JPMorgan Chase and Central Banking

On Friday, May 1, 2012, JPMorgan Chase said it suffered a $2 billion trading loss. Some commentators have suggested that the huge loss emanates from so-called proprietary trading or placing risky bets using the bank’s money. The loss raised the credibility of the Volcker rule, which restricts banks from trading their own money. Despite JPMorgan Chase’s large loss, the opponents of the Volcker rule are of the view that the rule, if it is introduced, will only destabilize the financial markets and make things much worse. Hence they would like to allow market forces to do their job.

Do Fewer Banking Controls Always Equate with a Free Market?

The proponents for less control in the banking industry hold that fewer restrictions imply a better use of scarce resources, which leads to the generation of more real wealth.

It is true that a free banking environment is an agent of wealth promotion through the efficient use of scarce real resources, while controlled banking stifles the process of real wealth formation. However, it is overlooked by the opponents of the Volcker rule that the present banking system has nothing to do with free banking and thus a free market.

What we have at present is a banking system within the framework of the central bank, which promotes monetary inflation and the destruction of the process of real wealth generation through fractional-reserve banking.   Read more»

The Emperor Is Naked

A “paralyzed” Federal Reserve Bank, in its “final days,” held hostage by Wall Street “robots” trading in markets that are “artificially medicated” are just a few of the bleak observations shared by David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget. He is also a founding partner of Heartland Industrial Partners and the author of The Triumph of Politics: Why Reagan’s Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy. The Gold Report caught up with Stockman for this exclusive interview at the recent Recovery Reality Check conference.

The Gold Report: David, you have talked and written about the effect of government-funded, debt-fueled spending on the stock market. What will be the real impact of quantitative easing?

David Stockman: We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble.

Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector – both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon.   Read more»

Risk Off Gains a Foothold

There were important developments this week in the realm of market risk dynamics, developments that increased the likelihood that problematic de-risking/de-leveraging dynamics have begun to gain a foothold.

Let’s start with Europe. First, the Greek elections have created great uncertainty, hence, market risk. Voters hammered the two establishment parties, the main New Democracy and Pasok parties that were responsible for negotiating the two EU/IMF/ECB Greek bailouts. Fully 70% of the votes were cast for parties committed to abrogating European-imposed austerity measures. The surprise beneficiary was Syriza, the “Party of the Radical Left,” having placed second to New Democracy. Syriza is led by the radical and charismatic Alexis Tsipras, who this week gained additional support with his message that previous agreements are “null and void” and that Greece is well-positioned to call Europe’s bluff (blackmail the blackmailer, some have suggested).   Read more»

Global Meltdown of Historic Proportions & A Fork in the Road

Why Civilized People Buy Gold

“Gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939 but civilized people don’t buy gold – they invest in productive businesses.” ~ Charlie Munger

Charlie Munger is Warren Buffett’s partner. He is 88 years old. You can see his remark in this brief extract from an interview on CNBC. That sounded clever. But cleverness can conceal a great deal.

Jews in Vienna were civilized people. Uncivilized people had been running the government ever since March 1938. The Nazis were in charge.

The trouble facing civilized people who are under the control of uncivilized people is that they suffer from an illusion. They don’t understand the degree to which the uncivilized people are uncivilized.   Read more»

The Fed’s Jelly Donut Policy

A Jelly Donut is a yummy mid-afternoon energy boost.

Two Jelly Donuts are an indulgent breakfast.

Three Jelly Donuts may induce a tummy ache.

Six Jelly Donuts — that’s an eating disorder.

Twelve Jelly Donuts is fraternity pledge hazing.

My point is that you can have too much of a good thing and overdoses are destructive. Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn’t giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish. Last year, when asked why his measures weren’t working, he suggested it was “bad luck.”

I don’t think luck has anything to do with it. The blame lies in his misunderstanding of human nature. The textbooks presume that easier money will always result in a stronger economy, but that’s a bad assumption. Here is a good example of how a real family responds to monetary policy.   Read more»

Revenge of Risk Off?

In respect for economic history and brilliant but long-dead monetary thinkers, some years back I assigned the “inflationist” label to the outspoken Keynesians. Paul Krugman now calls his analytical/policy adversaries the “austerians,” an entertaining update to the wretched “liquidationists” and “Bubble poppers” from bygone eras. In this epic battle of inflationists vs. austerians, I’ll place my bets on the superior constructs of the “austerian” analytical framework. And, as the perennial optimist, I remain hopeful that contemporaneous analysis will at some point help (re-)expose the many flaws and misrepresentations of inflationist ideology.

