Transparency

Goldman Sachs, pillar of ethical honesty in the lead up to the last market top and crisis, appears to be so bullish on leveraged loan and high-yield debt that it prefers to create an entirely separate holding company (that requires less transparency and avoids the Volcker Rule), raise external equity capital, lever up, and use a management team with "no experience managing a business development company (BDC)."  As the WSJ reports, Goldman plans to offer shares in a new unit, Goldman Sachs Liberty Harbor Capital LLC "as soon as is practicable," in a BDC that means it is exempt from the so-called Volcker Rule. The entity also enables Goldman to report less transparently since it qualifies as an emerging growth company under the JOBS Act. Given the richness of credit, and the 'frothiness' in high-yield, is this an implicit option on credit (if credit rallies, profits go up to parent entity; if credit tanks, entity implodes and eats 'remotely' the new equity capital without affecting the bank itself)? Or maybe we are being too negative?

A few days ago, when news hit that Cyprus has begun investigating who the people were who had managed to pull cash out of nation's insolvent banks, both during the capital control "blackout" period and previously, we asked "how much longer will the rule of law remain in Cyprus once full blown class warfare is unleashed, and the 99% are generously handed the list of the 1% who were "informed" enough to pull their money from the flaming sovereign equivalent of Bernie Madoff, while every other uninsured depositor is facing losses of up to 80%, and soon 100%?" We may get the answer much sooner than expected, as the first iteration of this list: one naming the beneficiaries of millions of loans written off by the now insolvent Cyprus banks and therefore indirectly responsible for the "impairment" of the banks' depositors, was released yesterday by Greece's daily Ethnos newspaper. But what virtually assures substantial political fallout is that among the people listed is Cyprus' former president, George Vassiliou.

It appears the European Central Bank is having trouble keeping its lies straight. When Jeroen Dijsselbloem ("Diesel-BOOM", "D-Boom", or just "Diesel") made his now infamous "template" comment last week, reality was shattered for many trend-following, momentum-monkey, hope-and-dreamers that actual real monetary pain could exist for a bank that was entirely incompetent (and insolvent). Instantly the rest of Europe stepped up to deny-deny-deny (as did D-Boom himself) explaining this was a 'unique' situation with French ECB Director Benoît Coeuré explicitly stating that Cyprus is not a model for future bank rescues. However, as Reuters reports, it appears fellow-Dutchman and ECB Governing Council member Klaas Knot said last night that there was "little wrong" with J-Boom's comment and that "the content of his remarks comes down to an approach which has been on the table for a longer time in Europe. This approach will be part of the European liquidation policy." Further confirming D-Boom's perspective, Knot added that, "there has to be transparency about losses in the banking sector... and banks have to wind down their loss-making operations." It seems that in 2012 the ECB split was between the Germans and Draghi on unlimited inflation threats; in 2013 it will be between those who want bail-ins and bail-outs.

The BTFD mantra is alive and well in a market, where futures overnight briefly dipped to a low of -0.5% only to be set to open at record high, following the biggest one day drubbing in China in months, where the Shanghai Composite closed -2.82% after new rules were issued by the Chinese banking regulator to limit the expansion and improve the transparency of so-called “wealth management products”. The products, which are marketed as higher yielding alternatives to bank deposits, are often used to fund risky projects including property developments, short-term corporate lines of credit or for speculative purchases of commodities and have been identified as contributing to the rise of shadow-banking in China’s financial system. As Deutsche reports, Fitch estimates the total amount of outstanding wealth-management products was around 13 trillion yuan at the end of last year—equal to about 15% of total banking-system deposits. Japanese equities were also weaker overnight (Nikkei –1.3%) and the yen is 0.3% firmer against the dollar after BoJ Governor Kuroda told parliament that he has no intention of buying foreign bonds because doing so could be seen as currency intervention. Finally, South Korea informally entered the currency wars after it slashed its GDP forecast from 3% to mid-2%, announcing it would use "interest rates" to boost growth, which naturally means use of monetary means and directly challenging the BOJ.

Today, the very orders that make HFT a beneficial trading strategy and one worth the massive capex, are controlled by the exchanges.  That's the difference between this form of "technological advancement" and those of the past, the direct ownership of the critical intersection between information processing and order execution.

Even your data and conversations on its encrypted services that you thought were secure aren’t; at least not from 46 governments around the world.

Obama Is Worse than Bush In Favoring the Super-Elite, Bailing Out the Big Banks, Protecting Financial Criminals, Targeting Whistleblowers, Keeping Government Secrets, Trampling Our Liberties and Starting Military Conflicts In New Countries

Following Part 1's discussion of America's Dangerous Drift, and Part 2's succincy summation of why America needs a Grand Strategy, today's Part 3 concludes with a discussion of the 'choice' American leaders have: "A decline in America’s leadership role and the emergence of a highly unstable world is a serious possibility. In reality, decline is not a foregone conclusion but a deliberate political choice that builds from a failure to define what matters most to the nation." When we step back from the language and imperatives of grand strategy, the case for the United States to rethink its grand strategy is fundamentally simple. It is designed to meet serious threats while creating and taking advantage of strategic opportunities. To continue on the present course of "drifting" from crisis to crisis effectively invites powers to believe that America is in decline. Worse, Americans, too, might believe wrongly that the nation’s decline is inevitable. If we are to assure America’s future security and prosperity, we need a new national grand strategy that harnesses America’s spirit, sense of optimism, and perseverance to help the nation meet the challenges and grasp the opportunities of this era. When we think about the alternatives, the United States simply has no choice.

