The Unsustainable US Financial Sector

According to Bloomberg, the vast majority of the Big Five banks’ profits consisted of a taxpayer subsidy — the Too Big To Fail guarantee. If the Too Big To Fail banks had to lend at the rates offered to their non-Too Big to Fail competitors, their profits would be severely shrunk (in some cases, to a net loss):

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What does that mean?

That means that the American financial sector is a zombie, existing on the teat of the taxpayer.

It means the huge swathes of liquidity spent on saving the financial sector are ultimately good money chasing after bad.

As Bloomberg notes:

The U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy. The result is a bloated financial sector and recurring credit gluts.

This is extremely prescient stuff. The Fed since 2008 has reinflated the old bubbles, while allowing the same loot-and-pillage disaster-corporatist financial model to continue.

It is insane to repeat the same methods and expect different results. This credit glut, this new boom that has seen stocks rise closer and closer to their pre-crisis high (which may soon be exceeded) will just lead to another big 2008-style slump, just as the Fed’s reinflation of the burst tech bubble led to 2008 itself. This time the spark won’t be housing, it will be something else like an energy shock, or a war. Something that the Federal Reserve cannot directly control or fix by throwing money at it.

America (and the Western world in general) post-2008 needed real organic domestic growth built on real economic activity, not a reinflated bubble that let the TBTF financial sector continue to gorge itself into oblivion. 

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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.

How Badly Does Wall Street Want a Romney Presidency?

Apparently, this badly:

But this is chickenshit money — it doesn’t even add up to Lloyd Blankfein’s 2007 bonus.

Let’s see where the real money is going.

Markets couldn’t seem to care less:

The S&P is still well up during Obama’s presidency.

So does Wall Street really want a Romney Presidency? Or could Wall Street not care less, because they know that both sides will gladly do their bidding? After all it’s not like Obama has tried to jail corrupt bankers — Corzine, who after raiding segregated accounts is surely up there with the most corrupt guys on Wall Street, has been bundling for Obama as recently as April.

Ignore the chickenshit donations. If markets fall significantly between now and November — 1300, 1200, 1100, 1000 — the powers that be on Wall Street want a Romney presidency. After all, it’s not only possible but extremely easy to deliberately crash the market when you have at your disposal algorithmic trading programs that can buy the spike and sell the dip 40 times a second (that’s 2400 times a minutes, 144,000 times an hour). No market crash? They’re happy to stick with Obama.

The New European Serfdom

So let’s assume Greece is going to leave the Eurozone and suffer the consequences of default, exit, capital controls, a deposit freeze, the drachmatization of euro claims, and depreciation.

It’s going to be a painful time for the Greek people. But what about for Greece’s highly-leveraged creditors, who must now bite the bullet of a disorderly default? Surely the ramifications of a Greek exit will be worse for the international financial system?

J.P. Morgan — fresh from putting an LTCM alumnus in charge of a $70 trillion derivatives book (good luck with that) — is upping the fear about Europe and its impact on global finance:

The main direct losses correspond to the €240bn of Greek debt in official hands (EU/IMF), to €130bn of Eurosystem’s exposure to Greece via TARGET2 and a potential loss of around €25bn for European banks. This is the cross-border claims (i.e. not matched by local liabilities) that European banks (mostly French) have on Greece’s public and non-bank private sector. These immediate losses add up to €400bn. This is a big amount but let’s assume that, as several people suggested this week, these immediate/direct losses are manageable. What are the indirect consequences of a Greek exit for the rest?

The wildcard is obviously contagion to Spain or Italy? Could a Greek exit create a capital and deposit flight from Spain and Italy which becomes difficult to contain? It is admittedly true that European policymakers have tried over the past year to convince markets that Greece is a special case and its problems are rather unique. We see little evidence that their efforts have paid off.

The steady selling of Spanish and Italian government bonds by non-domestic investors over the past nine months (€200bn for Italy and €80bn for Spain) suggests that markets see Greece more as a precedent for other peripherals rather than a special case. And it is not only the €800bn of Italian and Spanish government bonds still held by non-domestic investors that are likely at risk. It is also the €500bn of Italian and Spanish bank and corporate bonds and the €300bn of quoted Italian and Spanish shares held by nonresidents. And the numbers balloon if one starts looking beyond portfolio/quoted assets. Of course, the €1.4tr of Italian and €1.6tr of Spanish bank domestic deposits is the elephant in the room which a Greek exit and the introduction of capital controls by Greece has the potential to destabilize.

A multi-trillion € shock — far bigger than the fallout from Lehman — has the potential to trigger a default cascade wherein busted leveraged Greek creditors themselves end up in a fire sale to raise collateral as they struggle to maintain cash flow, and face the prospect of downgrades and margin calls and may themselves default on their obligations, setting off a cascade of illiquidity and default. Very simply, such an event has the potential to dwarf 2008 and 1929, and possibly even bring the entire global financial system to a juddering halt (just as Paulson fear-mongered in 2008).

Which is why I am certain that it will not be allowed to happen, and that J.P. Morgan’s histrionics are just a ponying up toward the next round of crony-“capitalist” bailouts. Here’s the status quo today:

Greece no longer wants to play along with the game?

