As opposition party offices are raided and streets continue to fill with protesters, the “precarious” funding sitaution in the nation is beginning to flash red as interbank lending rates spike to 20%. Banks, clearly concerned about their own and each other’s liquidity in the face of potential deposit runs (and the accompanying counterparty risk) and huge demand for liquidity. The hryvnia is falling and bond yields are rising but it is the spike in KievPrime overnight rates that is most concerning – and policy-makers have little room to help.
“Federal Reserve officials are closer to winding down their controversial $85 billion-a-month bond-purchase program, possibly as early as December, in the wake of Friday’s encouraging jobs report.”
That from the much-deservedly maligned John Hilsenrath, widely regarded to be the Federal Reserve’s ventrioloquist dummy over at the Wall Street Journal, as in, from God’s mouth to the jittery multitudes. Of course the jobs number was just another highly seasoned and over-leavened cupcake from the Bureau of Labor Statistic’s magic hedonic oven, so you can be sure that the predicate of that statement is… how to put it delicately… the latest arrant lie with hypothetical icing on top.
Everybody knows that the Federal Reserve’s money-pumping operations have become a replacement for what used to be an economy. Therefore, no more money pumping = no more so-called economy. It’s that simple. But it doesn’t mean that the Federal Reserve won’t make a gesture and I wouldn’t be surprised if they try it during the season that Santa Claus hovers over the national consciousness — or what little of that remains when you subtract the methedrine, the Kanye downloads, the fear of an $11,000 bill for an emergency room visit requiring three stitches, and all the other epic distractions of our time.
The next meeting of the Fed’s Open Market Committee (FOMC), where such things as taper-or-not are considered, is Dec. 17. The Fed has to make some kind of gesture to retain any credibility, so I suspect they’ll go for a symbolic shaving of five or ten billion a month off the current official bond-buying operation number of $85 billion a month (or $1.2 trillion a year). If they don’t do it, no one will ever believe them again. I call it the “head-fake” taper, because it is essentially a false move.
The catch is that the Fed has more than one back door for vacuuming up all sorts of other miscellaneous financial trash paper securitized by promises already broken, moldy sheet-rock housing, college loans defaulted on, car payments that stopped arriving eighteen months ago, credit cards maxed to oblivion, sovereign foreign economies visibly whirling down the drain, and untold casino bet derivative hedges. Loose talk has it that the Fed is buying up way more dodgy debt than the official number of $85 billion a month. And why not? They bailed out way more than the $700 billion official TARP figure back in 2009 — everything from insolvent European banks to Floridian motels on the REO junk-pile — so nobody should take any particular taper number seriously. They’ll just backfill as necessary.
But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and real estate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go. China alone announced very loudly last month that US Treasury debt paper was giving them a migraine and they were done buying anymore of it. Japan is in a financial psychotic delirium scarfing up its own debt paper to infinity. Who’s left out there? Burkina Faso and the Kyrgystan Cobblers’ Union Pension Fund? The interest rate on the US 10-year bond is close to bumping up on the ominous 3.0 percent level again. Apart from the effect on car and house loans, readers have pointed out to dim-little-me that the real action will be around the interest rate swaps. Last time this happened, in late summer, the too-big-to-fail banks wobbled from their losses on these bets, providing a glimpse into the aperture of a black hole compressive deflation where cascading chains of unmet promises blow financial systems past the event horizon of universal default and paralysis where money stops moving anywhere and people must seriously reevaluate what money actually is.
I think we’ll see them try the head-fake taper. They must. It will be backstopped by and saturated in statistical lying, and everyone will have trouble parsing the probable effect because the chronic dishonesty loose in this land will have deformed and impaired all metrics of true value. At the heart of whatever remains of this economy is fire, and the officers of the Federal Reserve are playing with it. Pretty soon, we’ll get the un-taper, the final surrender to the crack-up boom that awaits before the western world has to go medieval.
I didn’t study business before I became a business reporter. I studied architecture, and of all the knowledge I acquired the most important was that I was not destined to be an architect.
Journalism was a lucky accident, born of necessity, and business journalism even more so. The underdog paper that would hire me in 1994 was the Financial Post and so I dove into the world of business.
From the beginning, I admired the untidy elegance of the way an economy functions. I believed in and even came to revere the importance of markets — that is, well-oiled machines whose only real job is to set prices.
Markets work to ensure that resources are allocated efficiently. Accurate prices are at the heart of that efficiency and the result isn’t some remote or arcane thing, it is prosperity and happiness for humans. Well-priced markets are essential. Fairness is essential.
‘Whenever it is possible to fix a price for personal gain, someone is doing it’
Over time, I watched a number of changes take place aimed at levelling the playing field. From the long ago days when stocks were traded by a group of men who met under a buttonwood tree in lower Manhattan, to a game that is pitched to grandmothers — “Manage your own money! You too can be wealthy!” — the rules have changed.
