Friday, February 26, 2010

China - The Mother of All Black Swans

This presentation here is too good not to be widely read.

Thursday, February 25, 2010

Casino Greece

I am lured back from my "sabbatical" to this blog by the more revelation of how "credit-default swaps" derivative products designed to help Greece to "hide" its true indebtedness have come to bite its bottom. Read the full report here.

The following excerpts deserve a few of your minutes:

..."These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich....

...But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations....

...there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.

So who or what's to blame? Swaps or Greek fiscal irresponsibility?

The primary problem has to be the latter. If Greece had been fiscally strong, no "hi-tech" derivatives could produce a financial calamity. Those CDS prices would not have gone haywire creating a momentum of their own.

What is not clear to most outside the financial business is how that industry has morphed into a hydra-headed weapon of destruction if you are on the wrong side of the trade.

And the mathematical complexity of those WMD is simply beyond most mortals. Not just WMD, the global financial game itself is beyond the knowledge of most politicians and legislators who are, in theory, there to protect the stability of the society which elected them.

Unless you understand this point, you cannot understand how Wall Street has been able to run circles around Washington in the current financial crisis getting away with the metaphorical murder.

Of course Wall Street has been and is still aided by its intellectual allies in Larry Summers, Geithner and Bernanke who have a natural tendency to think like Wall Streeters.

However, even they, without spent any meaningful time in the trenches on Wall Street, trading day in day out, playing with billions, making and losing in seconds, don't really appreciate how quickly Wall Street can spot an opportunity faster than you can say: "Can you explain this to me, please, slowly?"

two cases in point. When Wall Street understood Washington got scared by the prospect of Great Depression V2.0, the honchos immediately got Washington DC to grant them a banking license to gain access to zero cost funds plus federal guarantees on loans.

With these two de facto cost less blank checks, Wall Street quickly amassed financial assets priced for Armaggeddon. Any surprise their 2009 profits and bonuses were off the chart? They played DC for fools.

Take Greece. Of course the good folks at Goldman Sachs knew what they were doing selling derivates to Greece to postpone its inevitable days of reckoning. Of course they didn't want to hold any Greek papers unless they could quickly off load them to someone else. So Wall Street did two things: they helped create a market for those instruments by financing a new company, Markit in London, to produce sovereign risk indices: iTraxx Sovereign Index.

With that Index and its sub-indices covering Western Europe, Asia and so forth Wall Street created, out of thin air, derivative products that bet on movements of those products. Hence a giant Sovereign Risk Casino came into existence.

Wall Street could then hedge against whatever positions they may have held in whatever sovereign papers in their own accounts. Or for that matter bet against any sovereign risk on a net basis.

Goldman Sachs, according to earlier reports, also sold back to the Greece Central Bank, some of the Greek papers they were holding.

It is not far fetched that Wall Street has been running and managing a global casino for some years. Goldman Sachs and others have been not merely financial intermediaries taught in universities, they are principals themselves by holding positions for their own accounts.

If Uncle Sam had come to its rescue, that global casino's ownership and management would have looked very different today.

But politicians in general and Washington in particular don't understand modern finance. Wall Street has successfully led them to believe the world needs this "casino" and only they, the same crew, can manage it, thank you.

One can be cynical and say politicians are only too ready to be corrupted without knowing how to make an honest living let alone a living on Wall Street, and Wall Street is only too willing and able to lead them by their nose. But is that cynicism too far-fetched?

Back to my sabbatical, friends.

Thursday, February 18, 2010

Summing Up and a Sabbatical

Just about a year ago on March 1 I started this blog.

I said: "...There is much confusion and unhappiness all around regarding what is being done to bail out overpaid financial "geniuses" who got us into where we are.

Perhaps some straightforward thinking is in order devoid of patronizing and obfuscating technical terms preferred by those who run our system.

This blog hopes to contribute to that effort so that we, those who pay taxes and mortgages on time, may know what to do to make the system a little better in the future.

Towards this end all of us need to be a little more vigilant of future misdeeds committed by those we usually consider as our leaders or pillars of society: bank presidents, Treasury Secretaries, Central Bankers and elected officials.

Perhaps our vigilance will result in advance warnings before the next perfect storm could ever gather sufficient force to engulf us all as this one is doing right now"...

These days It is rare to find anyone who is not aware of how Wall Street went over board, how Washington DC has failed to put in rudimentary checks and balances reigning in Wall Street in exchange for a blank check; and how, as a politician, Obama has been self-destructing as a man whose promised changes one can no longer believe so readily.

After Obama compared multi-million dollar wages and bonuses paid to Wall Street leaders with those of baseball players, one can say for a high degree of certainty that Obama is essentially a "Chicago School" convert. Only alumni of that "Cathedral" could compare Wall Street pays with those of sports. Obama, as it turned out, ain't what many thought he was when they cast their vote for him as FDR V2.0. He is turning out to be "just another" politician.

Paul Krugman said it well, "Oh My God". He also said in conclusion: "He is clueless". To which I sadly concur.

