Paul Volcker

Goodbye, living spirit.

Anyone who worked in finance in the decade before Glass-Steagall was repealed knows that prior to Gramm-Leach-Bliley the megabanks just took their hyper-leveraged activities offshore (primarily to London where no such regulations existed). The big problem (at least in my mind) with Glass-Steagall is that it didn’t prevent the financial-industrial complex from gaining the power to loophole and lobby Glass-Steagall out of existence, and incorporate a new regime of hyper-leverage, convoluted shadow banking intermediation, and a multi-quadrillion-dollar derivatives web (and more importantly a taxpayer-funded safety net for when it all goes wrong: heads I win, tails you lose). I fear that the only answer to the dastardly combination of hyper-risk and huge bailouts is to let the junkies eat dirt the next time the system comes crashing down. You can’t keep bailing out hyper-fragile systems and expect them to just fix themselves. The answer to stupidity is not the moral hazard of bailouts, it is the educational lesson of failure. You screw up, you take more care next time. If you’re bailed out, you just don’t care. Corzine affirms it; Iksil affrims it; Adoboli affirms it. And there will be more names. Which chump is next?

1. How do you define market risk?
2. Do you take fixed price positions?
3. Are you exclusively a hedger or do you “optimize” your assets?
4. Do you have a risk policy?
5. How do you monitor trading/hedging limits?.

Simultaneous Global Printing Is Failing Miserably

In perhaps the most courageous (and now must-read) speech ever given inside the New York Fed's shallowed hallowed walls, Economic Policy Journal's Robert Wenzel delivered the truth, the whole truth, and nothing but the truth to the monetary priesthood. Gracious from the start, Wenzel takes the Keynesian clap-trappers to task on almost every nonsensical and oblivious decision they have made in recent years. "My views, I suspect, differ from beginning to end... I stand here confused as to how you see the world so differently than I do. I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality." And further..."I scratch my head that somehow your conclusions about unemployment are so different than mine and that you call for the printing of money to boost 'demand'. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%." But his closing was tremendous: "Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats."

In the science of physics, we know that ice freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.. There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building. It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building. Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

For all those who have long been curious what the precious metals "queen" thinks about allegations involving her and her fimr in gold and silver manipulation, how JPMorgan is positioned in the precious metals market, and how she views the fringe elements of media, as well as JPMorgan's ethical limitations to engaging in 'wrong' behavior, the answers are all here.

First it was Bob Janjuah throwing in the towel in the face of central planning, now we get the same sense from Bill Gross who in his latest letter once again laments the forced transfer of risk from the private to the public sector: "The game as we all have known it appears to be over... moving for the moment from private to public balance sheets, but even there facing investor and political limits. Actually global financial markets are only selectively delevering. What delevering there is, is most visible with household balance sheets in the U.S. and Euroland peripheral sovereigns like Greece." Gross' long-term view is well-known - inflation is coming: "The total amount of debt however is daunting and continued credit expansion will produce accelerating global inflation and slower growth in PIMCO’s most likely outcome." The primary reason for Pimco's pessimism, which is nothing new, is that in a world of deleveraging there will be no packets of leverage within the primary traditional source of cheap credit-money growth: financial firms. So what is a fund manager to do? Why find their own Steve McQueen'ian Great Escape from Financial Repression of course. " it is your duty to try to escape today’s repression. Your living conditions are OK for now – the food and in this case the returns are good – but they aren’t enough to get you what you need to cover liabilities. You need to think of an escape route that gets you back home yet at the same time doesn’t get you killed in the process. You need a Great Escape to deliver in this financial repressive world." In the meantime Gross advises readers to do just what we have been saying for years: buy commodities and real (non-dilutable) assets: "Commodities and real assets become ascendant, certainly in relative terms, as we by necessity delever or lever less." As for the endgame: "Is a systemic implosion still possible in 2012 as opposed to 2008? It is, but we will likely face much more monetary and credit inflation before the balloon pops. Until then, you should budget for “safe carry” to help pay your bills. The bunker portfolio lies further ahead."

In an interview with Louis James, the inimitable Doug Casey throws cold water on those celebrating the economic recovery. "Get out your mower; it's time to cut down some green shoots again, and debunk a bit of the so-called recovery."

Bill Gross' monthly letters are always a fresh source of jovial imagery, although the bond king may have outdone himself in his latest monthly letter which collapses the principles of investing onto the football field: "My point about pigskin offense and defense is the perfect metaphor for the world of investing as well. Offensively minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy).... Canton, however, has an approximately equal number of defensive in addition to offensively positioned inductees, so there must be a universally acknowledged role for both sides of the scrimmage line. What fan can forget Mean Joe Greene, Deion Sanders or Mike Ditka? The old, now politically incorrect showtune laments that “you gotta be a football hero, to fall in love with a beautiful girl,” but football and any of life’s heroes can play on either side of the line, it seems." And it only gets better. While at its heart Gross' latest is merely yet another lamentation against the confines of the financially suppressive regime that arises from ZIRP and ends with what many expect is a whimper (when in reality they all forget to factor in the facility of hitting the CTRL+P keys as many times as necessary), the flourish of abandon this time around is palpable. We would not be surprised to soon see Gross hang up his offensive (and defensive) jersey, and sit back and enjoy the coming lunacy from a distance (but hopefully not before he allocates just a little to the Ron Paul SuperPAC).

Every time we see oil prices go up we hear that it will cause inflation and/or the economy will go into the tank. The premise is wrong because that has never happened.

And not because his Rule doesn't have teeth.

The Volcker Rule ignores the most basic and elementary facts about bank risk taking in the financial markets and must hurt overall liquidity among financial intermediaries and investors. 

• BOJ Adds to Monetary Easing After Contraction (Bloomberg)
• EU to punish Spain for deficits, inaction (Reuters)
• Obama, China's Xi to tread cautiously in White House talks (Reuters)
• Global suicide 2020: We can’t feed 10 billion (MarketWatch)
• Greece rushes to meet lender demands (Reuters)
• Obama Budget Sets Up Election-Year Tax Fight (Reuters)
• Foreign Outcry Over ‘Volcker Rule’ Plans (FT)
• Moody’s Shifts Outlook for UK and France (FT)
• France to Push On With Trading Tax (FT)

• Greek Parliament Backs Austerity as Rioters Burn Buildings (Bloomberg)
• China CIC Wary of EU Government Bond Investments (Reuters)
• Spain Unions Decry New Labor Rules (WSJ)
• China Tells Banks to Roll Over Loans (FT)
• We're Not Greece: Italian Prime Minister Monti (CNBC)
• Bernanke’s Labor Pessimism at Odds With U.S. Growth (Bloomberg)
• Obama Budget Seeks Funding for Trade Unit (Bloomberg)
• Obama's Election-Year Budget to Target Rich (Reuters)
• China May Need to Fine-Tune Policy This Quarter, Wen Says (Bloomberg)
• China’s Xi Seeks Second Front for U.S. Ties in Return to Iowa (Bloomberg)
• Why Greece and Portugal Ought to go Bankrupt (FT)