To be sure, those promoting only more aggressive fiscal and monetary stimulus ignore Credit theory and financial history. There is absolutely no discussion of Credit Bubbles or financial Manias – as if there’s no evidence that either has ever existed. Dr. Krugman proposes only more egregious deficits and central bank monetization without factoring in myriad risks, including the risks of Credit revulsion, currency collapse and global financial meltdown. Rather than 2008 developments alerting officials to systemic Credit collapse vulnerability, the inflationists have hung their (and everyone’s) hats on the specious “100-year flood” premise.

When the inflationists point to consumer price inflation as the predominant risk to their suggested policy course (and then quickly dismiss it), it just strikes me as disingenuous. They somehow ignore how the current policymaking course is increasingly impairing the creditworthiness of the heart of our and the world’s financial systems. They disregard how these policies have patently contributed to unprecedented global economic imbalances. Moreover, the inflationists somehow remain oblivious that policy interventions have fomented dangerous speculative dynamics throughout global securities markets.   Read more»

Jim Grant: “The Federal Reserve Is The Vampire Squid Of Vampire Squids”

Munch’s “The Scream” may be all the rage today, but to Jim Grant, in his latest interview on Bloomberg TV, the record price paid for the painting is not so much a manifestation of modern art as one of modern currency: “This is the flight into things from paper” . Thus begins the latest polemic by the Grant’s Interest Rate Observer author whose topic is as so often happens, the Federal Reserve (for his latest definitive expostulation on why the Fed should be disbanded and why a gold standard should return, delivered from the heart of Liberty 33 itself, read here). The world in which we invest is a world of immense wall to wall manipulations by our friends in Washington. And people get off on Goldman Sachs because it has done this and this, it is pulling wires… The Federal Reserve is the giant squid of squids, it is the vampire squid of vampire squids.”

He continues: “They – the vampire squids – have manipulated virtually every single price and valuation in the capital markets. People ought to recognize when they invest that one of the unspoken risks is the risk that this hall of mirrors, this Barnum and Bailey world that the Fed has created for us is going to vanish one day because they will not be able to hold it any more… It’s not as if there is nothing to do in investing, but one must always keep in mind that the valuations that we see, that the prices that we watch flicker across the tape are prices that are fundamentally manipulated by these well-intended, dangerous people in Washington called the Federal Reserve“.

And to think that 3 short years ago Grant would have been branded a loony, tin-foil hat wearing gold bug, while now it has become trendy for hedge fund managers to bash the Fed with impunity. It is all downhill from here.

Link to Video:

http://www.zerohedge.com/news/jim-grant-federal-reserve-vampire-squid-vampire-squids

Can an Economy Prosper through Currency Devaluation?

Many policymakers believe that their country’s economy would benefit from a fall in the foreign exchange value of its currency. The line of thinking goes something like this: “A fall in the value of our currency relative to the currencies of our trading partners will make our manufacturers more competitive on the world stage, thus allowing us to have a more positive trade balance, stronger economic growth and a generally higher level of employment.” The only problem with this line of thinking is that it is completely wrong.

The first of two keys to knowing why devaluing the currency won’t achieve the intended result — assuming that the intended result is a stronger economy — is to understand that a sustained reduction in a currency’s foreign exchange value can only happen via a comparatively high rate of monetary inflation. The second key is to fully understand how monetary inflation affects the economy.   Read more»

The Many Facets of Roro

April 21 – Financial Times (Bryce Elder): “Markets are broken. Accepted investment wisdom has been overturned and the basic tenets of value and diversification no longer work. The financial crisis put the market into a volatile ‘risk on, risk off’ – or Roro – mode for which there is no cure. For many investors, this has made stockpicking seemingly an impossible task. Markets once responded to their fundamentals. Now, disparate assets have a much greater tendency to move together, individual characteristics lost. Trusted strategies such as relative value and currency carry trades are nearly useless, overwhelmed by daily market-wide volatility.”

The above is the introductory paragraph to an FT article, “‘Roro’ Reduces Trading to Bets on Black or Red.” Market players have by now become seasoned to the “risk on, risk off” (“Roro”) dynamic. Yet few are willing to concede (publically) that global markets are indeed broken – and likely irreparably. As highlighted in the article, this trend began to take root with the unfolding financial crisis back in 2007. The investing world then turned essentially bimodal with the Lehman Brothers collapse. Approaching four years later, the market landscape is providing no indication that it has even the slightest inclination to return to normal. This is a critical issue.   Read more»

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Fat Gold Fingers – China Buys Gold…No Matter Who’s Selling

Someone is selling in size…Someone is buying in size. That’s what makes markets, as the saying goes. But that’s also what makes market manipulations, according to the bloggers at Zero Hedge.

