernanke Seen Attacking Jobless Rate With QE Until His Term Ends (Bloomberg)
• Mortgage applications plunge 12%, down for third week in a row (Dow Jones)
• Exchanges Retreat on Trading Tools - Fund Managers, Regulators Say Certain Orders Are Risky, Aid High-Speed Firms (WSJ)
• Europe Bank Chief to Defend Bond-Buying Plan (WSJ)
• Japan, China Envoys Met Last Week for Talks on Island Feud (Bloomberg)
• Goldman’s Pill Says ‘Guerrilla’ ECB to Impose Losses on Skeptics (BBG)
• Chance rise of an Obama defeat (FT)
• King Says BOE Is Ready to Add to QE If U.K. Recovery Fades (Bloomberg)
• Rajoy Sees Case for Slowing Spain’s Austerity as Economy Shrinks (BusinessWeek)
• Hong Kong Intervenes to Defend Peg as Upper Limit Tested (Bloomberg)

The International Monetary Fund’s paper, “The Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof highlighted a means to wipe out debt by legislation by using state created money to replace the private banking system and was commented on in The Telegraph by journalist Ambrose Evans-Prichard. The full paper can be read here. In sum, the paper illuminates on a plan created in 1936 by professors Henry Simons and Irving Fisher during the aftermath of the US Depression. It examines how money  created by credit cycles leads to a damaging creation of wealth.   Authors, Benes and Kumhof argue that credit-cycle trauma - caused by private money creation – has been around forever and lies at the root of debt catastrophes as far back as ancient Mesopotia and the Middle East. They claim that not only harvest cycles lead to defaults but rather the concentration of wealth in the hands of lenders would have augmented the outcome.

• Global easing deluge resumes: Bank of Korea Slashes Policy Rate (WSJ)
• And Brazil: Brazil cuts Selic rate to new record low of 7.25 pct (Reuters)
• With Tapes, Authorities Build Criminal Cases Over JPMorgan Loss (NYT) Just don't hold your breath
• IMF snub reveals China’s political priorities (FT)
• Add a dash of trade wars: Revised Duties Imposed by U.S. on Chinese Solar Equipment (Bloomberg)
• IMF calls for action as euro zone crisis festers (Reuters)
• Dubai Losing Billions as Insecure Expats Send Money Abroad (BBG)
• Softbank in Advanced Talks to Acquire Sprint Nextel (WSJ)
• Lagarde calls for brake on austerity (FT)
• EU lambasts Turkey over freedoms (FT)
• Race Tightens in Two States (WSJ)

• Draghi Says Next Move Not His as Spain Resists Bailout (Bloomberg)
• EU Doubts on Deficit Cutting May Hinder Spain’s Path to Bailout (Bloomberg)
• Merkel to Visit Greece for First Time Since Crisis Outbreak (Bloomberg)
• Fed's Bullard warns inflation won't ease U.S. debt burden (Reuters)
• Walmart Workers Stage a Walkout in California (NYT)
• Natural Gas Glut Pushes Exports (WSJ)
• BOJ Refrains From More Stimulus as Political Pressure Mounts (Bloomberg)
• Big funds seek to rein in pay at Wall Street banks (Reuters)
• Hong Kong Luxury Sales Fall as Chinese Curb Spending (Bloomberg)
• Dave and Busters Pulls IPO due to "Market Conditions" (Reuters) - so market at anything but all time highs now is market conditions?
• Weak U.S. labor market looms ahead of elections (Reuters)
• Glut of Solar Panels Poses a New Threat to China (NYT)

Lately, it has become particularly fashionable to bash private equity, especially among those workers in the employ of the state. The argument, in as much as capitalism can be summarized in one sentence, is that PE firms issue excess leverage, making bankruptcy inevitable (apparently those who buy the debt are unaware they will never get their money back), all the while cutting headcount to maximize cash flow (apparently the same PE firms don't realize that their investment will have the greatest terminal value to buyer if it has the highest possible growth potential, which means revenue and cashflow, which means proper CapEx investment, which means streamlined income statement, which means more efficient workers generating more profits, not less). The narrative ultimately culminates with some variation on a the theme that PE firms are responsible for offshoring jobs. While any of the above may be debated, and usually is especially by those who have absolutely no understanding of finance, one thing is certain: when it comes to bashing PE, America's public workers should be the last to have anything negative to say about Private Equity, and the capital markets in general. Why? Because when it comes to fulfilling those promises of a comfortable retirement with pensions and benefits paying out in perpetuity, always indexed for inflation, and otherwise fulfilling impossible dreams, who do America's public pension fund administrators go to? The very same private equity firms that have suddenly become outcast number 1.

These days every pundit and his barber are suddenly central banking gurus and monetary transmission mechanism experts, but while some of them may have an educated guess as to the reality of the matters at hand, none can envisage that which the Fed is able to.  What is almost never considered by most wanna-bees  is that no one in the world has access to as many economic and financial data sets, metrics, and indicators, and the synthesis thereof, as the United States Federal Reserve.  Ben may make mistakes, but he is no fool.  When he acts, he either sees present reason to do so, or he is bracing for a future shock. It is just a matter of time before markets lose complete faith in the recklessness of central planning Ponzi artists.