The weight of money in influencing how public policies are formed in Washington, DC, indeed in so many other countries of varying degrees of political liberty, is perhaps the trend of the 21st Century.

If you detect a touch of helplessness and futility in what I have been trying to do, you are not wrong.

Here is what has happened:

The Great Depression V2.0 has been averted by the Fed and other major Central Banks printing money. However, due to the blanket no-question-asked way of doing so, a base is formed for another bubble down the road.

The unevenness with which public money has been spent lays bare how strong interest groups representing numerically small number of people, but numerically large sums of money, have managed to capture Washington DC.

USA is supposedly a true democracy. But in my view it is moving ever closer to a Third World Crony Capitalist model once dismissed in the land as corrupt and "Third World" with a barely disguised pinch of racist superiority. "We in the West don't do this sort of thing". "That" could only happen in "Asia".

Sure, mate. Whatever you wish to believe it's fine with me. We still live in the free world and we are all entitled to our opinions however stupid and wrong they maybe.

I am going to take time off to focus on other things including writing columns for publications, something I used to do far more regularly before I began this blog. lists most of my articles.

I want to add to that list. To do so, I will blog less frequently. So, it is not "adios", rather it is "hasta luego". See you soon.

Every now and then I could write something if I am so moved. But I shall not be writing everyday here. I hope you are not too disappointed.

If I publish something, I will alert you on this blog. So, check back every now and then.

Thanks to you all for being my regular readers. Until next time, keep well and keep alert for volatility in financial and other markets.


Tuesday, February 16, 2010

Goldman Sachs and Global Financial Stability

An intriguing thought proposed by Simon Johnson at MIT:

"A rogue trader could destabilize a firm, such as Barings, and a rogue firm such as Goldman Sachs"?

Johnson's argument is well worth your time:

Goldman Goes Rogue – Special European Audit To Follow
Posted: 14 Feb 2010 06:22 PM PST

At 9:30pm on Sunday, September 21, 2008, Goldman Sachs was saved from imminent collapse by the announcement that the Federal Reserve would allow it to become a bank holding company – implying unfettered access to borrowing from the Fed and other forms of implicit government support, all of which subsequently proved most beneficial.

Officials allowed Goldman to make such an unprecedented conversion in the name of global financial stability.

(The blow-by-blow account is in Andrew Ross Sorkin’s Too Big To Fail; this is confirmed in all substantial detail by Hank Paulson’s memoir.)

We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November.

These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets. When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings. But a single rogue bank can bring down the world’s financial system.

Goldman will dismiss this as “business as usual” and, to be sure, a few phone calls around Washington will help ensure that Goldman’s primary supervisor – now the Fed – looks the other way.

But the affair is now out of Ben Bernanke’s hands, and quite far from people who are easily swayed by the White House. It goes immediately to the European Commission, which has jurisdiction over eurozone budget issues. Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients.

This audit should focus on ten sets of questions.

1) Which eurozone governments have worked with Goldman, and on what basis, over the past decade? All actions prior to and after the introduction of the euro need to be thoroughly reexamined.

2) What transactions has Goldman facilitated and how has that affected the reporting of European government debt? (Under the Maastricht Treaty, eurozone government debt is not supposed to exceed 60 percent of GDP.)

3) In the case of Greece, the accusation is that Goldman deliberately and in a premeditated manner conspired to hide the true degree of government debt. Is this true, and to what extent has Goldman helped other countries engage in similar transactions, e.g., countries now seeking entry to the eurozone?

4) What is the full extent of Greek and other government liabilities, if these are accounted for properly? Without this reckoning, it is impossible to design a proper level of European Union (or any other) support for weaker eurozone countries.

5) Are there non-eurozone countries that have also been aided and abetted by Goldman in this fashion? For example, are the UK and Switzerland implicated – and thus endangered?

6) Has Goldman extolled the virtues of government debt in Greece, or other countries, while at the same time helping to deceive investors on the true risks inherent in those debts? What were Goldman’s own holdings of these securities?

7) Is there evidence that Goldman has structured similar transactions for the private sector – enabling companies to conceal the level of their true indebtedness? Have securities issued by such firms also been endorsed by Goldman to the buying public?

8) Were Goldman’s US-based supervisors aware of Goldman’s activities in Greece and other eurozone countries? Did they condone activities that undermine the integrity of the European Union?

9) Where was the European Central Bank while all of this was happening? Has the ECB become dangerously enraptured with the new Wall Street and its “techniques”?

10) Did any responsible official really think that what Goldman was constructing was really some sort of productivity-enhancing financial innovation – as opposed to a sophisticated form of scam?...

...If the Federal Reserve were an effective supervisor, it would have the political will sufficient to determine that Goldman Sachs has not been acting in accordance with its banking license. But any meaningful action from this direction seems unlikely.

Instead, Goldman will probably be blacklisted from working with eurozone governments for the foreseeable future; as was the case with Salomon Brothers 20 years ago, Goldman may be on its way to be banned from some government securities markets altogether.

