Tag Archives: wall street

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No Investment is an Island

kennedy-island-big

A Chinese woman from Kunming is attempting to sue the Federal Reserve for debasing the dollar:

A woman in Kunming, Yunnan province, is trying to sue the United States central bank after discovering that the real value of the US$250 she put in an account in 2006 had shrunk by 30 per cent.

She claims it was a result of the Federal Reserve issuing too much money.

Her attorney, her son Li Zhen , called the lawsuit “litigation for the public good” which aimed to stop the Fed from continuing its quantitive easing policy and promote people’s awareness of their rights.

This is a quite bizarre claim. If I buy and hold a currency or instruments denominated in that currency, I try to understand the mechanisms through which the market price (or my subjective valuation) of that asset could increase or decrease. In buying dollars, market participants tacitly accept the actions of the United States government and the Federal Reserve system. They tacitly accept that dollars (and implicitly, dollar-denominated instruments) are freely reproducible in either cotton-linen blend, or as digital currency in accordance with the Federal Reserve’s mandate, which includes a definition of price stability of 2% inflation (reduction in purchasing power as measured by the CPI-U) per year.

This is true with other liquid media, as well as less liquid assets like land, companies and capital goods. With gold and silver, future market prices are dependent on the actions and subjective expectations of gold miners and market participants. How much gold will they bring to the market? How much will they dig up out of the ground? To what extent will future market participants desire to hold and own gold? These are the questions one must implicitly answer in buying or selling gold.

The same is true for seashells, Bitcoin, Yen, Sterling, Euro. The differences are in physical characteristics, and the web of social interactions around them. All currencies and liquid assets are built on social interaction. The future viability of any currency or asset is dependent upon a complex web of social interactions.

Users and holders of Bitcoin today have an extraordinarily precise timetable for future monetary production — with Bitcoin, the great uncertainty lies in whether people will choose to use Bitcoin or not, and whether or not governments will try to outlaw it. For modern state-backed fiat currencies, there are legislatively-defined price stability targets designed to regulate monetary production, although the actions of central bankers and macroeconomists may surprise many holders of the currency. The power of the state also matters; a collapse of a state usually spells doom for any fiat currency it has issued.

When we buy something as a store of purchasing power, we enter into an implicit contract with ourselves to accept the currency risks and counterparty risks associated with it. That is our due diligence. Purchasing dollars and then complaining that the Federal Reserve is debasing them is incoherent. No investment is an island, insulated from risk. It is the same as purchasing gold before Columbus sailed to the Americas and complaining when conquistadors brought back huge new supplies of gold that diluted the money supply. The discovery of huge new gold supplies is part of the risk in holding gold, just as quantitative easing is part of the risk in holding dollars.

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Too Big To Jail

What’s worse than unjust and ineffective laws like the failed War on Drugs and the failed sanctions on Iran?

Unjust and ineffective laws that apply to ordinary folks, but not to banksters:

When the Justice Department announced its record $1.9 billion settlement against British bank HSBC last week, prosecutors called it a powerful blow to a dysfunctional institution accused of laundering money for Iran, Libya and Mexico’s murderous drug cartels.

But to some former federal prosecutors, it was only the latest case of the government stopping short of bringing criminal money laundering charges against a big bank or its executives, at least in part on the rationale that such prosecutions could be devastating enough to cause such banks to fail.

They say it sounds a lot like the “too big to fail” meme that kept big but sickly banks alive on the support of taxpayer-funded bailouts. In these cases, they call it, “Too big to jail.”

This stings. It should sting anyone who cares about the idea of equality in front of the law, anyone who cares about the basic rule of law, anyone who doesn’t want to see their society devolve into a festering pool of feudalism.

According to the most recent data, there were 197,050 sentenced prisoners under federal jurisdiction of which 94,600 were serving time for drug offenses.There were 1,362,028 sentenced prisoners under state jurisdiction of which 237,000 were serving time for drug offenses. That’s over 300,000 individuals serving time currently for drugs offenses, in addition to over one million currently on probation. Now I don’t agree with the War on Drugs at all. But big banks are deemed too “systemically important” to be held to the same standard as the huge and disproportionately black population of low-level drug users.

