Funds - Weekly Market Comment: The Heart of the Matter - June 11, 2012. June 11, 2012 The Heart of the Matter John P. Hussman, Ph.D. All rights reserved and actively enforced. Reprint Policy Over the past 13 years, the S&P 500 has underperformed even the depressed return on risk-free Treasury bills. The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren't low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.
Lost in this debate is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad. What is central here is that the government policy environment has encouraged this result. By our analysis, the U.S. economy is presently entering a recession. I really don't mean to pick on Facebook. The uptick's downside. Rio De Janeiro, Brazil - Since late last year, a series of positive developments has boosted investor confidence and led to a sharp rally in risky assets, starting with global equities and commodities.
Macroeconomic data from the United States improved; blue-chip companies in advanced economies remained highly profitable; China and emerging markets slowed only moderately and the risk of a disorderly default and/or exit by some members of the eurozone declined. Moreover, under its new president, Mario Draghi, the European Central Bank appears willing to do anything necessary to reduce stress on the eurozone's banking system and governments, as well as to lower interest rates. Central banks in both advanced and emerging economies have provided massive injections of liquidity. Volatility is down, confidence is up and risk aversion is much lower - for now. Second, there is now evidence of weakening performance in China and the rest of Asia. Geopolitics and the economy. The Final Countdown. Submitted by Tim Price, Director of Investment, PFP Wealth Management courtesy of Sovereign Man The Final Countdown “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.”
Debt talks “have not produced a constructive response.” - The Institute of International Finance, January 13, 2012 “The war situation has developed not necessarily to Japan’s advantage.” - Japanese Emperor Hirohito after the atomic bombing of Hiroshima and Nagasaki, announcing Japan’s surrender to the Allies. There is a terrible hubris at the heart of mankind. In a significant essay for Foreign Affairs, “The Black Swan of Cairo,” Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous. There is an analogy from the natural world.
Rothbard identified the ways in which government can hobble the adjustment process: 1. 2. 3. 4. 5. 6. Its name was Europe. Weil: Why Zombie Banks Hate to Write Off Bad Loans. There’s a simple explanation for why the world’s zombie banks remain so reluctant to write off worthless assets and tap the equity markets for fresh capital. They don’t want to end up like UniCredit SpA. This month has been a nightmare for the Italian bank’s shareholders. Since embarking last week on a 7.5 billion euro ($9.7 billion) stock sale at a steep discount to its Jan. 3 closing price, UniCredit shares have fallen 39 percent to 2.56 euros. It seems no good deed goes unpunished when it comes to lenders besieged by Europe’s debt crisis. A little bit of candor about the true state of a company’s finances can hurt a lot. That undoubtedly is the message some other lenders facing large capital shortfalls will take from UniCredit’s troubles.
Not that a lot of them have better options. Frightfully Low The markets sense, with good reason, that the latest cash infusion won’t be enough. Investors still see a huge hole in the company’s books that UniCredit executives have yet to admit. The Worldwide Depression/Recession Of 2012. This article originally appeared in the Daily Capitalist. In case you haven't noticed, the rest of the world continues to slow down and the negative data is accelerating.
The big powerhouses of the world, the eurozone including Germany, Japan, and China are leading this trend and there is no reason to believe that the U.S. will not follow. I've been writing about this theme frequently lately because, while we are seeing some positive numbers here in the U.S., we are also seeing signs of weakness starting to show up, and since we live in a world of international trade, the world's woes will hit us. The first thing to note about this phenomenon is that the central banks of the world, including the Fed, have been doing all they can to support their economies with plentiful money. This is nothing new. Since the Crash of 2008, most central banks have been pumping fiat money into their economies. China's economy relies on the West for its exports, and as a result: Here is what it looks like: Simon Johnson: 'We Are Looking Straight Into The Face Of A Great Depression' By Mark Harrison, CFA In the opening session of the fourth annual CFA Institute European Investment Conference today in Paris, MIT Sloan School of Management professor Simon Johnson didn’t equivocate on the perils of the current global economic environment.
“We have built a dangerous financial system in the United States and Europe,” said the former chief economist at the International Monetary Fund. “We must step back and reform the system.” Professor Johnson cited alarming parallels with October 1931, when “people thought the worst was behind them, but the smart people were wrong and instead the crisis just broadened.” Johnson began his talk by pointing to the recent failure of MF Global (MF) as good news because it “barely caused a ripple in markets, despite its $40 billion balance sheet.” But he contrasted this with the conundrum of “too-big-to-fail” banks in the financial system, which have all benefited hugely from an implicit state guarantee. Is this author on the ball? Fault Lines... Have We Avoided A Recession? - December 4, 2011. December 4, 2011 Have We Avoided A Recession? John P. Hussman, Ph.D. All rights reserved and actively enforced.
Reprint Policy In recent months, we've observed a fairly neutral flow of economic data - not strong by any means, but offering a reprieve from the clearly negative momentum that we observed in late-summer. The latest employment report presents a similar picture. Combining the average workweek with average hourly earnings for all employees provides a nice complementary measure of economic activity.
