Juggling Dynamite

Reform may be finally getting somewhere. MSNBC's Dylan Ratigan walks us through the allegations and suit filed against Goldman Sachs yesterday by the SEC:

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Hopefully this will be a tipping point back in favour of sanity, truth and real reform. The implications have the makings of a renewed firestorm in the financial sector, and given that their continued fraud has been the wind beneath the wings of the stock market rally the past year, the implications should not be ignored.

“Given the push in Washington to pass a new financial-regulation bill, the SEC suit comes at a perfect time to help mute opposition.
If it results in stricter-than-otherwise legislation surrounding derivatives and trading activities, as proposed by former Federal Reserve Chairman Paul Volcker and the Obama administration, profits would suffer not just at Goldman.
First-quarter results from J.P. Morgan Chase showed, for example, that about 75% of the bank's net profit came from investment banking, which includes trading. Bank of America on Friday told a similar tale.
The SEC's Goldman case may also be just the first in a flood of actions against banks that sold exotic financial instruments based on mortgages. The growing threat of general litigation risk has already emerged in bank results….”

See: WSJ: Goldman's Grief may be shared

There is great market excitement the past week about the prospects for earning beats in Q1. Surely we must care that 86% of the total growth in corporate earnings of the S&P over the past 12 months has been thanks to “extend and pretend” financial institutions who have so far been able to side-step acknowledging staggering losses in their loan portfolios.
The charade cannot possibly last forever, especially when commercial loans are now failing in record volume in the next wave of the on-going credit crisis.
This chart from the Wall Street Journal this week, paints the present disconnect between the rally in bank stocks, the S&P 500 which it has led, and falling commercial property values to which the banks are heavily levered.

See: WSJ: Lenders open to real-estate pain
Important to note that while the banks packaged and sold off large chunks of the residential mortgage junk in their trunk, they held on to the bulk of commercial loans all for themselves. Hopefully the government won't step in again to rescue them by throwing tax payers further under the bus.

Over-capacity and wasted resources are a hallmark of the Chinese government's insistence on growth at all costs. Just one example is that the country is currently building a number of high-speed railway networks as a kind of economic stimulus to create jobs. The trouble is the ticket prices are higher than most people there can afford and are more expensive than some of the faster air travel options available. The natural result is that citizens are not using the existing lines enough to make them economically viable. Yesterday a major rail line was shut down after only two months of operation because so few people were using it:

“Some people wondered why the train was shut down permanently and didn't try to compete more effectively with airline tickets in terms of prices. Others felt closing the newly-built rail line was a complete waste of resources.
What is outrageous is that there doesn't seem to have been any feasibility study conducted to see if such a line was needed, and instead the government, probably provincial, went ahead and built it just to boost GDP growth.
Imagine all that steel, technology, and not to mention migrant workers' physical labour to build the rail line, only to have it shut down in two months?”

See: High Speed Overload Hat tip Ray T.
This reality behind the “China story” are details that perma-bulls recklessly gloss over.