Complexity and government backing abet banksters

It is impossible for regulators or anyone else to control mammoth financial conglomerates that are designed to maximize risk-taking without personal consequences to the actors involved. The answer is not more regulation, but smaller institutions that separate deposit taking utilities from investment banking/speculating. See: UBS Restructuring shows need for banking’s simpler future.

Breaking up the conglomerates and demanding they build up self-insuring capital buffers within their risk-seeking arms is critical and will increase their cost of capital, reduce free cash flow and lower earnings for shareholders and executives. And that is as it should be.

Andrew Huszar, senior fellow at Rutgers Business School, discusses revelations of the Federal Reserve Bank of New York’s handling of Goldman Sachs in secret recordings and how the role of regulation has changed in the banking industry since the financial crisis. Here is a direct video link.

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Warren calls for hearing on whistleblower tapes re Fed and Goldman Sachs

“Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) are both calling for Congress to investigate the New York Federal Reserve Bank after recently released secret recordings show the central bank allegedly going light on firms it was supposed to regulate.

Warren and Brown, both members of the Senate Banking Committee, called for an investigation of the New York Fed after Carmen Segarra, a former examiner at the bank, released secretly recorded tapes that she claims show her superiors telling her to go easy on private banks. Segarra says that she was fired from her job in 2012 for refusing to overlook Goldman’s lack of a conflict of interest policy and other questionable practices that should have brought tougher regulatory scrutiny.

After Segarra made the tapes public in a joint report with ProPublica and This American Life on Friday, Warren was quick to call on Congress to take action.” See: Secret tapes of Fed meetings

In case you missed it, here is a link to the Segarra interview and tape sampling from last week.

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Stock market headed for Minsky moment

“We’re still not wise enough to realize that our current model is a ‘Ponzi’ scheme rushing toward its inevitable ‘Minsky moment’,” Steen Jakobsen, a chief economist at Danish investment bank Saxo Bank, said in a research note on Friday. Here is a direct video link.

“We’re still working with the same dog-eared script we were introduced to all of five years ago,” he said. “Maintain sufficiently low interest rates to service the debt burden, pretend to have credible plan, but never address the structural problem and simply buy more time. But while we were able to get away with this theme for an awfully long time, the dynamic is now changing.”

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Cohan: “Fed exists for the benefit of Wall Street”

More honest comments about investment banking.

Bloomberg Contributing Editor Bill Cohan discusses risk taking and incentives on Wall Street. Here is a direct video link.

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Must read: Preventing Economists’ Capture

Further to the glaring capture of the Fed and regulators by the large investment banks, yesterday I read a very important paper by professor Luigi Zingales documenting similar capture among finance and economic academics.

The paper is long and detailed, but immensely readable and well worth the time.  Importantly, Zingales ends with 9 actionable reforms that can be implemented today in order to reduce the ties that have been subjugating truth, critical thought and accountability among the academics who are supposed to be independent thinkers:

“Awareness of the risk of capture is the first line of defense. It might not be sufficient protection, but it is certainly a necessary one. Without this awareness any other initiative is hopeless. Unfortunately, my experience talking with colleagues is that this sense of awareness is missing. There is a diffuse perception that we are different. While a simple application of economic principles, like I have done in this article, shows that we should be no different than regulators, we are unwilling to admit it. Until we are ready to do so, any other mechanism to prevent capture will be useless.

Most academic economists are very honest people, who chose their career because they were motivated by noble goals, like the quest for the truth and “making the world a better place”. Yet, the same can be said for the regulators. So why academic economists think that the regulators are generally captured, while they cannot stand even the thought that this might happen to one of them? This time we are different?”

You can read the whole important paper here, see:  Preventing Economists’ Capture

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Must listen: The truth about Goldman Sachs caught on tape

This should be our generation’s Pecora commission-like epiphany bringing the outrageous policies and procedures of the Fed and the large banks into the broad light of public view.  It is long past time to admit truth and break up the ‘Vampire squids’.  What more will it take?

Carmensegarra
Listen to the audio link of the report here.