In the late 1990s, as technology stocks bubbled to a temperature that would burn some investors for a decade or more, rules about fairness of pricing were implemented. The point of the most important such rule, known as Regulation Fair Disclosure, was that insiders — or the “smart money,” as professional money managers are sometimes called — shouldn’t have an unfair edge in the form of access to information. Prices are only perfect if all information is priced in and the more participants there are to that process, the more pristine the outcome. Or so the thinking went.
How naive that view now seems. How innocent. Because for the last two years, as the globe staggered back to its feet in recovery from the body blow delivered by fast moving investment banks that lost sight of basic risk management policies, the number of examples of ways in which the markets are rigged are too numerous to count.
Each one seems more shocking than the last.
Insider trading, as old as the hills, is now a billion-dollar enterprise at certain investment funds and part of the culture of many. Investment banks may be gaming the price of some commodities, with a subsequent cost that reaches every corner of the planet. Currency traders collude with each other to make tiny profit on their trades, writ large over billions of executions.
The system is rigged
Then the most shocking of all, a key international interest rate used to set trillions of dollars of prices, is being manipulated. LIBOR, the London Interbank Offered Rate, is like the foundation of a house that holds billions of people. If that foundation is askew — as we now know it was — what does that say about huge parts of the markets and those prices we thought were based on real information? A mirage.
For this business journalist, the shock of that was intense. There will always be fraudsters — smooth-talking snake oil pitchmen — and regulators are on the lookout for them. But the evidence is mounting that whenever it is possible to fix a price for personal gain, someone is doing it.
That’s not just a disappointment; it undermines the entire system. Tiny price distortions get magnified across the global economy. We all pay, even if we don’t really know it. Most important, if market participants — from a sophisticated bond trader trying to price a bond based off a benchmark rate, to your grandmother putting her life savings into a stock — don’t believe in its fundamental soundness, don’t believe that prices are as fair as prices can be, the entire thing falls apart.
It happened in Holland in the 17th century, when tulip bulbs became an irrational bubble. It has happened often in fact, in tiny pockets, from land in Florida to London Bridge. The outcome of those incidents is distrust and an unwillingness to invest there again.
So what is the outcome if those kinds of mispricings are everywhere? That’s a thought too stark to contemplate. Better that investors — the “dumb money” that is you and me — sit up and take notice before it’s too late. If indeed it isn’t already.
Japan’s PM Shinzo Abe has seen his approval ratings collapse for the first time since his ‘devalue-to-glory’ strategy was unveiled a year ago. Kyodo News reported, support for Mr. Abe fell 10.3ppt to 47.6%, while Japan News Network reported a 13.9-point fall to 54.6% as WSJ reports, public concern over the controversial secrecy bill (designed by Kafka, inspired by Hitler) and its nationalist overtones merelyexacerbated Japanese people’s concerns about their pocketbooks (as incomes stagnate and costs rise). As Abe plays lip service to economic issues (with a very Maduro-like speech recently on profit margins and wage increases), there is little but public outrage to hinder his plans as his ruling Liberal Democratic Party has big majorities in both houses of parliament, with no election scheduled until 2016. So much for Abenomics…
*JAPAN UPPER HOUSE PANEL ADOPTS SECRECY BILL AMID UPROAR
*ABE: SECRETS BILL NECESSARY TO PROTECT LIVES AND PROPERTY
The right to know has now been officially superseded by the right of the government to make sure you don’t know what they don’t want you to know. It might all seems like a bad joke, except for the Orwellian nature of the bill and a key Cabinet member expressing his admiration for the Nazis, “just as Germany needed a strong man like Hitler to revive defeated Germany, Japan needs people like Abe to dynamically induce change.”
All three media surveys signaled public concern after the ruling coalition steamrolled the passage of a controversial bill to set stricter penalties for intelligence breaches amid objections from opposition parties.
Around 80% of those questioned in all three polls felt that the bill wasn’t thoroughly debated in parliament.
In a news conference Monday, Mr. Abe said it was necessary to push through the secrecy bill quickly to protect public safety, but acknowledged the criticism.
“We must sincerely and humbly accept the people’s harsh criticism,” Mr. Abe said, adding that “I myself should have taken more time to carefully explain” the bill.
Mr. Abe’s high poll numbers early in his rule created a virtuous circle that allowed him to push through policies that were seen as aiding the economy and lifting the stock market, which in turn further sustained his popularity, allowing him to win a key election, and extend his power.
His sustained high support rate over the past year has been unusual among recent Japanese prime ministers. Starting with Mr. Abe’s own first one-year term, which ended abruptly in September 2007 after his party lost an election and his popularity plunged, Japan ran through six unpopular prime ministers in six years.