If it is to be allowed back into this arena, it will have to address the inherent conflicts of interest between advising a government on how to put (deceptive levels of) lipstick on a pig and cajoling investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a fundamental question: For how long does it wish to be intimately associated with Goldman Sachs and this kind of destabilizing action? What is the priority here - a sustainable recovery and a viable financial system, or one particular set of investment bankers?

To preserve Goldman, on incredibly generous terms, in the name of saving the financial system was and is hard to defend – but that is where we are. To allow the current government-backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible.

The credibility of the Federal Reserve, already at an all-time low, has just suffered another crippling blow; the ECB is also now in the line of fire. Goldman Sachs has a lot to answer for.

By Simon Johnson

How likely would any of the above 10 items be taken up by EU authorities? Good question.

Monday, February 15, 2010

Global Banking Compensation

Absent is Goldman Sach's Lloyd Blankfein compensation because it would be outside of the box on the left hand side. He reportedly took home over $80 millions versus "only" $19.7 millions by Jamie Dimon. Obama still didn't get it that these guys were grossly overpaid compared to the "market".

Greek Offensive

When your back is up against the wall the best defense is often a good offense. This is exactly what the besieged Greek Prime Minister is doing. Blame your domestic trouble on foreigners, even if they are in fact your fellow members of the same eurozone club, the club Greek begged to join as a symbol of its "developed" status when in fact it was and is still run like a banana republic.

What is Mr. Prime Minister doing?

FT reports:

..."In a harshly worded speech to the cabinet the day after the summit, which was televised live, Mr Papandreou claimed Greece was being used as a “laboratory animal” in a test of strength between the eurozone and financial markets.

“The EU’s own credibility is being tested,” he warned. “It must correct the mistakes it made over Greece, so it will be especially strict with us.”

Analysts said the speech was intended to rally trade unionists, who are threatening to increase strike action, as well as the governing Socialist party’s hardline faction"...

This is another example of how the bank is held hostage by a borrower of billions unable to pay. The bank needs him more to survive and the borrower can then play the bank like a fiddle.

That "harshly" worded speech was clearly intended also to shift national anger towards outsiders.

Greece will not wage war. But often in the past governments waged wars to divert domestic attention to somebody else. Today the Greek government is doing exactly that.

So predictable. So tragic.

The Greek Economy - A Glance

From the CIA FactB Book 2009:

- Greece violated the EU's Growth and Stability Pact budget deficit criteria of no more than 3% of GDP from 2001 to 2006, but finally met that criteria in 2007-08, before exceeding it again in 2009 by 12.7%. Public debt, inflation, and unemployment are above the euro-zone average; debt and unemployment rose in 2009,
- GDP - real growth rate: -2.5% (2009 est.)
- nvestment (gross fixed): 15.6% of GDP (2009 est.)
- Budget: revenues: $108.7 billion expenditures: $145.2 billion (2009 est.)
- Public debt:108.1% of GDP (2009 est.) 97.4% of GDP (2008 est.)
- Exports: $18.64 billion (2009 est.) $29.14 billion (2008 est.)
- Imports: $61.47 billion (2009 est.) $93.91 billion (2008 est.)
- Reserves of foreign exchange and gold: $NA (31 December 2009 est.) $3.473 billion (31 December 2008 est.)
- Debt - external: $552.8 billion (30 June 2009 est.) $504.6 billion (31 December 2008 est.)
- The public sector accounting for about 40% of GDP

You don't need a PhD in economics from MIT to conclude Greece is flat broke.
Wny is it broke? There can only be one answer: years of mismanagement by the "leaders" of the country voters kept electing to public office.

Sunday, February 14, 2010

What is a "Free Lunch" Greek style?

The Germans without whose help Greece will fall further down a deep hole have this to say, reported by the FT:

..."The mood in the German Bundestag is strongly opposed to any significant financial package.

“We have a big problem,” said Hans-Peter Friedrich, deputy leader of the largest Christian Democrat-Christian Social Union group in the parliament. “Four years ago we increased our pension age to 67. In Greece it is 55. We cannot persuade our people that we will give the Greeks money to finance their state spending when they have not carried out their most urgent reforms"...

55 is the age of retirement or when the pension is collectible? If this ain't a "free lunch", I don't know what else it could be.

So, any wonder Greece is going broke? How to fix it is not an economic issue. You can see it is deeply political.
Once folks are used to "free lunches" they expect that to be their right. Who promised them initially? You don't need a PhD from Oxford to figure that one out.

Greece vs European Union

Fingers are pointing this and that and every which way. They might as well be daggers. What a pathetic scene.

The FT reports: "Greek Prime Minister Mr Papandreou blamed the European Commission for failing to crack down on the previous conservative government’s “criminal record” in falsifying statistics. “This has undermined the responsibility of the European institutions with international markets,” he said".

Ah, so a domestic issue of lousy governance is a foreign responsibility?

You can bet your bottom dollar, or euro, that if indeed foreign authorities had taken a strongly worded public position there would have been a major uproar about violation of sovereignty.