The seller in this case is very large and very sloppy, perhaps intentionally so. The buyer is also very large, but very patient and methodical. Trapped between these two powerful opposing market participants we find a “range-bound” gold market. Let’s take a closer peek at the curious goings-on…   Read more»

Doug Noland’s Credit Bubble Bulletin

Selected Notes

April 30 – Bloomberg (John Gittelsohn): “The U.S. homeownership rate fell to the lowest level in 15 years in the first quarter… The rate dropped to 65.4% from 66% in the fourth quarter and fell a full percentage point from a year earlier…”

May 1 – Bloomberg (Lucy Meakin and Emma Charlton): “European Central Bank measures to stem the region’s debt crisis threaten instead to undermine the euro. ECB loans worth more than $1.3 trillion have been recycled into government bonds, capping borrowing costs. As Italy’s reliance on its local institutions increases and Spanish banks accelerate purchases of domestic government securities, however, the economic ties that bind the fate of euro members to each other loosen, weakening the incentives for cross-border support to defend the currency union. ‘As the local bond markets have become owned only by domestic institutions, there is less and less incentive for the other countries to support and bail out one of those,’ said Stephane Monier, who helps manage more than $150 billion as head of fixed income and currencies at Lombard Odier Investment Managers. ‘Basically you’re planting the seeds for the disintegration of the euro zone.’”

May 2 – Bloomberg (Giles Broom): “Rich Americans renouncing U.S. citizenship rose sevenfold since UBS AG whistle-blower Bradley Birkenfeld triggered a crackdown on tax evasion four years ago. About 1,780 expatriates gave up their nationality at U.S. embassies last year, up from 235 in 2008… The embassy in Bern, the Swiss capital, redeployed staff to clear a backlog as Americans queued to relinquish their passports.”   Read more»

Doug Noland’s Credit Bubble Bulletin

[Selected Notes]

April 25 – Bloomberg (Helene Fouquet and Tony Czuczka): “French Socialist Francois Hollande, the leading presidential candidate, said France won’t ratify the European agreement pushed by Germany to tighten budget rules if he’s elected. ‘There will be a re-negotiation,’ Hollande told journalists… ‘Either there will be a new treaty, or there will be a modification of the existing treaty. It’s about negotiation.’ The comments put Hollande on a collision course with German Chancellor Angela Merkel, who has championed debt reduction as the key to ending the region’s fiscal crisis.”

April 26 – Bloomberg (Michelle Kaske): “U.S. municipalities from California to Florida are selling the most debt in three years to pay for their workers’ retirements in a bet that investment returns will exceed borrowing costs. Fort Lauderdale, Florida, is among issuers considering a sale this year, following an offer by Pasadena, California, last month. Illinois borrowed a combined $7.2 billion in 2010 and 2011. The governments are placing taxpayers at risk by papering over pension deficits with taxable securities. The strategy can backfire if the proceeds don’t earn enough to pay off the bonds.”

M2 (narrow) “money” supply jumped $26.1bn to a record $9.854 TN. “Narrow money” has expanded 7.4% annualized year-to-date and was up 9.7% from a year ago…   Read more»

Doug Noland’s Credit Bubble Bulletin

Selected Notes

April 19 – UK Telegraph (Ambrose Evans-Pritchard): “Controversy is raging in Germany over soaring ‘payments’ by the Bundesbank to shore up Europe’s monetary system and cope with a tidal wave of capital flight from southern Europe. Professor Hans-Werner Sinn, head of Germany’s IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. ‘The euro-system is near explosion,’ he told Austria’s Economics Academy… Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors – often by the back-door – that will saddle Germans with ruinous losses one day.

“‘It is a horror scenario,’ he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped. Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens…”   Read more»

IMF Says European Banks May Have to Sell $3.8 Trillion in Assets

European banks could be forced to sell as much as $3.8 trillion in assets through 2013 and curb lending if governments fall short of their pledges to stem the sovereign debt crisis or face a shock their firewall can’t contain, the International Monetary Fund said.

In a study of 58 banks including BNP Paribas SA (BNP) and Deutsche Bank AG (DBK), the IMF forecast that under such circumstances, gross domestic product in the 17-country euro region would be 1.4 percent lower than now expected after two years. Even under its baseline scenario, the IMF sees banks’ combined balance sheets possibly shrinking by as much as $2.6 trillion.   Read more»

More U.S. cities set to enter default danger zone

America’s swelling ranks of fallen municipal borrowers have been blamed in the past year on ‘what-were-they-thinking’ causes, be it a Taj Mahal sewer system in Alabama or an overpriced trash incinerator in Pennsylvania’s capital city of Harrisburg.