Okay, fine — cut them out of the equation. In the interests of “long-term financial stability”, let’s stop pretending that we are bailing out Greece and just hand the cash over to the banks.

Schäuble and Merkel might have demanded tough fiscal action from European governments, but they have never questioned the precept that creditors must get their pound of flesh. Merkel has insisted that authorities show that Europe is a “safe place to invest” by avoiding haircuts.

Here’s my expected new normal in Europe:

After all — if the establishment is to be believed — it’s in the interests of “long-term financial stability” that creditors who stupidly bought unrepayable debt don’t get a big haircut like they would in a free market.  And it’s in the interests of “long-term financial stability” that bad companies who made bad decisions don’t go out of business like they would in a free market, but instead become suckling zombies attached to the taxpayer teat. And apparently it is also in the interests of “long-term financial stability” that a broken market and broken system doesn’t liquidate, so that people learn their lesson. Apparently our “long-term financial stability” depends on producing even greater moral hazard by handing more money out to the negligent.

The only real question (beyond whether or not the European public’s patience with shooting off money to banks will snap, as has happened in Greece) is whether or not it will just be the IMF and the EU institutions, or whether Bernanke at the Fed will get involved beyond the inevitable QE3 (please do it Bernanke! I have some crummy equities I want to offload to a greater fool!).

As I asked last month:

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?

And will the inevitable 2012-13 bailouts of European finance cement this aristocracy even deeper and wider?

Obama Embraces Gay Marriage

Obama and Corzine — A Match Made in Heaven?

Unlike virtually every mainstream media commentator or political talking head I don’t care about Obama embracing gay marriage.

Now I know that a lot of people on the left — disappointed by his banker-friendly, PATRIOT Act-renewing, indefinite-detention-enabling, American-citizen-assassinating regime — are searching for any reason to vote for him, and plausible reason to defend his record. That’s the nature of tribal politics — “anti-war” Democrats will happily protest the Bush war machine, but they seem quiet when Obama is the one using drone strikes to assassinate American citizens without trial. I don’t like Mitt Romney either, but that’s not the point.

Even for those in favour of gay marriage, let’s not forget that Obama is capable of doing absolutely zero to change the law. Want to introduce a Federal law allowing homosexual couples to marry? Good luck getting it through the Republican Congress.

I’m in favour of consenting adults being able to do whatever they like with each other, but the fact that the current push for gay marriage is supported by Lloyd Blankfein and Goldman Sachs makes me very suspicious (does he want to sell securitised gay marriage debt?).

It just seems like an easy issue for Obama to posture on, while trampling the Constitution into the dirt.

When it comes to civil liberties, Obama has always talked a good game, and then acted more authoritarian than Bush. He talked about an end to the abuses of the Bush years and an open and transparent government, yet extended the Fourth-Amendment-shredding Patriot Act, empowered the TSA to produce naked body scans and engage in humiliatingly sexual pat-downs, signed indefinite detention of American citizens into law, claimed and exercised the power to assassinate American citizens without trial, and aggressively prosecuted whistleblowers. Under his watch the U.S. army even produced a document planning for the reeducation of political activists in internment camps. Reeducation camps? In America? And some on the left are still crowing that talking about being in favour of gay marriage makes him “pro-civil liberties”? Is this a joke?

Here are a few metrics that we should be judging Obama on:

People not in the labour force is spiking:

The public debt keeps soaring and soaring from eyeball-watering multi-trillion dollar deficits:

Meanwhile India, Iran, China, Russia, Saudi Arabia and Japan have all ditched the dollar for other currencies in new bilateral trade agreements — which lest us forget is America’s biggest export, and the product that keeps goods and oil flowing into America. This is an extremely dangerous time. While we cannot lump Obama with the blame for the entire U.S. economic system — the system we have was accumulated via Bush, and Cheney, and Paulson, and Clinton, and Bush, and Reagan, and Carter, and Brzezinski, and Nixon, and Kissinger, and Johnson, and Roosevelt and Wilson and Lincoln and probably most significantly of all the father of central banking Alexander Hamilton — Obama certainly has not improved matters.

And it should be obvious to anyone paying attention that Romney — who claims he would support the NDAA and the PATRIOT Act, that he wants to attack Iran, and has hired many ex-Bush staffers, as well as winning the endorsement of both Jeb and George H.W. Bush, and bizarrely claiming to want to start a trade war with China — is cut from the exact same cloth as Bush and Obama.

This is a dead election. Here’s hoping that Ron Paul — who continues to pick up delegates in the Republican race even while being ignored by the mainstream media who would rather talk about Obama’s posturing on gay rights — can cause some mayhem.

Get Bullish, Muppets!

Sounds like Goldman has some equities (AAPL?) to dump on its muppet clients.

From Business Insider:

Goldman portfolio strategists Peter Oppenheimer and Matthieu Walterspiler are out with a doozy of report, basically presenting a big bullish case for stocks, relative to bonds.

