Archive for December, 2011

2012 Trends

December 31, 2011 Leave a comment

1. Continuing worldwide recession, with fireworks in Europe and the US and – this time – Australia, with the $A finally taking a beating.  Stocks down again.

2. Gold slightly up – or slightly lower.  Silver the same.

3. Bonds – very risky.  Great returns in some pockets (US short term).  Some other pockets will blow your trousers off, especially in Europe.

4. Credit crunch in first half of 2012.

5. At least one major environmental catastrophe.  Possibly two or three.  All man made, and all potentially avoidable.

Sweet dreams.  And to understand the dynamics for the next 10 years, see this suckling video from Max Keiser:


Most Evil People in Australia – 2011

December 31, 2011 Leave a comment

Let’s recap the appalling year that was 2011.  Worldwide recession.  Unprecedented environmental catastrophes, including Fukushima (the disaster that still has no solution).  Banking bailouts.  Corrupt politicians.  Authoritarianism in the West, chaos in the Middle East.  No solutions.  None.

Instead of reviewing events, let’s focus on the human causes of the catastrophe.

In the US, the evil agents of world government, banking control of the economy, political corruption are all out in the open.  Gringrich.   Every senior executive of Goldman Sachs.  Every Federal Reserve Bank official since 1913.

But what about little old Australia?  Who are the most evil agents here?

My vote for most evil agents in 2011:

1. Glenn Stevens: Continuing stealth bailout of banks, facilitating the concentration (and ultimate collapse) of the Big Four model, all-round idiot, slimy to boot.  Nasty piece of work.

2. Wayne Swan (and the nameless senior bureaucrats in Treasury).  Massive stealth bailouts of banks.  Covered bonds allowed to be issued by banks.  Appalling systemic corruption at the highest levels between Macquarie Bank and senior government officials.  Sickening.  Perhaps just a passenger, with Treasury officials from the banks doing the heavy lifting, but sickening nevertheless.

3.  All CEOs of the major banks.  Toothy tiger, Gail Kelly.  Fat British bulldog Smithy.  New Zealand imposters, Clyne and Narev.  Notice how none of them are Aussies.  Can’t have national loyalties when you’re screwing the debt slaves down and crucifying them day after day.  John Symonds is the most misrepresented financial figure in Australia (possibly ever).  Treated as the battler’s hero.  But is a stooge for major financial institutions and is a big reason for the blowing of the housing bubble.  Is an absolute pest, who brings down interest rates only to inflate bubbles and increase private debt levels when they should be contracting.  Should not exist in genuinely free financial markets.

4.  Most mining executives in Australia.  The environmental catastrophe from fracking, water pollution, cyanide poisoning from gold production… the list goes on.  Disasters.  Nearly all of them.

5.  Lowys.  Ripping the heart out of Australian retail.  Oxford Street, Paddington is dying.  So is Chapel Street.  We are forced into rat holes and rabbit warrens to eat and shop.

6.  Triguboff.  Of course.  Worse quality mass private housing in Australia since Theeman.  Destroys local communities with soulless housing mainly for overseas buyers.  Terrible scourge.

But, in essence, we don’t have really evil forces, because we’re just dumb-ass agents of forces created overseas.

Lack of originality seeps into every corner, even into evil.  We’re too derivative even to have good quality evil in this country.

Thank God for small blessings.

Categories: Miscellaneous Musings

Why we are all screwed except for the 0.001%

December 13, 2011 Leave a comment

Categories: Miscellaneous Musings

What the NYTimes should have written

December 11, 2011 Leave a comment

Here is the NYTimes’ twisted characterisation of the difference between the Obama and Merkel visions –

At the heart of the debate is the question of how far governments must bend to the power of markets. Mr. Obama sees retaining the stability of markets and the confidence of investors as a primary goal of government and a prerequisite for achieving any major changes in public policy. Mrs. Merkel views the financial industry with profound skepticism and argues, in almost moralistic fashion, that real change is impossible unless lenders and borrowers pay a high price for their mistakes.