Will stronger members of EU help out? In particular Germany, the largest of them all?

FT reports: "Mr. Papandreou's outburst is likely to infuriate the very leaders whose help Mr Papandreou needs. It came as it emerged there would be no more talk of financial assistance until Athens had persuaded the EU that it had a sustainable austerity programme in place.

Germany is insisting Athens bears initial responsibility for restoring confidence in Greece. Angela Merkel, German chancellor, resisted French efforts to come up with an explicit bail-out package at Thursday’s summit of EU leaders in Brussels"....

What would constitute a "sustainable austerity programme"?

Good question. The Greek government has just announced a series of measures: higher taxes on more people, no cash transactions of over 1500 euros after jan 1, 2011, higher VAT taxes, capital gains taxes and cut in earnings of public servants.

Ummm. Good luck. Expect social turmoil, if you asked me.

The economy has been in recession.

FT reports : "...a deepening slump which has been worse than reported, with the fourth quarter of last year seeing another turn for the worse – raising more doubts over whether it can meet its targets of cutting public-sector deficits. Greek gross domestic product contracted by 0.8 per cent in the final three months of last year, by far the sharpest decline reported so far by a eurozone country.

That followed declines of 1 per cent, 0.3 per cent and 0.5 per cent in the first, second and third quarters of the year.

Previous estimates had shown falls of 0.5 per cent, 0.1 per cent and 0.4 per cent. The pace at which Greek GDP dropped last year could also cast doubt on the government’s prediction that GDP will fall by just 0.3 per cent in 2010"...

Given this background and the history of free lunches, the history of a "shadow" market where cash transactions have been a normal fact of life to get around punishing taxes that have been misspent by incompetent and wasteful governments, no one would want to pay higher taxes.

Students of economic development are usually forced to read dense, mathematical economic models. I have always thought that's silly.

No economy can prosper without quality public governance. Countries are poor not because the leaders do not understand mathematics or economic models. They do and they don't care. Most economic problems are created by corrupt leaders.

Greece is yet another example of how those leaders have led the country down to a dead end. To revive it would take herculean effort -- not by leaders who are on top, but by the people who have to pay the price.

Now, people are willing to suffer, even die, if they believe in a just cause. Unfortunately, leaders, or the ruling elites, of declining economies have long lost their legitimacy as trustworthy. It will take a miracle for the Greek people, or for that matter, for the Argentinian people, or name any African people to voluntarily agree to an austerity program when they do not have trust in their leaders. In those poor countries "austerity" measures are usually enforced by force. Many people have died in protestations.

This is going to be a real Greek drama. Watch your headlines. I smell big trouble. Even blood.

Wall Street & "hidden" Sovereign debts

The real story not told by the scary headlines about Wall Street "hiding" Sovereign debt to help borrowers to report legally but not truthfully is how ignorant the various regulatory authorities are about modern financial tools.

The first layer story is about Wall Street designing derivative products that allow borrowers, including governments around the world, to legally report less than what it should.

Sovereign can legally make its debts "go away" because there are insufficient reporting requirements with respect to derivatives. Contingent liabilities appear to belong in a parallel and uncharted universe.

So, should we be upset now to realize Greece, among others, is in far more serious indebtedness than we knew of? That there is now at a minimum a meaningful risk that some major financial blowout may happen? We thought we had seen the worst, yes? So, whom should we blame?

We cannot really blame Wall Street since it had done nothing illegal, right?

So, do we blame government officials?

Well, not quite, since they are not as qualified and smart as those who run around them in circles, namely, their former smarter classmates who went on to work on Wall Street to maximize their incomes and wealth while the more publicly spirited blokes went on to work for the government, namely, to become "public servants" of you and me. We cannot realistically blame people for being dumb. They are what they are. Besides public servants are downright "cheap" compared to what their bankers receive as wages or bonuses.

Perhaps we should blame ourselves. We don't want to pay taxes but we expect public servants to be as savvy as Wall Street bankers. More than that, my recent postings tried to show, we, the taxpayers, expect free lunches wanting the government to foot all kinds of bills, but we pay the officials a pittance.

In Singapore, public servants are paid as well as most senior private sector jobs. And if they are then caught with a greasy palm, they end in a long jail sentence.

In the United States Senators, Congressmen can be "bought" with a pittance by lobbyists. When the government was deep in ideological navel gazing, as in the last Bush Administration, not even smart public servants dared to take a harsh look at funny business on Wall Street let alone propose new regulations to enforce more transparent reporting.

So, while the world is horrified by what Greece had managed to get away with hiding its debts with the help of, yes you guess it, Goldman Sachs, let's think about the deeper problem of how to regulate Wall Street without strangling it.

The full report of how Goldman Sachs helped Greece is here.

The "Cradle of Western Civilization"

Simon Johnson says: "...Greece is well down the path to becoming regarded more like Argentina – a country that struggles over many decades (and whose leaders frequently rail against the world) and for which episodes of reasonable prosperity and new economic models are punctuated by gut-wrenching crises, most of which do not shake the world.