BlackPrisoners

If the Drug War laws don’t apply to the big banks — if Wall Street bankers who have broken the law can’t go to prison too — then how is incarcerating low-level drug users really much different to chattel slavery?

And not only do private prison companies pocket massive profits from the taxpayers’ purse for running the prisons, but prisoners are a pool of ultra-cheap indentured labour.

As Todd Curl notes:

Prisons in the United States used to be institutions of actual reform and rehabilitation. Men who entered a prison, would often learn a trade and have a usable skill to earn a legitimate living upon release. The recidivism rates have sharply increased as job and education programs within prisons–especially private prisons–have steadily declined. This is not to say that skills are not acquired in these private prisons, quite the contrary. In many of these private prisons, inmates are contracted as telemarketers, among other things, for many large corporations. These prisoners can earn as much as 75 cents an hour for their job–sometimes under 40 cents. What’s the payoff one might ask? For one, corporations get very cheap—third world cheap—labor that cannot unionize, cannot call in sick and cannot complain without fear of time added to their sentence or retaliation from guards who overworked and underpaid themselves, and risk losing their livelihood if an “uppity” prisoner refuses their indentured corporate servitude.

The War on Drugs is descending from tragedy into farce. Poor black drug users are fair game for the slave labour business. Rich Wall Street bankers who launder drug money? Nope.

In May I asked:

Have the 2008 bailouts cemented a new feudal aristocracy of bankers, financiers and too-big-to-fail zombies, alongside a serf class that exists to fund the excesses of the financial and corporate elite?

Only time will tell.

Time is telling.

Once a certain segment of society becomes protected from criminal liability, that society has travelled a long way down the road to feudalism, to a caste system, to serfdom.

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We’re All Currency Manipulators Now

The BBC reports:

The US has decided not to declare China as having manipulated its currency to gain an unfair trade advantage.

But the Treasury did say that China’s currency, the yuan, remains “significantly undervalued” and urged China to make further progress.

In its semi-annual report, it said Beijing did not meet the criteria to be called a currency manipulator, which could have sparked US trade sanctions.

Critics of China say it keeps the yuan low to keep its exports cheap.

There’s a point that no-one in the establishment will admit.

Every country with a central bank is by definition and without exception a currency manipulator.

Every country that devalues its currency to boost exports is a currency manipulator.

Every country that bails out banks is a currency manipulator.

Every central bank purchase of treasury securities, mortgage-backed securities or equities is currency manipulation.

Every central bank that inflates away treasury debt is a currency manipulator.

And that is why America would look clownish and absurd to label China a currency manipulator, when China can throw back the exact same accusation even more forcefully. China holds trillions and trillions of dollar-denominated assets.

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Debt & Obesity

The waistline bubble began to expand at just about the same time as the debt bubble:

First, it’s important emphasise that correlation is not causation — more than 99% of murderers have consumed water in the twenty four hour period preceding a murder. But it is clear that the effects of globalisation are at play in both cases (simply because globalisation has transformed the American economy) – far fewer Americans have to do physically demanding manufacturing work, and thanks to the mechanisation of agriculture and food production there are far more calories-per-American available to consume.

The interesting difference between debt and obesity is that while it is possible from historical evidence to construct a fairly coherent model linking excess outgrowth in debt with recession and depression — for example, I conjecture that a depression becomes inevitable when debt service cost growth consistently outpaces income growth  — there is no such historical evidence available for obesity, because there has never in known world history been an obesity epidemic of such proportion, so there is no way to know how the obesity bubble may burst.

To what extent do the healthcare overheads of an obesity epidemic act as a drag on economic growth? According to an estimate by the CDC, $147 billion.

How much of a drag on the real economy is supporting those who have dropped out of the labour force due to obesity-related illness like diabetes, fatigue, depression and cardiovascular illness?