“It’s a battle of ideas,” said Almut Möller, a European Union expert at the German Council on Foreign Relations. “There is a different understanding of how to set up a sustainable economy in a globalizing world. Here there is a major rift.”

It will be difficult to know for weeks, or maybe even in months, which approach is right. But it is clear that the stakes are high, with the health of the world economy, the European Union and perhaps Mr. Obama’s presidential hopes hanging in the balance. Economists have fretted for months that forcing austerity plans on Europe’s troubled economies — while a good long-term solution — could lead to deep recessions in the short term, compromising any chance for effective change.

On a political level, Mrs. Merkel could look back on last week’s meeting of leaders in Brussels and declare, “We have succeeded.” Where her mentor, former Chancellor Helmut Kohl, failed, Mrs. Merkel managed to push through enforceable oversight of government spending that would allow the European Court of Justice to strike down national laws that violate fiscal discipline.

Initial market reaction to the Brussels meeting was positive, but that has happened before as deal after deal has been struck between European leaders. Skeptics say that, economically, Mrs. Merkel, the hard-line austerity queen of Europe, has won a hollow victory, one that will fall apart like every other solution that was proclaimed as lasting but proved to be fleeting.

“If the new arrangement turns out to be too toothless to enforce the rules, we’ll be back to square one,” said Thomas Klau, a political analyst and head of the Paris office of the European Council on Foreign Relations.

Just ahead of Mrs. Merkel’s unexpectedly robust success, Mr. Obama issued his unheeded warning from across the Atlantic. “There’s a short-term crisis that has to be resolved,” he said, “to make sure that markets have confidence that Europe stands behind the euro.”

Mr. Obama is fiercely proud of the record he achieved in keeping not just the United States but also the entire world out of an acute financial meltdown after 2008, presiding over enormous stimulus spending in tandem with unrestrained support from the Federal Reserve. The president and his allies now say that in doing so, they may well have prevented the world from falling into another Great Depression.

By ignoring the short-term threat, American officials say, Mrs. Merkel is unwittingly courting the very threat they so narrowly managed to keep at bay. Strong governments can borrow cheaply, mainstream economists on both sides of the Atlantic argue, and have an obligation to intervene more aggressively than they would in normal times to make up for the slump in private demand.

Germans are staunchly opposed to any solution that involves greater debt, but even more so to policies that might court inflation, their historic obsession. Policy makers in Berlin and at the Bundesbank headquarters in Frankfurt have urged restraint on the part the European Central Bank, insisting it should not buy up too many bonds from heavily indebted euro zone countries.

I have a different take.

Let me write this article again –

At its heart, Germany and the US have different views on the danger of the banking system and financial markets.  The US currently views banking as not only benign, but vital to the health of the economy.  Fractional reserve banking is seen as the font of wealth and dynamism.  Germany sees the making of real things, rather than embezzlement and counterfeiting, as the source of real wealth.  Who has the correct view?  Self-evidently Germany.  But that doesn’t mean the bully can’t steal indefinitely and call it wealth building.  Which is why the UK decided to protect its banks from regulation and why the US decided to save its banking system instead of the broader economy.

This is a fight over the legitimacy and efficacy of modern banking.  One side sees it as deeply flawed and in need of control and regulation.  The other side sees it as morally beneficial – or at least as morally neutral – and does not have an aversion to embezzlement but rather celebrates it as a source of national wealth.

The unfortunate reality only occurs at the end of the Ponzi scheme, when the scales fall from people’s eyes and reality is revealed.  It has been – all along – a scam to induce the productive to transfer their effort and toil for little or no value.  They have been enslaved.  Germany doesn’t like enslavement.  The US doesn’t like giving up the long-standing master-slave relationship that it has found impossible to forgo since its inception.

It is about morality.  And the wealthy today are rarely moral.  They rarely have been.