Will the EU save Greece? Much will depend on how bad the situation could become in other “related” (in the eyes of the financial markets) places"...


Argentina was once one of the five richest countries on this planet ahead of France even. Now, through a mind boggling history of serially mindless, cynical, corrupt, incompetent governments the country is now just another Exhibit A of a mismanaged Third World banana republic.

Sad. Argentina was at one point as advanced as a continental European country. It has produced as many Nobel prize winners as Spain, winning the first among all Latin American countries. The country's name, Argentina, was derived from the world silver in French: Argent, now commonly used in French to mean money.

Greece. Ah the Glory that was once Greece: Aristotle, Plato, Homer, Acropolis, that Greek myths and plays, the art, the architecture, and of course the thoughts behind the big D for Democracy that defined the concept of the West is now another tiresome exhibit of a nation badly governed serially run by cynical, incompetent, corrupt politicians who are only good at promising free lunches to a people grown up expecting "manas" from heavens without having to work for it.

As the West continues to expect "government" to do this and that for them, the West will no doubt continue to decline relative to those peoples elsewhere who, after years of painful lessons, know you cannot get rich without working your ass off, day in day out, without handouts.

Yes, many such countries' leaders are also corrupt, but the saving grace is their national economic development policy is growth oriented and not protectionists and not based on handouts.

Saturday, February 13, 2010

The Greek "tragedy" or farce in PIGS

PIGS in current economic jargon stands for Portugal, Italy, Greece and Spain. Why lump them together? Lots of debt.

So what's wrong with that? Well, if you owe enough money and if cannot pay the creditors, something has to give. As a footnote, many argue PIGS may sound good, but the acronym misses out Ireland. PIGS should really be PIIGS. OK, PIGS does sound better, so let's go with the convention.

Why is PIGS now a hot topic? The immediate answer is Greece. The larger issue is Debt in general, now especially in the West.

The case in point is the particularly odorous case of Greece the government of which has been lying to the world through creative accounting and selective reporting for some years (6 is the figure used) about the true sizes of its national deficits.

Right now EuroZone governments, mainly Germany and France, the two largest economies in Europe, are scrambling to find a solution to the Greek "problem".

The problem arose from essentially 2 sources, reducible to one.

1) EuroZone imposes strict quantitative limits on how much deficits (ergo national debt) a member country can run up.

If these limits are breached, the government in question must remedy the deficit situation. Ergo, cut, cut and more cuts to bring the deficits down to statutory limits. A grace period is given, but clearly specified.

2) Government spends more money than it should to placate social and economic demands (I want what "they" have and I want them NOW) and to "buy" off political opponents or to "solidify" domestic allies. In short, many folks outside the government want a free lunch. Irresponsible government officials gladly oblige. They don't have the leadership and the spine to say NO.

This second reason is now a Western phenomenon. The US is a prime example of that.

Ironically those Asian "third world" economies, themselves lectured at and battered by too much debt a while back had swallowed hard, tightened belts and now have by and large sterling national balance sheets. Thailand, Malaysia, not to mention Singapore, Hong Kong, Korea and of course China. All have abundant (some say too much) reserves, trade surpluses and high savings rate.

Greece, among others, has been living a good life on borrowed funds and the time to pay up has come.

What to do? Good question.

EU cannot really afford to let Greece get off the Euro as speculators are betting on. Recorded shorts on Euro has never been so high. Once Greece went, then like the Lehman Brothers case, the "signal" is that all weak Euro economices, the PIIGS, will have to leave the Euro. That means a total collapse of the European Union each going back to one's own national currency. IT would be a godsend to currency speculators.

I am sure the German Bundesbank and France are loath to bail out Greece, but what's the alternative? Switzerland is the second largest creditor to Greece.

I think these 3 countries will have to do what the Western countries have been doing for decades to African countries: just forgive the debt Greece owes. Or print more money to buy off the debt.

Who are the major creditors: See this chart

If you have 10 minutes the following 2 clips are worth your time: Stiglitz, Spanish official vs a sarcastic, no holds barred hedge fund manager on Greece.

Friday, February 12, 2010

Whither US interest rates?

Is there a global bond bubble or are we blinded by old habits?

The author of "The Black Swam" recently said on TV that it was "100%" certain bond prices would collapse. Interesting statement from someone whose punch line in that famous book was about the unpredictability of the future. The book was published before the Wall Street bailout and the author became famous precisely he was warning about the uncertain future in the middle of a huge bubble no one saw bursting.

The case for a bubble is straightforward: just look at all the money printed by the major economies, including China, to save the world from Great Depression 2.0.

Yet, interest rates are close to zero. Long bonds have barely moved.

Paul Krugman argues strenously that those, like me, are blinded by simplistic quantity theory of money: more money printed, all others being equal, results in higher inflation.

Krugman believes we are more like Japan in the "lost decade" of the eighties where zero cost money didn't do much, if anything. Economy was stagnant because Japan found itself in a liquidity trap where easy money was irrelevant, What the world needed then and now is more stimulus, forcibly pulling the world economy out of a deep ditch.