Also see Michael Lewis’s article today for some important background: The Secret Goldman Sachs Tapes

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Canadian Investor Conference in Toronto

Danielle will be appearing at the Canadian Investor Conference in Toronto on Thursday September 25 doing some media interviews and a World Outlook panel discussion with Grant Williams and John Kaiser at 4:30pm. The event will be held at the Sheraton Centre, Toronto on Queen Street.

You can register to attend or learn more about the event here on the conference website.

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Export currencies telling truth about global demand

The Canadian, Aussie and Japanese export currencies all peaked with the 2009 economic rebound in 2011. Currency markets are the largest and most liquid asset markets in the world. Notwithstanding concentrated attempts by large banks and other players, they are least amenable to the control of any one interest group–the closest to the ideal of perfect competition. Despite a mammoth price-pumping confidence (con) game by companies and bankers around the world in the relatively smaller risk markets since 2011 (stocks and high yield debt), export currencies have been moving lower, reflecting the truth about this economic cycle: the recovery coming out of the 2008 recession was short and shallow and ended in 2011. The contraction phase is back, and ‘growth’ assets are so far, wildly over-priced.

Cdn Aussie NZ $ Sept 2014

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Danielle on The Financial Survival Network

Danielle was a guest today with Kerry Lutz on The Financial Survival Network talking about recent developments in the world economy and markets. You can listen to an audio clip here.

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The ties that bind: bankers and politics

The 2014 American Values Survey released Tuesday by the Public Religion Research Institute reports that 72% believe the recession is still on and just 7% say they are in excellent financial health. A third of the people in the survey said they or someone else in their household had to cut back on food in the last year to save money. There is a connection between weakness at home and an increasing focus on foreign intervention.

“Best-selling author Nomi Prins says the trouble with Ukraine, Iraq and Syria are happening because they are what she calls the “gateways.” Prins explains, “What I call the gateways are the countries in the world where political and financial strategy connect in respect to the United States and its bankers. . . . Why do we care about the Ukraine? We care about Ukraine because it’s a gateway to oil. It’s a gateway to Eastern Europe. It’s a gateway to control a situation politically, but also for our banking system to get involved from a financial perspective. Putin understands Ukraine is a gateway, as well. Russia backed a lot of the larger Russian banks . . . to fund oil and infrastructure and to basically take over the roll the U.S. banks and European banks were starting to have in the Ukraine.”

The Middle East is the same scenario. Prins says, “Russia has backed pipelines in Iraq. Lukoil is involved in projects there that have billions of dollars of money attached to them. U.S. banks also see the potential for billions of dollars of, not just oil money, but financing, or what’s called project financing, of the pipelines in Iraq. There is an $18 billion pipeline project and Citi Group wants to finance that. Citi Group set up a bank in Iraq last year to be able to do that. Citi Group has a $2 billion contract with Boeing financing airplanes with Iraq. So, there are a lot of other components in that region that are still in flux.”

Here is a direct video link.

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Good new ad from Interactive Brokers

Pleased to see this new ad running on Bloomberg recently…
Here is a direct video link.

Their marketing people must have heard my podcast last November… (a little joke)

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Howard Davidowitz on the Financial Survival Network

Howard has 40 years of experience in debt analysis and corporate restructuring. Agree with him or not, he’s always good for a giggle…

Howard Davidowitz, well known consultant and turnaround expert, is unhappy with the state of affairs in America today. He says there’s no leadership and that the appearance of prosperity is being fed by record amounts of debt. The situation can’t continue on indefinitely and won’t have a happy ending. However, Howard has not lost hope. He believes that the right person will be elected and will help turn it all around. He’s seen it happen before in New York City and he believes that it will happen again in Washington, D.C. Here is a direct audio link.

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Resistance to debt now widespread

Drug resistance is the name for a reduction in drug effectiveness over time. Perpetual “add debt and stir” monetary prescriptions are no different. Years of over-use have now rendered more debt highly ineffective at treating reduced consumption.

As pointed out by Grant Williams recently, where in the early 1950′s a dollar of increased debt in America multiplied to nearly $5.00 of increased demand in the overall economy, between 2001 and 2012 this effect diminished to some $0.08 of increased GDP for each new dollar of debt.  In other words, increased debt financing has been an inefficient capital trade-off– detracting from future spending–for years.  That future is now here.