Banks – The Ultimate Safehaven Employer

December 7, 2011 Leave a comment

If I only knew this when I was 18.  Aim for a Big Four Bank and don’t look back.  From the SMH:

When it comes to banking in Australia a strong tradition is emerging, that is the tradition of taking from the poor to give to the rich.

And so it is that, despite taxpayer guarantees and all manner of taxpayer largesse afforded the big banks, they continue their cowardly stand-off over mortgage rates in the wake of yesterday’s cut to the official cash rate.

This is the ultimate game of bluff. Nobody wants to go first because nobody wants to pass on the Reserve Bank’s full 25 basis point reduction.

And the reason for this is twofold: firstly if the bankers pass on the full rate cut that will put a little more pressure on their profit margins. More pressure on profit margins translates into more pressure on the share price, which in turn translates to, potentially, less executive pay.

This is the great dread, the menacing spectre of a decrease in $10 million executive salaries due to lower profit growth and its impact on long and short term incentive schemes.

If somebody else however, that is another bank, “does the dirty work” and goes first by withholding all or some of the official rate cut then this “first-mover” gets the bad publicity while all the rivals sit out the day of shocking headlines before cutting their mortgage rates by a tad more than the first-mover.

The big banks tend to take it in turns to be the ugly banker. Westpac chief Gail Kelly did it two years ago and departing CBA chief Ralph Norris did it last Melbourne Cup day.

The stand-off then, this game of chicken, comes down to the fear of poor publicity and consequent threat to market share, and therefore profits, by being first-mover.

In the banks’ defence, their primary responsibility is to their shareholders, not their customers, so as long as management tactics don’t turf off too many customers, thereby affecting the share price and shareholders, they have done their job. Luckily for them, their pay also depends on appeasing and delivering for shareholders.

This brings us to the second reason for not wanting to pass on the official rate cut. It is not greed alone. Although the banks, with their collective $20 billion in bottom line profits, can definitely absorb a 25 point cut to mortgage rates, roughly one-third of their funding for mortgages hithers from overseas markets.

That is, two-thirds of mortgage funding derives from deposits but the rest comes from bond markets, mostly offshore. This sovereign debt crisis in Europe has made investors particularly wary about bonds, even bonds which are effectively guarantees by a rock-solid sovereign credit such as Australia.

So the price of getting this funding has gone up – some people believe it might freeze completely – and therefore banking costs are potentially on the rise. It gets back to profit growth and executive salaries again because the price is not prohibitively high at the moment but our banks don’t want to pay any blow-out in costs or it will affect their profits.

At the moment it is “rainy day” stuff. Witholding the Reserve Bank rate relief means protecting profits from the potential for a blow-out in wholesale funding costs. It is insurance against the “Armageddon Scenario”.

But this only notionally helps taxpayers, that is to shore up the system against collapse. There is a disconnect here though; executives and shareholders benefit by the banks holding back on rate relief but those who provide the guarantees get nought, except vicariously via some funding fees paid to Treasury.

But since the very survival of the banks and the risks of the bankers are underpinned by taxpayers there may be little point in the fees anyway.

RBA assistant governor Guy Debelle spelt out the safety net in his address to Risk Australia Conference in August 2010:

The institutional framework determines the point at which the public sector needs to be called on. But in terms of insurance of the system as a whole, at some point, it has to be provided by the public sector.

I do not believe it is socially optimal for the individual entity to fully insure itself. It would be excessively costly for the financial sector to hold enough capital and liquidity to enable it to survive a freezing of capital markets of the type that occurred in 2008. At some point, it is not even affordable.

There you have it – a protected species. The government will bail out the banks. And if that is the case, there is a strong argument that, as they are underpinned anyway – mollycoddled unlike any other “private business” in the country – they should do as Wayne Swan tells them.

In a metaphorical sense the banks are performing a “Reverse Robin Hood”, taking from the poor taxpayer to give to the rich chief executive, and all with the imprimatur – albeit sometimes reluctantly – of King Wayne.