One big change for Mr. Abe between his first term and his second has been his focus in his most recent stint on pulling Japan’s economy out of its long slump. Long seen as a conservative nationalist, devoted to building up Japan’s military and global clout, he devoted much of his first term to those causes.
“The Cabinet must understand the risks involved in moving ahead with Mr. Abe’s agenda,” Mr. Nakano said. “It faces a tough decision, whether to push ahead with Mr. Abe’s conservative goals, or to focus on Abenomics in a bid to revive popularity.”
So, it’s for your own good Japan…
It seems Abe is going to need to raise that stock market even more to keep his popularity…
Meanwhile, the nationalist talk continues…
- *ABE:NO PROSPECT OF SUMMITS WITH CHINA, SOUTH KOREA NOW
And yet last night’s speeches sounded awfully like an awakening of the Maduro-style -ism of Venezuela’s control system “economy”
- *ABE: REAL BATTLE FOR ECONOMIC RECOVERY STARTS NOW
- *ABE CALLS FOR COMPANIES TO BOOST WAGES MORE THAN PRICE GAINS
- *ABE SAYS TOYOTA, HITACHI EXECUTIVES PLEDGED TO RAISE WAGES
Raise wages, cut margins, or else… we can only hope this stress does not bring on another bout of chronic diarrhea (as none of these Japanese leaders are getting any younger).
From Bernanke’s infamous 2008 “not forecasting a recession” call to Fannie Mae CEO Franklin Raines 2004 “subprime assets are riskless” commentary, the following 10 “predictions” – as opposed to Wien “surprises” – will go down in infamy for their degree of errant-ness…
10) Ben Bernanke, 10th January 2008 – “The Federal Reserve is currently not forecasting a recession.”
A few months later, United States entered one of the wort recessions ever.
9) Herbert Hoover 1928: “The United States are nearer to the final triumph over poverty than ever before in the history of any land.”
The Great Depression started a year after. Stocks lost almost 80% under his presidency.
8) James Glassman & Kevin Hassett (writers of the book : DOW 36000), 1999: “Stocks are now in the midst of a one-time-only rise to much higher ground–to the neighborhood of 36,000 on the Dow Jones industrial average.”
According to their estimates, the Dow Jones was supposed to reach 36,000 points. The following years were marked by the Internet bubble, the Dow went down from 10,000 (book edition) to 7,200.
7) Georges W. Bush, 15th July 2008: “We can have confidence in the long-term foundation of our economy… I think the system basically is sound. I truly do.”
This sentence was pronounced exactly two months before the bankruptcy of Lehman Brothers.
6) Donald Luskin (US investment guru), 14th September 2008: “Anyone who says we’re in a recession, or heading into one—especially the worst one since the Great Depression—is making up his own private definition of ‘recession’.”
According to Luskin, Obama deliberately worsened economic figures to discredit McCain for the presidential election that took place two months later. Lehman Brothers filed for bankruptcy the next day.
5) Irving Fisher (economist), 15th October 1929: “Stock prices have reached what looks like a permanently high plateau.”
The crash of 1929 began the following week, the Dow Jones losing up to 85% of its value from the “permanent plateau”!
4) David Lereah (US economist), 12th August 2005: “I truly believe the housing market will continue to expand. But rather than the double-digit price appreciation we’ve seen, we might see that drop to a 5 or 6 percent appreciation sometime toward the end of next year.”
Real Estate prices fell sharper between 2006 and 2008 than during the Great Depression.
3) Joseph Cassano (Head of Financial Products at AIG), 2007: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these Credit Default Swap transactions.”
The following year, AIG was rescued by the government after huge losses. Especially on CDS positions…
2) Franklin Raines (CEO of Fannie Mae), 10th June 2004: “These supbrime assets are so riskless that their capital for holding them should be under 2 percent.”
The U.S. government intervened in 2008 to rescue Fannie Mae – in big trouble during the subprime crisis.
1) David Woo (Analyst, Bank of America), 5th December 2013 about bitcoin: “Our fair value analysis implies a price of $1300”
The future will tell whether it is reasonable to assign a “fair value” to this virtual currency. Meanwhile, the bitcoin still lost 46% of its value Friday…
Although the U.S. stock market continues to hit new nominal highs on a nearly daily basis, the U.S. economy bumps along at a lackluster pace. This disconnect has been achieved by a massive Fed experiment in monetary stimulation. Through the combination of seemingly endless maintenance of zero interest rates and the injection of some $1trillion a year of synthetic money into fixed-income markets, the Fed is hoping that the boom it is creating on Wall Street will lead to a boom on Main Street. In reality, this a very dangerous economic gamble of enormously high stakes. As we have seen in the recent past, financial bubbles can leave catastrophe in their wake.