Well, we know that in the years that obesity has been exploding, that the disabled proportion of the workforce has almost tripled:

That’s almost 9 million individuals receiving Federal disability — almost six million more than we would have if the number of those receiving Federal disability was proportionate to the numbers at the beginning of the Ford administration. And if each disabled worker was contributing the per-capita average of $46,546 to GDP, the US would be producing roughly $279 billion more output. Even if only half of the increase is associated with obesity (a very, very, very conservative estimate) that equates to around $140 billion of  lost output. That — especially when considered next to the healthcare costs — is a pretty big gap, and that does not even begin to consider that the obese workers not on disability tend to be associated with lowered productivity.

So to what extent has the debt acquisition been an attempt to paper over the cracks of an economy increasingly losing productivity due to obesity and obesity-related illness, and to what extent is obesity linked to the current American employment and growth weakness?

Well, we know that it is possible to blow up a huge debt bubble without a high level of obesity, because Japan has been mired in a debt-fuelled depression for the last twenty years without any associated obesity epidemic, and because the Great Depression was preceded by a huge outgrowth in debt, but no such outgrowth in obesity. And certainly, the United States lives with far greater burdens than the effects of obesity — for example, the quantifiable burden of invading and occupying Iraq and Afghanistan has been greater in the past decade than the quantifiable burden of growing national obesity. This is not to mention the effects of job migration, maintaining a global empire with bases in over 150 countries, and bailing out Wall Street banks. Debt has been a means to paper over the cracks of lost productivity and an American empire living far beyond the means of its productivity — but there is far more to that than just the outgrowth in obesity.

But obesity is causing a significant output loss, which by definition contributes to the wider problems.

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The High Frequency Trading Debate

A Senate panel is looking into the phenomenon of High Frequency Trading.

Here’s the infamous and hypnotic graphic from Nanex showing just how the practice has grown, showing quote volume by the hour every day since 2007 on various exchanges:

It is a relief that the issue is finally being discussed in wider venues, because we are witnessing a stunning exodus from markets as markets mutate into what we see above, a rampaging tempestuous casino of robotic arbitrageurs operating in millisecond timescales.

The conundrum is simple: how can any retail investor trust markets where billions of dollars of securities are bought and sold faster than they can click my mouse and open my browser, or pick up the phone to call their broker?

And the first day of hearings brought some thoughtful testimony.

The Washington Post notes:

David Lauer, who left his job at a high-frequency trading firm in Chicago last year, told a Senate panel that the ultra-fast trades that now dominate the stock market have contributed to frequent market disruptions and alienated retail investors.

“U.S. equity markets are in dire straits,” Lauer said in his written testimony.

One man who I think should be testifying in front of Congress is Charles Hugh Smith, who has made some very interesting recommendations on this topic:

Here are some common-sense rules for such a “new market”:

1. Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.

2. Every security–stock or option–must be held for a minimum of one hour.

3. Every trade must be placed by a human being.

4. No equivalent of the ES/E-Mini contract–the futures contract for the S&P 500 — will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve’s proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.

5. All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.

6. Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life–one strike, you’re out.

However, I doubt that any of Smith’s suggestions will even be considered by Congress (let alone by the marketplace which seems likely to continue to gamble rampantly so long as they have a bailout line). Why? Money. Jack Reed, the Democratic Senator chairing the hearings, is funded almost solely by big banks and investment firms:

It seems more than probable that once again Congress will come down on the side of big finance, and leave retail investors out in the cold. Jack Reed opened a recent exchange on Bloomberg with these words:

Well I believe high frequency trading has provided benefits to the marketplace, to retail investors, etcetera.

Yet retail investors do not seem to agree about these supposed benefits.

Retail investors just keep pulling funds:

Reed failed to really answer this question posed by the host:

Senator, US equity markets are supposed to be a level playing field for all kinds of investors; big companies, small companies and even individuals. That said, how is it possible for an individual investor ever to compete with high frequency traders who buy and sell in milliseconds. Aren’t individuals always going to be second in line essentially to robots who can enter these orders faster than any human possibly can?