In our view, it is very difficult to obtain useful views about economic direction using the standard "flow of anecdotes" approach that is the bread-and-butter of many analysts. We use a variety of methods to gauge recession risk. As of last week, a simple average of 20 of these binary recession indicators continued to show a preponderance of signals still in place - a condition that has never been observed except alongside a U.S. recession. (graphic via www.distressedvolatility.com )
MF Global warning: Financial markets have not been fixed. The October 31 bankruptcy of MF Global Holdings Ltd., a broker-dealer on Fifth Avenue in New York City, is important news for all Americans because it is a warning: The Dodd-Frank Act, which Congress passed 16 months ago to protect Americans from another financial crisis, is not working. Instead, one thing that does seem to protect Americans is size. The MF Global bankruptcy was triggered by one of the same key Wall Street gambles that rocked Bear Stearns & Co., Lehman Brothers Holdings and others in 2008 and froze credit markets, that brought Long-Term Capital Management hedge fund to its knees in 1998 and Orange County in 1994, and that threaten European banks today: Repurchase (repo) loans.
These nuclear weapons are still as dangerous as ever. Yet MF Global’s 2008-style failure – while tragic for its employees (2,894 on September 30), investors, clients, suppliers, and others – is having little impact on Main Street. MF Global’s relatively limited impact is not going unnoticed. How? MF Global and the great Wall St re-hypothecation scandal.
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Revisiting Rehypothecation: JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again) Yves here. One of our ongoing frustrations at NC is when the media and blogosphere get up in arms about what we think are secondary issues. We’ve been loath to comment on a Thomson Reuters article that claimed that rehypothecation of assets in customer accounts was the reason MF Global customer funds went missing. The reason we’ve stayed away from this debate is that the article, despite its length, did not provide any substantiation for its claim. While it did contend that US customer accounts were set up so as to allow assets to be rehypothecated using far more permissive UK rules, and described how rehypothecation could be abused, it did not provide any proof that this was what took place at MF Global. But there is plenty of reason to be worried about rehypothecation.
And it may be completely unrelated to the issue of collateral, but consider this tidbit from the Financial Times yesterday: We thought the earlier Richard Smith post would again be of considerable interest to readers. Second MF Global Unveiled As Canadian Regulator Accuses Barret Capital Of Commingling Client Funds. When we learned of the MF Global client theft scandal, in the aftermath of its sudden bankruptcy filing, the one thing we predicted would happen (in addition to Jon Corzine never going to prison) was that many more brokers, banks and broadly financial intermediaries would be discovered having dipped in client accounts, or otherwise "commingled" capital in direct violation of the first rule of banking.
Sure enough, a little over two months since, the second notable company to have been alleged to have abused client capital for own purposes has emerged. And it comes to us courtesy of sleep Canada whose "banks are all fine. " As the Winnipeg Free Press reports, "One of Canada's investment regulators has accused Barret Capital Management, a firm specialized in futures and options on metals and other exchange-traded commodities, of using client money for its own purposes. From the company's blog, which has all about 5 entries: And the website's About Us section: This was merely the first. Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies!
I have been doing a series of TV interviews focusing on risk in the banking system. Of note is the topic of the latest discussion, which is basically how MF Global collapsed while losing $1.2 billion of customer funds. The answer to the question appears to be in hypethecation, and re-hypothecation of securities - actions whose counterparty risks lay off balance sheet.
Reuters reports MF Global and the great Wall St re-hypothecation scandal In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. ... As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. “Note 7. Nor is lending confined to between banks. Yeah, it gets worse. On MF Global, Hyper-Hypothecation That Creates $6b Out $2B And A Central Bank That Couldn't See A Bankruptcy Staring It In The Face. A discussion of MF Global, hyper-hypothecation, the ability to creat e $6 out of $ (like leveraged magic), and Germany renting the penthouse suite in the European roach motel of unsustainable debt.
REggie__On_Max_Keiser_discussing_MF_Globall_and_Germany Go to 12:32 in the video to see yours truly... The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! Yes, The BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!! Goldman, et. al. What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else. Reposting by popular demand, and because everyone has to understand the embedded risks in this market, courtesy of the shadow banking system.
In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B? " in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on).
Why was this prescient? But first, a detour to London... As readers will recall, the actual office that blew up the world the first time around, was not even based in the US. Under the U.S. And the kicker: AC2011 Session 1.2 Come Undone: Kyle Bass redux. Men prefer a false promise to a flat refusal. Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time.
I was going to walk my blog subscribers and readers through my recent thoughts and related developments in the insurance and real estate industries, but I think I will postpone that until tomorrow for two companies that I have picked apart in considerably more detail than the average buyside investor and sell side analyst were featured in Bloomberg this morning.
The questions asked forced one to query whether more than an editor or two are full time BoomBustBlog subscribers. Yes, boys and girls... Like it, love it, leave it or hate it... It's now time to get back to business. Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GS and attempting to gain a green card for our entrance into the "Economic Republic of JP Morgan... " image001.png Bloomberg reports (and Reggie clarifies): JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark JPMorgan Chase & Co. BoomBustBlog annotation... As excerpted from An Independent Look into JP Morgan: A run on the SQUID??? Image006 Mr. ‘Funded’ Exposure. Why Central Planning Has Doomed Us All. El-Erian warns - macrobusiness.com.au | macrobusiness.com.au.