To support his argument, there is indeed excess capacity all over the major economies. Stories of mega ultra modern factories in China abound. Savings rates in the US have been moving up, meaning folks are not spending. No wonders. A large number of Americans, save a handful on Wall Street, are flat broke.

Feeble private demand and excess capacity do not an inflation make. Hence, there is no bond bubble, if you follow this logic.

So, what gives?

Niall Ferguson, a fabulous English writer, a celebrity multi-millionaire talking-head on TV and a respectable historian, now a professor at Harvard B School, is not an economist. In fact, definitely he is not one of my favorite economists either.

However, sometimes it pays to listen to someone with a historical perspective even though Krugman, the Nobel winner and august professor at Princeton, has only contempt for Ferguson, the "fake" economist properly schooled only in historiography.

Trained as an economist myself, I am among the first to admit economists do not always have the correct answers on economic issues even if they speak with the air of authority honed by years of precision, mathematical logic.

This is why I want you to think about this particular excerpt by Ferguson here:

..."For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

Read the entire article here. It provokes thought, if nothing else.

Thursday, February 11, 2010

Don't you just love Goldman Sachs?

..."Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit...

...the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

...At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005"...

Source: Read Der Spiegel here

This is Beijing calling Sigmund, are you home?

..."A 20-year-old factory worker who joined a banned political party because he was unhappy with one-party rule in China was jailed for 18 months yesterday.

A court in Shenzhen found Xue Mingkai guilty of subversion of state power because he joined the United States-based China Democracy Party last April, his mother Wang Shuqing said"...

Source: The Standard, Hong Kong (here).

C'mon guys. The Chinese Communist has over 70 million members, larger than all but 18 countries on this planet. The party is larger than the entire population of England (62 millions), or France (65.5 millions) or Spain (46 millions). It is almost 10 times the population of Israel. That's men, women and child.

The 70 million party members do not include the military which is put at 3 million.

So what's this China Democracy Party? Is there anyone outside the paranoid Chinese Communist Party who seriously believes that this tiny group of people would constitute a threat so lethal that the political system in China would collapse?

Why are Chinese leaders so nervous, if not manic or are they manic-depressive?

How big is that little party that so scares Beijing? It has been put at between 15-200 members (tops) around the world.

So this 20 years old factory worker goes to jail because he has paid maybe 4 USD party membership fee and has attended a few meetings?

By that standard, the Republican Party in the US should all be in maximum security prison since they plot on an hourly basis to put Obama in the political dog house and are, so far, not doing a bad job either.

So what's with the CCP, the world's largest communist party that is more capitalistic than any society I can think and yet almost as retentive as that ruling party in Burma!

A severe case of insecurity? But about what? Uncle Sigmund, where are you? China needs you.

Wednesday, February 10, 2010

Hank Paulson being contrite?

He actually thinks investment bankers are overpaid. Read this.

Tuesday, February 09, 2010

The geek who made Avatar possible

No, it's not James Cameron, "King of the world", but this man you never heard of in this article here.

Monday, February 08, 2010

What is the market price of Democracy?

It is sad to note how the weight of money is affecting democratic outcomes.

Here is a report of how Wall Street is now throwing its weight around, as if it had not done enough of late:

..."If the Democratic Party has a stronghold on Wall Street, it is JPMorgan Chase.

Its chief executive, Jamie Dimon, is a friend of President Obama’s from Chicago, a frequent White House guest and a big Democratic donor. Its vice chairman, William M. Daley, a former Clinton administration cabinet official and Obama transition adviser, comes from Chicago’s Democratic dynasty.

But this year Chase’s political action committee is sending the Democrats a pointed message. While it has contributed to some individual Democrats and state organizations, it has rebuffed solicitations from the national Democratic House and Senate campaign committees. Instead, it gave $30,000 to their Republican counterparts"...

Source: NY Times, February 08, 2010

The message is clear. If the Democratic President, Obama, intends to get tough with Wall Street, watch out, we the Wall Street will vote for your political opponents with our money.

It is a sad fact of life that it costs a fortune to run a national campaign. Any candidate with national aspirations has to cozy up to the monied class. Wall Street has the single largest concentration of wealth in USA now.

So, politicians are to blame, solely?

Yesterday, I relayed a poll showing most Americans, Republicans and Democrats, blame politicians for excessive spending. I said politicians want to spend because such spending benefits someone or some organizations in their own home state

So, my question to those voters who blame politicians is this: why do you keep voting for big spenders?

Here is a living example of how spending became excessive with the voters essentially wanting the cake and eating it too!

..."Last week, after nine months, the Senate finally approved Martha Johnson to head the General Services Administration, which runs government buildings and purchases supplies. It’s an essentially nonpolitical position, and nobody questioned Ms. Johnson’s qualifications: she was approved by a vote of 94 to 2. But Senator Christopher Bond, Republican of Missouri, had put a “hold” on her appointment to pressure the government into approving a building project in Kansas City.