The reality is that unless regulators and markets can create an environment where individual investors can participate on a level playing field, they will look for alternative venues to put their money. It is in the market’s interest to create an environment where investors can invest on a level playing field. But I think the big banks are largely blinded by the quick and leverage-driven levitation provided by high frequency trading.

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More Government, Less Wages

Wages and salaries as a proportion of GDP in blue, contrasted with government expenditure as a proportion of GDP in red:

Yes; correlation does not prove causation. Yes; there are lots and lots and lots of other factors involved — the end of Bretton Woods, globalisation, deindustrialisation, the birth of the computer and the internet, financialisation, the United States’ growth into a global imperial power and more recently the beginnings of a decline.

But whatever the exact causality this does not make happy reading for those who lean toward the idea that more government involvement in the economy translates to a bigger share of the pie for the working class.

Quite the opposite — while wages have just hit an all-time low, corporate profits have just hit an all-time high:

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Assange or Corzine?

Priorities are a bitch.

The United States won’t prosecute Corzine for raiding segregated customer accounts, but will happily convene a Grand Jury in preparation for prosecuting Julian Assange for exposing the truth about war crimes.

From the New York Times:

A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives. After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case.

Corzine is considering opening a new hedge fund, though the notion that anyone — even a slack-jawed muppet happy to buy whatever Goldman ‘s prop traders want to sell — would seed Corzine money so he can trade or steal it away seems absurd — rather like putting a child molester in charge of a day-care.

But nobody knows how much dirt Corzine has on other Wall Street crooks. Not only may Corzine get away with corzining MF Global’s clients’ funds, he may well end up with a whole raft of seed money to play with from those former colleagues and associates who might prefer he remain silent regarding other indiscretions he may be aware of.

But the issue at hand is the sense that we have entered a phase of exponential criminality and corruption. A slavering crook like Corzine who stole $200 million of clients’ funds can walk free. Meanwhile, a man who exposed evidence of serious war crimes is for that act so keenly wanted by US authorities that Britain has threatened to throw hundreds of years of diplomatic protocol and treaties into the trash and raid the embassy of another sovereign state to deliver him to a power that seems intent not only to criminalise him, but perhaps even to summarily execute him. The Obama administration, of course, has made a habit of summary extrajudicial executions of those that it suspects of terrorism, and the detention and prosecution of whistleblowers. And the ooze of large-scale financial corruption, rate-rigging, theft and fraud goes on unpunished.

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The Fed Confronts Itself

From Matt Taibbi:

Wall Street is buzzing about the annual report just put out by the Dallas Federal Reserve. In the paper, Harvey Rosenblum, the head of the Dallas Fed’s research department, bluntly calls for the breakup of Too-Big-To-Fail banks like Bank of America, Chase, and Citigroup.

The government’s bottomless sponsorship of these TBTF institutions, Rosenblum writes, has created a “residue of distrust for government, the banking system, the Fed and capitalism itself.”

I don’t know whether to laugh or cry.

First, this managerialism is nothing new for the Fed. The (ahem) ”libertarian” Alan Greenspan once said: “If they’re too big to fail, they’re too big.”

Second, the Fed already had a number of fantastic opportunities to “break up” so-called TBTF institutions: right at the time when it was signing off on the $29 trillion of bailouts it has administered since 2008. If the political will existed at the Fed to forcibly end the phenomenon of TBTF, it could (and should) have done it when it had the banks over a barrel.

Third, capitalism (i.e. the market) seems to deal pretty well with the problem of TBTF: it destroys unmanageably large and badly run companies. Decisions have consequences; buying a truckload of derivatives from a soon-to-be-bust counter-party will destroy your balance sheet and render you illiquid. Who seems to blame? The Fed; for bailing out a load of shitty companies and a shitty system . Without the Fed’s misguided actions the problem of TBTF would be long gone. After a painful systemic breakdown, we could have created a new system without any of these residual overhanging problems. We wouldn’t be “taxing savers to pay for the recapitalization of banks whose dire problems led to the calamity.” There wouldn’t be “a two-tiered regulatory environment where the misdeeds of TBTF banks are routinely ignored and unpunished and a lower tier where small regional banks are increasingly forced to swim upstream against the law’s sheer length, breadth and complexity, leading to a “massive increase in compliance burdens.”

