Since moral hazard - the disconnect of risk and consequence - is the fundamental cause of the global meltdown of 2008, the only solution is to eliminate moral hazard. By this we mean de-institutionalizing moral hazard. But de-institutionalizing moral hazard means smashing the vested interests' primary engine of wealth and political power. Playing monetary games has done nothing to eliminate moral hazard; indeed, playing monetary games cannot possibly eliminate moral hazard, as monetary policy enforces moral hazard.
I love the idea that prosperity can be decreed by a G20 communiqué. World leaders in Brisbane have airily committed themselves to two per cent growth. (Why only two per cent? Why not 20 per cent? Or 200 per cent? Who knew it was so easy?) Meanwhile, in the real world, the divergence between Continental Europe and the rest of the planet accelerates. David Cameron can hardly have failed to notice, as he looked around the G20 table, that his European colleagues are the ones with the worst problems. Britain is in the wrong place.
The monetary tectonic plates are shifting, and predicting the next global financial earthquake is relatively easy.
- Banks Had Unfair Advantage From Commodity Units (Bloomberg)
- Report Notes Deals Between Goldman, Deutsche and Others Drove Up Aluminum Prices (WSJ)
- Goldman, Morgan Stanley Commodity Heyday Gone as Units Faulted (BBG) - because when you can no longer manipulate, you move on...
- Lenders Shift to Help Struggling Student Borrowers (WSJ)
- Immigrants face major hurdles in signing up to new Obama plan (Reuters)
- Distressed Debt in China? Ain’t Seen Nothing Yet, Buyers Say (BBG)
- Banking culture breeds dishonesty, scientific study finds (Reuters)
- Amazon Robots Get Ready for Christmas (WSJ)
Simply put, the dollar's rise could destabilize the entire global financial system. To understand why this is so, we have to start with the source of the risk: the world's central banks.
At the end of the day, it is overwhelming clear that the headline jobs number is thoroughly and dangerously misleading because there has been a systematic and relentless deterioration in the quality and value added of the jobs mix beneath the headline. It has no value whatsoever as an index of labor market conditions, labor market slack or even implied GDP growth. The truth is, in an open global economy the quantity of labor utilized by the US economy is a function of its price - not the level of interest rates or the S&P 500. Currently, wage rates on the margin are too high, but the Fed’s ZIRP and money printing campaigns only compound the problem. They permit the government to fund with ultra low-cost bonds and notes a massive transfer payment system that keeps potential productive labor out of the economy, and thereby props up bloated wages rates; and it enables households to carry more debt than would be feasible with honest interest rates and competitively priced wage rates, thereby further inhibiting the labor market adjustments that would be required to actually achieve full employment and sustainable growth.
While no US Federal Agency sees fit to monitor ocean radioactivity in coastal waters, the Woods Hole Oceanographic Institute (WHOI) has taken on the task of keeping the information flowing in a world of 'promises' that everything will be ok. As WHOI reports this week, scientists have detected the presence of small amounts of radioactivity from the 2011 Fukushima Dai-ichi Nuclear Power Plant accident 100 miles (150 km) due west of Eureka, California.
Following Friday's notable weakness in USDCNY (the biggest drop in the market rate since March and an abrupt change of recent trend), and trade data this weekend, the PBOC appears to have decided to try and put a stop to any weakness and smashed the USDCNY Fix lower by 0.37% - its biggest 'stronger CNY' adjustment since 2010 - when the Fed initially ended QE1 (and 2nd biggest shift since Lehman). Of course, we are sure it is nothing but a storm in a teacup that the largest economy in the world just re-valued its currrency fix by the most in 4 years... just days after the end of QE3 and the BoJ's insanity... but as we warned previously, "we think that for China in particular this latest BoJ action is perceived as an aggressive provocation that must be responded to forcefully." We note also that Japan's Abe and China's Xi are due to meet on Wednesday and perhaps this is a tactical move in that chess game.
When we commented on Mel Watt's Einsteinianly-insane plans to reform FHFA, allowing bad creditors to buy houses (again) with only 3% down-payments (again), we expected nothing but echoes as the "it's everyone's 'right' to own a home"-meme gets played out for all to see in this goldfish-like societal memory that has entirely lobotomized the actions (and impact) of when this idiocy was trued before. However, a funny thing happened this week... called an 'election'. And The Republicans have been quick to take note of Obama-appointee Mel Watt's (replacing acting director Ed Demarco - who had some less-politik plans for real reform) plans with House Financial Services Committee Chairman Jeb Hensarling exclaiming he was "extremely concerned," about Watt's "efforts to force taxpayers to back high-risk mortgages with ultra-low down payments," concluding this plan "must be rejected."
Confused how your cost of living increase is always orders of magnitude above the "inflation" reported by the BLS' Consumer Price Index? Then prepare for your daily dose of Keynesian epiphany, with this step by step guide from the BLS of how to use the Hedonic Quality Adjustment to turn a 400% price increase into a 7.1% decline.
The US Dollar is moving up RAPIDLY. Will this blow up the financial system as it did in 2008? We’ll soon find out.
There is an old Wall Street chestnut that goes, “It’s not a stock market; it’s a market of stocks.” Fair enough, but we’ll take a different approach today to complete this aphorism: “It is a market of stories.” Yes, it is stories that vie for our attention, define our realities, and spur us to action. Recent academic work on the subject reveals that the right narrative – ideally one with a strong human element – physically changes how we process information and make us more likely to empathize with and ultimately believe the stories we hear. Too fluffy a concept for you? The research we cite was partially funded by the U.S. Department of Defense’s Advanced Research Projects Agency (DARPA), and when they have an interest in something, rest assured it has a very serious purpose. As for applications in the world of investing, recognizing powerful stories earlier than the pack is pretty much the job description for a nalysts and portfolio managers alike. Just be aware that it is all too easy to fall for one as well.
U.S. Ignoring Earthquake Risks to Nuclear Plants
The recent spike in global political-financial volatility that was temporarily soothed by ECB covered bond buying reveals another crack in the six-year-old throw-money-at-the-banks strategies of politicians and central bankers. The very fact - that without excessive artificial stimulation or the promise of it - more hell breaks loose - is one that government heads neither admit, nor appear to discuss. But the truth is that the global financial system has already failed. The political system that stumbles to sustain the illusion that economies can be built on rampant financial instability, has also failed us. Past presidents talked of a square deal, a new deal and a fair deal. It’s high time for a stability deal that prioritizes the real financial health of individuals over the false one of financial institutions.