This dubious achievement may have inspired Senator Richard Shelby, Republican of Alabama. In any case, Mr. Shelby has now placed a hold on all outstanding Obama administration nominations — about 70 high-level government positions — until his state gets a tanker contract and a counterterrorism center"...

Source: NY Times here.

Voters want to see the Federal Government spend money in their own state, obviously. They reward their Congressional and Senate representatives when they bring back the "pork" benefiting their own local economies. In reality only the contractors and real estate folks will benefit from new constructions.

However, the same voters do not want to follow their own logic. This very same logic is on the minds of voters in all other states who want to see the Federal Government spend more money in their states.

Classic conflict between what is good for one individual is not necessarily good for the whole.

You may be cynical and call this Democracy for Sale. But the real question is why don't the majority voters who do not benefit from "pork" vote the bastards out? Instead they prefer to blame "politicians" who are what they are only because they got voted in by the same complainers!!!

I have no answer. Do you?

Sunday, February 07, 2010

What are American taxpayers thinking?

Latest poll (read here) has some interesting and revealing statistics about what Americans are thinking.

Overwhelming numbers (83%) don't mind paying taxes but believe politicians unwilling to cut spending. Over 91% of Americans believe politicians are responsible for excessive spending. Only 11% believe government spends money wisely.

Yet, politicians pass bills to spend money because they are effectively pressured by parts of their constituencies to spend that money. Those who successfully lobby their representatives in the Congress are among the voters.

What is so obviously clear is the Congress that spends money is largely influenced by a relatively small part of the population who have the means to lobby and to make politicians sign into law bills the interested parties desire.

Therefore we see the discrepancy between what most voters think is the fault of the politicians and whom the politicians really listen to -- the powerful lobbies representing serious economic interests.

Voters should not blame politicians. They should vote for those poorly financed in their campaign who want to institute "change you can believe" -- like Obama! Ha!

Friday, February 05, 2010

Goldman Sachs the un-fall-able?

One would have thought the issue of whether US bailout saved Goldman Sachs from collapse had long been answered in the affirmative. But no, the official position at that august Wall Street firm is still Nyet. Nein. Non. No.

..." Gerry Corrigan, a senior executive at Goldman and former head of the New York Fed, suggested that Goldman Sachs has an impeccable approach to risk management and seemed to imply that the firm was not in trouble in fall 2008. When pressed on why Goldman requested and was granted a banking license – and access to the Fed’s discount window – in September 2008, he fell back slightly, “There is no question whatsoever that when you look at totality of the steps that were taken by central banks and government, particularly in 2008, that Goldman Sachs was a beneficiary of this"...

Why is this so hard for Goldman to admit?"...
wrote Simon Johnson at MIT, former chief economist at the IMF.

Good question.


Wall Street Dominoes Falling?

World Headlines read:

!) BofA and ex-chiefs face fraud lawsuits

Source: FT here

2) Cuomo Sues Bank of America, Even as It Settles With S.E.C.


Note: Why did Ken Lewis, ex CEO of BofA, settle a $150 million penalty with SEC if the bank hadn't done anything wrong?

While the media continues to vent anger against executives, I am still waiting for those honorable men and women of the press to wake up to the fiduciary responsibility of the Bank of America's Board of Directors who had the ultimate responsibility to make sure the bank's senior executives were doing the right thing.

Funny none has been hauled out to public scrutiny. Not at B of A, not at Goldman Sachs. Not at anywhere. Strange.

Global Warning, a figment of imagination?

Why Is Princeton so Rich?

Harvard may have the world's largest endowment, despite its 30% or more drop in its portfolio value, Princeton still has the highest endowment per student and the 4th largest in the world.

How did Princeton do it? It is a tiny university with under 8000 students in total compared to nearly 20,000 at Harvard and over 12000 at Yale?

Well, the legend is that the Admissions Office looks for brains and looks in addition to other criteria such as whether they are monied "legacy" kids whose parents and their parents have always attended Princeton.

Princeton's T.L.C. machinery is by any standard, especially by how other colleges discharge their duty of "in loco parentis" is only "deficient" against a $1500 a night Riokan in Kyoto where attendants serve their customers on hands and knees, making sure their boarders would experience a life-changing sejour at the centuries old "onsen" .

Princetonians, not exactly a low IQ crowd, despite obligatory grumbling about food and unresponsive Administration while at college -- like all undergrads anywhere -- would leave college knowing they had been spoiled rotten. They know in their heart of hearts they had been pampered at an intensity not since their infant days of suckling on their wet nurses' supple breasts.

One mother of a lovely Princeton co-ed told me in all seriousness that she "knew" for a fact that Princeton looked out for looks among its pool of applications for it was the unspoken policy there to encourage mating among the students. That was when her daughter was just a freshman. I thought it was a barely subtle comment by a proud mother of her daughter's good looks.

Fast forward 10 years she is marrying her classmate this Fall. I just received the invitation. It will be a cast of thousands at one of the poshest locations in NYC. Her future husband: a hedge fund manager -- of course.