So the Fed is guilty of crystallising and perpetuating most of these problems with misguided interventionism. And what’s the Fed’s purported answer to these problems?

More interventionism: forcibly breaking up banks into chunks that are deemed not to be TBTF.

And what’s the problem with that?

Well for a start the entire concept of “too big to fail” is completely wrong. The bailout of AIG had nothing to do with AIG’s “size”. It was a result of systemic exposure to AIG’s failure. The problem is to do with interconnectivity. The truth is that AIG — and by extension, the entire system — was deemed too interconnected to fail. Many, many companies had AIG products on their balance sheets. If AIG had failed (and taken with it all of that paper, very generously known as “assets”) then all those companies would have had a hole blown in their balance sheets, and would have sustained losses which in turn may well have caused them to fail, bleeding out the entire system.

The value that seems to matter in determining systemic robustness is the amount of systemic interconnectivity, in other words the amount of assets on balance sheets that are subject to counter-party risk (i.e. which become worthless should their guarantor fail).

Derivatives are not the only such asset, but they make up by far the majority:


Global nominal exposure is growing again. And those derivatives sit on global balance sheets waiting for the next black swan to blow up a hyper-connected counter-party like AIG. And such a cascade of defaults will likely lead to another 2008-style systemic meltdown, probably ending in another goliath-sized bailout, and another few rounds of the QE slop-bucket.

The question the Fed must answer is this: what difference would it make in terms of systemic fragility if exposures are transferred from larger to companies to smaller ones?

Breaking up banks will make absolutely zero difference, because the problem is not the size but systemic interconnectivity. Losses sustained against a small counter-party can hurt just as much as losses sustained against a larger counter-party. In a hyper-connected system, it is possible for failed small players to quickly snowball into systemic catastrophe.

The Fed (as well as the ECB) would do well to remember that it is not size that matters, but how you use it.

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No Capitalism on Wall Street

Herman Cain doesn’t understand the #OccupyWallStreet protests.

From ThinkProgress:

CAIN: I don’t have facts to back this up, but I happen to believe that these demonstrations are planned and orchestrated to distract from the failed policies of the Obama administration. Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself! It is not someone’s fault if they succeeded, it is someone’s fault if they failed.

Really? Wall Street is succeeding? You could have fooled me. The reality is that Wall Street’s largesse since 2008 has been underwritten by government. That’s why it’s so bizarre that Obama and Bernanke — two “system-saving” bailout architects have acknowledged sympathy for the protestors. Some of the protestors might be angry with the present system, and they may call that system capitalism, but there is no way that that is a fair description. As I wrote last month:

If government doesn’t allow banks that made bad decisions to be punished by the market, then the bailed-out zombie banks can rumble on for years, parasitising the taxpayer in the name of ever-greater bonuses for management, while failing to lend money, create new employment, or help the economy grow.

The global financial system isn’t working because there are fundamental structural problems with the global economy. These include over-leverage, the agency problem, trade deficits, failed economic planning, massive debt acquisition, Western over-reliance on foreign oil and goods, military overspending, systemic corruption, fragility and so forth. Stabilising the global financial system merely perpetuates these problems. The market shows that it needs to fail — preferably in a controlled way so that real people don’t get hurt — so that we can return to experimental capitalism, where good ideas prosper, and bad ideas don’t.

Bernanke’s organisation — the private Federal Reserve — pays a 6% dividend to member banks. That’s a staggering risk-free return on investment. Is it any wonder that banks won’t lend to small businesses or common people when the chosen few can just make easy money through having their funds sit at the Federal Reserve?

So no — Herman Cain is wrong. Protestors shouldn’t be blaming themselves for their “failure”. They should blame a system of government and monetary policy that gives money and favours to its friends. Call it crony capitalism, or corporatism or simply call it corruption.