But the next series of major cities and counties in danger of defaulting on their debt can hardly point to one single decision for their malaise. Whether it be Detroit, Miami or Providence, Rhode Island, their problems have a lot more to do with financial policies that put them on course to live well beyond their means.   Read more»

Doug Noland’s Credit Bubble Bulletin

Selected Notes

April 10 – Bloomberg (Lucy Meakin):  “German two-year note yields dropped to less than the rate on similar-maturity Japanese government bonds for the first time since Bloomberg began collecting the data in 1990, based on closing-market rates.”

April 11 – Bloomberg (Meera Louis):  “The U.S. government’s budget deficit widened 5.3% in March, as outlays increased on recurring benefit payments and a subsidy re-estimate for the Troubled Asset Relief Program.  The shortfall expanded to $198.2 billion from $188.2 billion a year earlier… ‘The government budget deficit is still bursting at the seams with little chance that either side of the aisle is willing to shake hands and get a deal done,’ Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi… said… ‘The economy is growing again but we can’t grow our way out of these trillion dollar deficits.’”

M2 (narrow) “money” supply jumped $21.9bn to a record $9.858 TN.  “Narrow money” has expanded 8.5% annualized year-to-date and was up 9.8% from a year ago…[Folks, that’s inflation!!!]   Read more»

Brazil president Dilma Rousseff blasts Western QE as ‘monetary tsunami’

Brazil’s president Dilma Rousseff has attacked Western governments for creating a “monetary tsunami” as they pursue quantitative easing (QE) policies in an effort to revive their economies.

In her first visit to the White House since her election more than a year ago, Ms Rousseff voiced concern over an “expansionist” monetary policy that has caused a “depreciation in the value of currencies of developed countries, thus impairing growth” in other nations.

The Brazilian government has taken aggressive steps to try to tame the strength of its currency and protect exports, with the country’s central bank intervening in the currency markets in recent weeks.

South America’s biggest economy recorded a trade deficit of $8.2bn (£5.2bn) with the US last year as robust growth fuelled demand for imports.

“Brazil will continue to take whatever actions required to offset the detrimental effects of QE policies,” Ms Rousseff said.

The world’s fast-growing emerging economies are concerned that QE policies in the US are a thinly disguised effort to weaken the dollar and lift US exports.

The Brazilian leader’s attack echoes those made by countries including China, and suggest that any further QE by the Federal Reserve will trigger an international backlash.

Although the majority of economists are not forecasting more QE, Friday’s weaker jobs report has once again raised the possibility of the US Federal Reserve doing more. Ben Bernanke, the Fed chairman, has consistently emphasised the hurdles that the recovery of the US economy still faces.

With the Presidential election just over six months away, most believe that if the Fed is going to unleash a further round of QE, it will have to do so at its meeting in June. The next meeting scheduled meeting of the Federal Open Market Committee after June is in October, just a month before Americans go to the polls.

Ms Rousseff added that Brazil’s trade balance with the US needs to be “progressively balanced”.

President Barack Obama is keen for corporate America to secure a share of a range of opportunities in Brazil, including the infrastructure development the country requires to host the Olympics in 2016 and the World Cup in 2014.

Doug Noland’s Credit Bubble Bulletin

Selected Notes

April 2 – Bloomberg (Sharon Smyth): “Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings. Home prices will decline 12% to 14%, according to research and advisory company R.R. de Acuna & Asociados…”

April 3 – Dow Jones (Christopher Emsden and Giovanni Legorano): “When Italian Prime Minister Mario Monti returns from a self-styled road show in Asia, he will find a citizenry reeling from new taxes, reports their neighbors don’t pay taxes, soaring utility bills and comments from business leaders that the future is going to be worse. ‘The government risks getting caught up in mud and quicksand,’ Enrico Letta, a senior official in the center-left Democratic Party and a strong Monti supporter, said…”

M2 (narrow) “money” supply jumped $37.6bn to a record $9.825 TN. “Narrow money” has expanded 7.8% annualized year-to-date and was up 9.5% from a year ago.   Read more»

None of the World’s 20 Safest Banks are in the US

Global Finance is publishing a list of the world’s top 50 safest banks in their April issue. Rankings were determined by credit rating and balance sheet. Only major institutions qualified.

Main takeaway: American banks are really not safe at all, at least compared to their global peers.

Not a single U.S. bank figured in the top 20.

Just five are in the top 50.

Full Story: http://www.businessinsider.com/survey-no-us-banks-among-worlds-top-20-safest-2012-4