However, there are many in the financial establishment who disagree with the professor, including, most interestingly, Professor Karl Case, the co-creator of the famous Case-Shiller Home Price Index. Most markets either believe that current share prices are fully justified by corporate metrics or they believe the Fed has expertise, and the ability, to prevent an ugly sell-off if things turn out badly. This debate has become the defining conversation as we head into the end of the year.
However, those who believe that QE will produce positive results to compensate for the risks are finding their position to be increasingly difficult to defend. At the International Monetary Fund’s November annual conference in Washington, Mr. David Wilcox, reputed to be one of the Fed’s most important economic advisors, offered insight into some problems facing QE. In essence, he maintained that the Fed’s QE-3 program is producing only very limited results in terms of U.S. economic growth. At the same time, he seemed to hint that unlimited QE could create serious financial market distortions.
Many market observers, including myself, think that the Fed’s open-ended QE program has been a massively expensive failure. As a result, market watchers have become increasingly eager for the program to be wound down, and many do not understand the Fed’s reluctance to taper its monthly bond purchases.
Although many of the more open-minded members of the Fed’s Open Market Committee may have lost faith in the ability of QE to deliver tangible gains in the real economy, they have also shown some concern that a diminishing of QE could trigger stock and bond market turmoil. There can be little doubt that such an outcome could usher in a new round of recession. In other words the “good” that the Fed sees in QE may merely be the prevention of a potentially worse reality.
A majority of investors have seemed to convince themselves that QE has become an unneeded crutch that the Fed will be more than happy to abandon by the end of next year. Many believe that such an outcome will place limited downward pressure on stocks, bonds and real estate. These views are Pollyannish in the extreme. The recent sell-off in the bond market should attest to that. On the other hand, some investors, including some aggressive hedge funds, seem to be operating under the belief that QE will not be ended any time soon, if ever. They have even borrowed massively to invest on booming financial markets that stand already at record highs. Today, total New York Stock Exchange margin debt stands at $412 billion, an all-time record.
The disagreements of the investing public are of little weight in comparison to the opinions of the FOMC members themselves (such is the world we have created). The key point for 2014 is how many voting members of the new Yellen-led FOMC will follow her down the Keynesian cul-de-sac. Should a majority of the FOMC feel forced, in the national interest, to vote against an expansion of the Bernanke-era stimulus policies (which we believe Ms. Yellen is sure to propose), financial markets could be in for a severe shock.
Those who wish to continue equity investing in face of this risk might be well-advised to ensure they have adequate hedging policies in place. Investors in both equities and bonds must question how the Fed can coax a market into a continued boom in a manner disconnected from economic reality.
John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
OTTAWA – The watchdog over the national eavesdropping agency says many recent leaks about the Five Eyes intelligence network are being taken out of context by the media.
Jean-Pierre Plouffe, who keeps an eye on Communications Security Establishment Canada, or CSEC, says the leaked tidbits often then become misinformation.
Plouffe told senators on the national security and defence committee that he aims to clarify such information so that it is no longer promoted as myth.
Edward Snowden, a former contractor with the National Security Agency, CSEC’s American counterpart, is making almost daily headlines with a cache of leaked documents.
Material disclosed by Snowden suggests Canada helped the United States and Britain spy on participants at the London G20 summit in 2009.
Other documents indicate CSEC once monitored Brazil’s department of mines and energy.
In the House of Commons recently, Opposition leader Tom Mulcair pressed the government on whether CSEC or anyone else in the Canadian government authorized the U.S. NSA to spy on Canadian soil.
However, Plouffe, who assumed the watchdog’s post in October, seemed to play down such allegations.
“The information provided by Mr. Snowden made the news, often very sensational in the media,” he told senators.
“Unfortunately, this information is often taken out of context, which as a result becomes misinformation. So one of the key objectives of my office is to help to clarify this information and to correct it if necessary so that it is no longer propagated as a myth.”
CSEC has a budget of over $400 million and a staff of more than 2,000, including skilled mathematicians, codebreakers, linguists and programming experts. It is a key player in the Five Eyes surveillance network along with the U.S., Britain, Australian and New Zealand.
The federal government has consistently said that CSEC obeys the law and respects the privacy of Canadians.
But it has been put on the defensive by the torrent of information from Snowden.
Conservative Sen. Vern White expressed concern about the Snowden leaks, asking whether CSEC was taking steps to prevent similar unauthorized disclosures from its Ottawa headquarters.
Bill Galbraith, executive director of the watchdog’s office, replied that it was a question for CSEC itself to answer.
White said he was looking for assurances that there won’t be major intelligence leaks in Canada.
“I have to be honest, I don’t feel any comfort or confidence at this point.”
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Notorious Foreign Spy Cases