Dick Fisher speaks: "Just recently, in a hearing before the Senate, your senator and my Harvard classmate, Chuck Schumer, told Chairman Bernanke, “You are the only game in town.” I thought the chairman showed admirable restraint in his response. I would have immediately answered, “No, senator, you and your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum; get on with it. Sacrifice your political ambition for the good of our country—for the good of our children and grandchildren. For unless you do so, all the monetary policy accommodation the Federal Reserve can muster will be for naught.”"

• Obama, Romney tiptoe around housing morass as they woo voters (Reuters) ... just as ZH expected
• Poll Finds Obama in Better Shape Than Any Nominee Since Clinton (Bloomberg)
• Romney on Offense, Says Obama Can’t Help Middle Class (Bloomberg)
• Fed’s Fisher Says U.S. Inflation Expectations Rising (Bloomberg)
• Citigroup Warns Irish Investors to Plan for Losses (Bloomberg)
• Central Banks Flex Muscles (WSJ)
• China says U.S. auto trade complaint driven by election race (Reuters)
• Brussels sidesteps China trade dispute (FT)
• How misstep over trading fractions wounded ICAP's EBS (Reuters)
• Ex-CME programmer pleads guilty to trade secret theft (Reuters)
• Income squeeze will persist, says BoE (FT)
• South African miners return to work, unrest rumbles on (Reuters)

Without justice for investors, pension funds and banks defrauded to the tune of hundreds of billions of dollars, there can be no investor confidence to support private finance.  

With 20 minutes to go, we thought it timely to see the script (perhaps) for the frivolity to come. It seems like the fate of the known world is predicated on the words of a bearded academic this afternoon and whether you believe he must or must not LSAP us to Dow 20,000 (and Gold $2,000) in the next few weeks - even as the economy and jobs tail-spin - there are many questions, which Goldman provides a platform for understanding, that remain unanswered (and more than likely will remain vague even after he has finished his statement). Their expectations are for a return to QE and an extension of rate guidance into mid-2015 (and everyone gets a pony) but no cut in IOER.

The Little Investor Is About to Get Hosed Again by Ben and the Boyz ...

Having operatied for years under ZIRP, and with the NIRP neutron bomb just around the corner, and already implemented in various European countries, one question remains: can banks be banks, i.e., can they make money, in a world in which borrowing short and lending long, no longer works, courtesy of ubiquitous and pervasive central planning which is now engaged solely and almost exclusively (the other central bank ventures being of course to keep FX rates and equities within an acceptable range) on the shape of the yield curve. Since 2009 our answer has been a resounding no. Today, Bill Gross speaks up as well, and his answer is even more distrubing: "If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low. Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over." Indeed, according to Gross central banks have now clearly sown the seeds of the entire financial system's own destruction. That he is right we have no doubt. The only question: how soon until he is proven right.

Some in the markets think that the Fed effectively targets equity prices, meaning that to predict Fed policy, one merely needs to track the US stock market. There is a curious circularity to this view, however: the Fed will not launch QE3 so long as stock prices are high, yet the stock market is high because it anticipates QE3. BofAML's chart-of-the-day is intrguingly similar to our 'QE Hopeyness' chart as it shows that stock and bond prices have decoupled since the summer, as QE3 expectations overwhelmed the weaker macroeconomic data to buoy equities. Now that recent data have improved, yields have risen - but so too have stocks. This "heads I win, tails you lose" aspect of stock prices rising regardless of the macro backdrop, BofAML believes, makes them a far less useful signal for Fed officials. Moreover, it creates the risk that the equity market could sell off after the 12-13 September FOMC meeting if the Fed disappoints. Right now, however, we are in an anti-Goldilocks period in which the data are too hot for clear-cut Fed easing, but too cold to support a sustained rebound — anything but "just right".

Peripheral stock indices continued to outperform today, as market participants reacted to yet another reiteration of support for ECB’s pledge to do all necessary to defend the Eurozone. As a result, banks in Europe are trading up with decent gains, with health care sector in the red given its traditional appeal as a safe-haven investment. German DAX continues to consolidate above the key 7000 mark, being driven higher by Daimler and Deutsche Bank. Looking at other asset classes, there is visible outperformance in the short-end of the curve, with the in-focus Spanish 2s tighter by around 20bps mark. The ongoing speculation of an intervention in the bond market also weighed on the German Bund, which underperformed its US counterpart. USTs come off overnight highs to trade little changed, with the move attributed to deal related selling. In the FX market, the EUR continued to re-price risks surrounding what is inevitable an unlikely scenario of a Eurozone break up. To the upside, resistance levels are seen at the 55DMA line at 1.2395 and then at 1.2400, which is also an intraday option expiry for the session.