Some of this is that an aging population wants less consumer goods. But the balance is due to the paralyzing effects that low savings and ongoing debt payments have after years at zero bound rates and every crazy financing scheme imagined to entice borrowing far beyond healthy limits.

The foreseeable endgame is taking many by surprise and throwing traditional economic theory on its stubborn and foolish head as shown in the chart below  See:  Let there be bubbles for some more excellent context.

Problem is debt chartAging demographics and debt resistance are the main reasons that central banks have lost their once significant force on the global demand throttle.  This updated chart of the US 10 year Treasury yield speaks volumes:  6 years of massive global stimulus and interest rates continue to signal more deflation ahead.

10 year treasury Sept 23 2014

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Potential templates for Canadian home prices

We have long been aware that Canadian home prices are among the top 3 most over-valued on the planet along with Australia and New Zealand. (Talking with a friend from New Zealand last week, confirmed that prices on the ground feel just as crazy as the charts and stats we track from afar). The Chinese property markets were also sheer madness over the past few years, but in recent months seem to have started into a much deserved and necessary deflation phase once more.

The common thread in these late blooming bubbles has been lingering optimism from the 2002 to 2008 consumer credit-led commodities boom that burst in 2008, revived on global stimulus in 2009, and then re-burst in 2011 amid massive over-capacity and inventory left by the rampant speculation of the boom. Misunderstanding the nature of these boom-bust investment cycles, Canadian households went full self-destructive mode over the past 3 years, piling on far more debt than anyone should have lent them.

For those who are wondering what the correction phase for still jubilant property valuations could look like: “Like how bad could it be eh?”, other global precedents can offer some guidance. A recent article on the Spanish property market gives a sense of the template that has followed other previously bubbling property values in the world:

“Spanish home prices rose 0.8% in the second quarter compared with a year earlier, the first year-over-year increase since 2008, according to data published earlier this month from Spain’s national statistics institute. The uptick is a sign that prices are stabilizing after falling more than 35% during the last six years.”  See: Squatters welcome Blackstone’s Spanish property play.

An average decline of 35% nationally followed by several years of flat pricing as valuations work lower with debt levels and back in line with wage growth and disposable income is, not only feasible in Canada but, a pattern we have seen many times in the aftermath of previous boom and bust property cycles.

The decline phase doesn’t feel great for those with a lot of property equity. But with little to no debt, price declines are manageable and should be welcome, since mean reversion will bring prices back into the realm of attractive investment. 25 to 35% lower prices will bring rent yields, that have been inadequate of late, up to properly compensate for capital risk once more. Buying low and holding for longer-term income collection will be an attractive investment option.

On the other hand, for those who are highly levered today, such property devaluations are likely to prove bankrupting.

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Important read: “Where’s the Growth?”

John Mauldin’s latest weekend missive, “Where’s the Growth?” is an important read this week.

Just as the Catholic Church convicted Galileo as a heretic for pointing out that the earth rotates the sun and not the other way round as the church insisted, the economics and finance status quo directing global policy today is similarly wrong, entrenched and intolerant in its insistence that more and more monetary ‘stimulus’ is the solution to an already toxically-indebted global economy.

In the same way that unlimited steroid-use eventually degrades the health and viability of athletes, so relentless and wrongheaded monetary stimulants are degrading our economy. After 24 years of ‘stimulus’ experiments in Japan, followed by now 15 years of reckless easing and debt-schemes in the rest of the world, the results are quantifiable and undeniably devastating for real households.

And yet, those who dare to say so are systemically excommunicated from policy directing institutions and mainstream media all around the world. It is long past time for fresh thinking that works with the facts rather than tortured academic theories that have long been proven wrong and incredibly damaging. Getting new decision makers into the self-deluding monetary circles now running global policy is a critical next step in the recovery back from financial disaster. The critical steps are as always: admit, repent, reform, recover. So long as those who led into the crisis remain at the helm, there will be no admit and no repent, and thus no meaningful reform and recovery.

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