From Goldman:

In 1956, George Ross Goobey, the general manager of the Imperial Tobacco pension fund in the UK made a controversial speech to the Association of Superannuation and Pension Funds (ASPF) arguing the merits of investing in equities to generate inflation linked growth for pension funds.  He became famous for allocating the entirety of the funds investments to equities, a move that is often associated with the start of the so-called ‘cult of the equity’.

Prior to this, equities were largely seen as volatile assets that achieved lower risk adjusted returns than government bonds and, consequently, required a higher yield. As more institutions warmed to the idea of shifting funds into equities, partly as a hedge against inflation, the yield on equities declined and the so-called ‘reverse yield gap’ was born. This refers to the fall in dividend yields to below government bond yields; a pattern that has continued, in most developed economies, until recently.

In his speech to the ASPF, Ross Goobey talked about the long-run historical evidence that the ex-post equity risk premium was positive and that investors ignored this at their own peril.

The long-run performance of equities was much greater than for bonds having adjusted for inflation. As he said: ‘I know that people will say: ‘Well, things are never going to be the same again’, but … it has happened again, and again. I say to you that my views are that it is still going to happen yet again even though it may not be the steep rises which we have had in the past.’ Over the 50 years that followed Mr. Ross Goobey’s pitch, his predictions proved very successful. The annualized real return to US equities (as a proxy)  between 1956 and 2000 were 7.4%.

But things have changed since the start of this century and the collapse of equity markets following the bursting of the technology bubble. In this post bubble world valuations fell from unrealistically high levels. But the decline of equity markets continued well after most equity markets returned to more ‘normal’ valuations. The onset of the credit crunch, and the deleveraging of balance sheets in many developed economies that followed this have punctured the confidence that once surrounded equities, and the pre-1960s skepticism about equity returns has returned. Dividend yields are once again above bond yields and both historical, and expected future returns have collapsed.

That’s right muppets, time to get bullish and hoover up all the equities we want to offload! This is a once in a generation opportunity to own equities!

Or not. Let’s just say that prices aren’t exactly being supported by a surge in manufacturing:

That’s right: manufacturing is just about where it was at the turn of the millennium, and unsurprisingly so is the S&P.

However there is a sliver of a superficial hint that the muppet masters may be right.

Here’s the S&P500 priced in gold:


Looks cheap next to where we were ten years ago. But in the long run I don’t really think where we were ten years ago tells us much about the fundamentals; it tells us more about Greenspan’s propensity to grease markets with shitloads of liquidity and watch stocks soar. The deeper I dig into the data, the more I tend to conclude that we really need to throw all recent historical trends out of the window.

Here’s a choice data set:


Does that look like a normal recovery? It looks like a complete paradigm shift to me. I’ve already covered my underlying reasons for believing that we live in unprecedented times. But this chart from Zero Hedge speaks as much as anything else:


So, if you have money to burn and a gullible nature go ahead and throw your money at the muppet masters. In the long run, equities and other productive assets have proven themselves superior to any other asset class, because they tend to produce a tangible return.

But right now? The real problem is that the global economic system is a mesh of interconnected fragility where one failed party can take the entire system down. Well run companies can be dragged down by badly-run counter-parties, and badly run companies can just be bailed out, totally obliterating the market mechanism. This is not an environment conducive to organic growth. It’s a cancerous environment, juiced up on (priced in) central bank interventions. It is the very definition of iatrogenesis: when “medicine” causes deeper and worse sickness.

What Would Jesus Do?

When it comes to money-changers, I think most readers will agree that Jesus had the right idea — he threw them out of the temple.

And Jesus went into the temple of God, and cast out all them that sold and bought in the temple, and overthrew the tables of the money changers, and the seats of them that sold doves.

— Matthew 21:12

President Obama likes to invoke Jesus when he claims that he wants to tax the rich.

From CNN:

President Obama offered a new line of reasoning for hiking taxes on the rich on Thursday, saying at the National Prayer Breakfast that his policy proposals are shaped by his religious beliefs.

Obama said that as a person who has been “extraordinarily blessed,” he is willing to give up some of the tax breaks he enjoys because doing so makes economic, and religious sense.

“For me as a Christian, it also coincides with Jesus’s teaching that for unto whom much is given, much shall be required,” Obama said, quoting the Gospel of Luke.

Trouble is, Jesus didn’t stuff his (spiritual) administration with money-changers, like Obama has done  — over twenty of Obama’s appointees have direct ties to Goldman Sachs. Jesus wasn’t the candidate of choice of Wall Street, either — in 2008, Obama received more money Wall Street than any previous candidate in history.

Just as Jesus cast the usurious moneychangers out of the temple, so we should cast them off the teat of public support. We already know what the problem is — the great global intermeshed web of debt, derivatives and payments that, if disrupted by a default can lead to a catastrophic chain of default after default after default that not only turns the entire system illiquid, but panics markets, resulting in crashes. Too interconnected to fail, but so interconnected that one bank failure can cause vast damage elsewhere.

This is simply not in its current form a self-sustaining industry.

The sad thing is that banking is a critically important endeavour. It is very important that people with drive and ideas can get access to capital, to realise their dreams, create new products and new innovations. Right now, our financial house is built on the sand.