Juggling Dynamite

Assets are being sold across the globe today in liquidation-style typical of participants who have been rolling the dice on record high leverage. As prices drop they must increase selling to cover margin calls, which forces more selling and more price drops…and so it goes.

In a related theme, China sold over $20 billion in US treasuries in the month of June. Some have suggested this was out of concern for US debt levels. This sounds very savvy, except more likely, I think, is that China is repatriating cash (selling investments) to raise liquidity needed in their domestic banks and economy.

See this clip on growing stress in China’s banks–some of the biggest in the world, aggravated by a surging shadow banking sector that has taken on a momentum of its own. Here is a direct video link.

It should not be forgotten that China has seen a large reduction in its trade surplus and thus income over the past few years (always worse because “unexpected” of course), and this trend has been accelerating in recent months as the global economy turns down again.

As with individuals and companies facing high overhead and falling income, China needs to sell assets and raise cash. The same thing is happening in Japan (they sold about $20 billion of Treasuries in June as well) where rates have been virtually nil for years, exports have been falling and an aging population is increasingly selling financial assets to pay for living expenses.

In the end, the net effect of all of this is that financial assets are being sold and yields are moving higher. (Just one example: REITS are now off more than 17% from recent highs). Bonds are also being sold and rates are moving higher–precisely what the confidence men in central banks assured they would not allow to happen.

Over time the mean reversion of market prices will bring better opportunities for true investors. At the same time it will no doubt crush many speculators and harm those holding over-pried assets today–not least of which are the central banks themselves, who have swapped trillions in longer dated and lower quality bonds onto their balance sheets over the past 3 years.

Over the past 10 years, corporate executives and employees, particularly in the financial sector, have avoided culpability for illegal acts and intentions by hiding behind their corporations.  The bigger the organization, the easier for executives to fain ignorance, “I was not aware,”  “I had no direct knowledge”…we have heard every such incredulous excuse over the past few years.

Since the companies boast a ‘fortress’ of deep pockets, few regulators or individuals have been able or even willing to sue them for civil damages. The result has been a shocking lack of accountability where people acting within corporations have literally gotten away with all manner of offense. Any settlement paid at all, has typically been negotiated as the cost of doing business without admission of any fault. On the criminal side, actions have been nearly nil. This pathetic state of affairs was admitted by Attorney General Eric Holder when speaking before the Senate Judiciary Committee in this clip last March, where Holder agrees that many financial firms had simply become too wealthy and lawyered to successfully prosecute, never mind jail.

The US Supreme Court made it clear in the 2010 Citizens United case that corporations were protected as people with full rights under the US constitution. (See MSNBC’s Keith Oldermann’s prophetic comment on the ramifications of this decision here).

Yesterday the Department of Justice reminded JP Morgan, Jamie Dimon and everyone else of something they have thus far overlooked: along with some constitutional rights, we individuals also have legal duties and responsibilities under the law. Where we fail these duties, we can be prosecuted and penalized for criminal intent, negligence and willful blindness.  While a corporation can’t go to prison, it can be penalized in accordance with the same established sentencing principles that apply to the rest of us: denunciation, deterrence, separation of offenders, protection of the public, rehabilitation, reparation, promotion of responsibility, reducing recidivism, confiscating the proceeds of crime…

The DOJ is finally onto a smart tack to restore the rule of law in the land. And it is long overdue.

U.S. Attorney Preet Bharara addresses the charges for two former JPMorgan employees in regards to the $6 billion “London Whale” case. “This was a perfect storm of misbehavior and inadequate internal controls,” he says. Here is a direct video link.

“There are half-a-million bees living at the Seattle Airport. Since 2006, 30% of the bee colonies in the U.S. have vanished. A huge problem, considering Bees pollinate 1/3rd of everything humans eat. In an effort to save the bees and utilize undeveloped airport land, Sea-Tac has given Bee Keeper Bob Redmond $500 dollars and 50 acres for breeding. The 500,000 bees living at the airport fly 5.5 million times a day, 5,500 times that of the commercial flights at Sea-Tac.” Here is a direct video link.