Juggling Dynamite

The rape and pillage of the public purse and trust by investment bankers the past 8 years is slowly coming into collective awareness. See: Los Angeles now spending more on Wall Street fees than on maintaining roads.

“A report, published by the union-backed Fix LA Coalition, notes that “the City of Los Angeles last year spent more on Wall Street fees than it did on our streets.” Indeed, the report notes the city “paid Wall Street $204 million in fees, spending only $163 million on the Bureau of Street Services.”

The fees are connected to the controversial interest-rate-swap deal cemented by Los Angeles in 2006. It is a deal similar to those engineered by Wall Street in cities across the country. Those deals have made headlines in recent years in some of the country’s most high-profile municipal budget crises.

For instance, a recent study by former Goldman Sachs investment banker Wallace Turbeville found that an interest-rate swap deal was a primary driver of Detroit’s fiscal crisis. Noting that the banks used the city’s bankruptcy to demand “upwards of $250-350 million in swap termination payments,” Turbeville concluded that “a strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.” (A court recently reduced the amount the city has to pay Wall Street to unwind the deals).

Likewise, Rolling Stone’s Matt Taibbi documented how interest rate swaps were at the heart of Jefferson County, Alabama’s infamous bankruptcy.

Meanwhile, as recounted in a front-page New York Times story about Denver in 2010, a swap deal involving Dexia that was engineered by then-superintendent Michael Bennet blew a hole in the city’s school budget. In 2013, Bloomberg News reported that “Wall Street banks collected $215.6 million that Denver’s public schools paid to unwind swaps and sell bonds” – a “sum is about two-thirds of annual teaching expenses.” But while the city suffered, Bennet went on to raise big money for his subsequent U.S. Senate run from the financial industry – including from J.P. Morgan, which was at the center of the catastrophic deal.”

It is time for people everywhere to wake up and put a stop to this gouging out of civil society…

Another look at the bearish small cap divergence is found in the below chart, showing a ratio of the Russell 2000 small cap index over the S&P 500 index since 2006. Each time we saw this break down since 2010, the Fed raced to the rescue with another round of QE; this time they are tightening tapering, not adding more.

The 10 year Treasury yield is so far confirming the small cap vote for slower growth ahead.

Sure HFT gamers don’t care about sales, income, jobs, economic growth or valuations, but alas, the real world must. The following chart courtesy of John Hussman shows that 49% of the Russell 2000 stocks have now entered a bear market with losses of 20% or more so far.

The volatile selling in Nasdaq and small cap names is making some traders nervous, and technicians say it’s a time for caution while the once sizzling names continue to burn. Here is a direct video link.