Surprise, surprise... the 'most transparent administration ever' is, well, the least transparent.  Not that any of you are shocked by this revelation, but a new report by the Associated Press demonstrates just how secret our government and intelligence agencies have become.  Not only did they claim “national security” over and over like a bunch of drunk parrots, they also claimed the need to protect “internal deliberations.”  Specifically, the number of times the government withheld or censored reports in 2012 was 479,000 times, up 22% from 2011.  The CIA denied 60% of requests, up from 49% in 2011. "In some ways, the Obama administration is actually even more aggressive on secrecy than the Bush administration."

• Dimon’s ‘Harpooned’ Whale Resurfaces With Senate Findings (BBG)
• Greece and lenders fall out over firings (FT) - as predicted 48 hours ago
• Dallas Fed Cap Seen Shrinking U.S. Banking Units by Half (BBG) - which is why it will never happen
• Xi elected Chinese president (Xinhua)
• Russia Bond Auction Bombs as ING Awaits Central Bank Clarity (BBG)
• U.S. and U.K. in Tussle Over Libor-manipulating Trader (WSJ)
• Chinese firm puts millions into U.S. natural gas stations (Reuters)
• In Rare Move, Apple Goes on the Defensive Against Samsung (WSJ)
• Berlin Airport Fiasco Shows Chinks in German Engineering Armor (BBG)
• Ex-PIMCO executive sues firm, says was fired for reporting misdeeds (Reuters)
• Bank of Italy Tells Banks in the Red Not to Pay Bonuses, Dividends (Reuters)

In August 2011, while undergoing cancer treatments that ultimately failed him, Venezuela’s President Hugo Chávez began withdrawing 160 tons of gold from U.S., European and Canadian banks. “It’s coming to the place it never should have left. ... The vaults of the central bank of Venezuela, not the bank of London or the bank of the United States. It’s our gold,” he said on national television as crowds cheered armored trucks carrying an initial bullion shipment to the central bank. The Caracas hoard would today be valued at around $9 billion, were it not for the fact that Venezuela has been selling it — about $550 million worth in the first eight months of 2012, according to the IMF. Did further sales follow over the past six months, with proceeds partly paying for the public largesse that helped fuel Chávez’s victorious up-from-the-sickbed presidential run? Thus, there is something less than $8.5 billion in untraceable gold bullion stashed in an extremely politicized city that’s simmering with grudges and dreams. Physical gold is modestly short of priceless to a criminal. What mala gente or dissident generals wouldn’t want some of Chávez’s rich legacy?

The Biggest Welfare Queens of All ...

Given China’s rapid rise in all aspects of national power, as well as its reluctance to release specific details about many important aspects of its military spending, its annual budget announcement rightly attracts worldwide attention. Last week, China revealed its projected 2013 official defense budget: 720.2 billion yuan (roughly $US114 billion), a figure that continues a trend of nominal double-digit spending since 1989 (the lone exception: 2010). Although China’s limited transparency about specific defense budget line items matters, it shouldn’t distract observers from seeing the bigger picture concerning China’s military development: The People’s Liberation Army (PLA) increasingly has the resources, capabilities, and confidence to attempt to assert China’s interests on its contested periphery, particularly in the Near Seas (Yellow, East, and South China Seas). This development has the potential to seriously challenge the interests of the U.S., its allies, and other partners in the region, as well as access to and security of a vital portion of the global commons—waters and airspace that all nations rely on for prosperity, yet which none own. That’s why the PLA’s development matters so much to a Washington located halfway around the world.

Because having legal authority to buy corporate bonds, ETFs and REITs, in addition to everything else the Fed now buys, is apparently not enough to crush, mangle and suicide its currency, the BOJ is now considering adding yet another "asset" to its cocktail of eligible securities for purchase: those which Buffett once declared weapons of mass financial destruction - derivatives.

Venezuela is a place of severe contradictions. It’s the only country we found that ranked in the top ten regarding improvement in the UN Human Development Index since 2006, and also ranked in the top ten regarding intentional homicides per capita. Usually, these two things do not go together. Similarly, income inequality has been reduced, but has been accompanied by very high inflation. Chavez’ redistribution policies contributed to a large decline in Venezuela’s Gini coefficient since 2002, now the lowest in the region (lower implies less income inequality). However, Venezuela has also experienced the highest inflation in the world over the last 5 years (excluding Zimbabwe, of course), which suggests that Venezuelans have in part been made more equal by having their incomes inflated away. Despite all the challenges, Venezuela’s economic model may well survive given how high oil prices are; but, what no one knows is how much hard currency the government needs to spend to maintain support from the Chavistas.