Right now, the bankers will be watching this website and the assorted news services, waiting for a move from their rivals, evaluating the public mood. What this really amounts to however is “price signalling”. This behaviour sits at the edge of the law. The longer the stand-off goes on the more obvious it is that nobody wants to move at all. They are nodding and winking to each other.

In this way, they can seek the comfort of the pack. No banker is worse than the other. Absent external pressure they are emboldened in their “sit tight and do nothing” strategy. Only one thing is sure, when there is a public utterance it is London to a brick that the public will hear how tough it is out there.

Categories: Miscellaneous Musings

Welcome to the Plantation Economy 2011

December 6, 2011 Leave a comment

From Bloomberg:

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

$7.77 Trillion

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

The solution: Short everything

December 6, 2011 Leave a comment

From Dan Amoss:

All central banks are desperate to stop stress from building in the global banking system. Despite what they say, job No. 1 of every central bank is to do whatever it takes to prevent a disorderly collapse of banks caused by “bank runs.” These central bankers are crazy, and nothing will stop them from supporting the status quo.

A group of the largest central banks in the world announced a coordinated easing program on Wednesday morning. This will involve printing more of their home currencies and lending these currencies to other central banks, which, in turn, will re-lend these currencies to local banks.

Many European banks have, essentially, been cut off from borrowing in the private credit markets. So central banks are going to ignore the fact that most of these European banks are insolvent and offer them easier and easier access to long-term funding in whichever currency they need to borrow.

The entirely predictable result will be similar to what we see in the US: zombie banks whose assets will feature fewer and fewer private-sector loans and more and more government bonds.

How is this supposed to foster global economic recovery? It seems like a perfect accelerant for global stagflation.

In other words, the world will have plenty of consumers, financed by government budgets, which are, in turn, financed by both compliant private banks and central banks. But will the world have enough producers?

The Fed and most of the other central banks believe the Western economies suffer from “deficient demand” and, therefore face the risk of “deflation.” But I disagree…vehemently. Bad credit needs to default and infirm corporations need to perish if the Western economies are to have any chance of beginning a new phase of renewal and growth.

But that’s not the plan that’s on the table. “Plan A,” in the modern playbook of central banking is to artificially support asset prices and to bail out sickly too-big-to-fail banks. The plan sounds like it could be relatively painless, but it will be extremely painful.

In the end, savers of paper money will pick up the tab — over a multiyear period — for all of these government- and banking-created disasters. The system of government, banking and central banking, as it’s currently configured, will force the responsible to bail out the irresponsible…once again.

Once central banks start lending to insolvent banks, there can be no orderly exit. When sovereign defaults occur — and they will, in Greece and Portugal, and probably Italy and Spain — there will be an acceleration of money-printing to keep the system propped up.

We may even see the Fed and the ECB lend to the IMF, which will re-lend cash to the PIIGS in the form of a “debtor in possession” loan that will, effectively, allow European banks to keep pretending that they have no losses on PIIGS bonds.

Here’s a fun game: Try to imagine your own fiat-money-driven, rule-changing scenario for “rescuing” the Western financial system. There’s a pretty decent chance the central bankers will try it at some point.

But there’s a big difference between press releases that goose the stock market and policies that foster genuine economic growth. This week, for example, the public in Greece and Italy are likely to be furious when their “technocratic” leaders from the banking establishment sign away their sovereignty to the EU and the IMF at this week’s summit. There will be more riots and strikes, which will make the goals of budget austerity even less likely than they are already.

Despite the obvious state of unavoidable depression in the PIIGS economies, the EU and ECB will get more and more radical in their tactics to protect the core EU banking system from collapsing under the weight of credit exposure to the PIIGS. All of this action is being done to protect banks, and as a result, will steadily suck the lifeblood from the private sector.

In short, I am not optimistic.

Therefore, my strategy at the Strategic Short Report remains the same: Identify the likeliest victims of the ongoing credit contraction in the private sector. American Airlines (AMR), a company I urged my subscribers to sell short several months ago was a classic example. AMR just filed for bankruptcy. There will be many more.