What's the alleged reason behind getting good looking students? Well, elementary. First the presumption that Princeton graduates will do well financially -- a simple fact of life.

So, if students marry one another at a high percentage, then the Princeton Development Office needs only to make one phone solicitation to bag two checks, one from the wife, the other from the husband, 2 happy alumni.

How true is this folklore?

Don't take my word. This is straight from the horse's mouth:

..."Early in her undergraduate days at Princeton, Allison Slater Tate ’96 heard the rumor — the one that says 75 percent of Princeton alumni marry other Princeton alumni. Or was it 50? Or 90? No one (including University and Alumni Association officials) really knows.

Whatever the figure, as she went into her senior year, Tate didn’t think she would be another statistic. But she didn’t refrain from sharing the marriage rumor with prospective students as she led them through Prospect Garden on an Orange Key tour...

..."Dating at Princeton was so abysmal,” Tate says. “I’d heard the rumor, but I didn’t see it happening for me.”

That was before she met Trey Tate ’96 at the end of their senior year

...For the Tates, the 75 percent statistic isn’t hard to believe. Among their closest friends are married couples Paul Hanson ’96 and Oona Miller Hanson ’97, Ben Pecht ’96 and Banks Staples Pecht ’96, Tom Flummerfelt ’96 and Dahlia Fetouh ’96, Jennifer Hubbard ’96 and Frank Winslow ’96, and Dave Digilio ’96 and Kim Sladkin Digilio ’95. Among the Sladkin siblings, the number climbs to 100 percent — Kim’s two sisters, Colleen ’91 and Cheryl ’93, also married Princeton alumni..."


OK, you may ask, legitimately: Are these kids on average really better looking than those at its peers colleges? Yale? Brown- which recently hit the headlines having bagged Emma Watson, the Harry Porter girl? The highest paid actress in 2009, by the way?

What is the evidence?

Well, don't just believe what you read. Come Spring, spend a day walking around the beautiful campus. Pedestrian friendly. Not big. Decide for yourself whether by visual inspection Princeton guys and gals have a higher incidence of "looks" than other campuses before you choose the college of your dream to attend.

The Giving Rate among Princeton Alumni at nearly 70% is the highest in the nation, way way ahead of Harvard and Yale, both below 50%.

Princeton has shown the way to boost its endowment, why didn't the others follow? Just asking.

Thursday, February 04, 2010

Showtime for Obama

President Obama, shaken by the Massachusetts upset in which the most liberal "blue" state in the union sending an unknown Republican to the Senate, is now taking a number of "I am a new man" steps across the board.

He finally is taking a strong stand in facing down Wall Street promising very tough regulatory measures. He obviously didn't appreciate sufficiently that his voters across the nation had been terribly angry at his velvet glove treatment of Wall Street allowing them to use zero cost, Federal guaranteed money to play the market and won big and then paying themselves silly in bonuses.

Who can blame them if Obama and his Wall Street friendly cabinet hadn't put in conditions before handing out those blank checks? You can accuse Wall Street of political insensitivity, which by the way is not illegal, but you can't blame them for driving a container truck through those loopholes the Obama presidency has provided for them.

You can however definitely blame Team Obama for ignoring the nearly ear-spliting protests by folks across the land that they had first dropped the ball in not putting in appropriate controls and then turning a deaf ear to those who were telling them they should do so quickly before the billions got lost in the shuffle. Now, the billions had all been legitimately "laundered" as if were so long after the final bailout checks had been mailed.

Better late than never you say? So, now it is High Noon on Wall Street? Can Obama really finish this game of chicken? Gary Cooper managed to shoot the villain in the movie. What can Obama really do now?

Paul Volcker, long ostracized by Obama's team, is now back in vogue. Is it too late? Wall Street folks are already telling the press this: you can hand down Volcker rules Friday, by Monday we will figure out how to get around them.

The mainland Chinese working under a heavy Visible Hand for decades have a famous saying: Policies from top, we have counter policies from bottom. Wall Street and mainland Chinese have lots in common.

Now, Obama is even playing tough with China on seemingly a full court press.

Having rejected Dalai Lama's request to visit before Obama's China trip, a first presidential rejection ever, he is now making a widely publicized point of seeing him. As if deliberately to pick a bigger fight he is loudly upgrading Taiwan's weapon system and has sent Hilary Clinton to wage a PR war against Chinese hackers. Of course they are official hackers to have access to powerful computers. China has high quality IT institutes to groom hackers. These institutes are directly under the military or national security departments.

Obama had shown weakness by first acceding to China's pressure not to see the Dalai Lama. He should have stood up to them in the first place.

The China US relationship is importantly influenced by the indebtedness of the US to China, the largest single lender. Obama should have done what any large debtor should do -- since now I owe you, the bank, so much, you need me more than I need you. So, I dare you to "punish" me. Ha. Instead, Tim Geithner went to Peking University and promised the students (!) they could have faith in US credit. The only response, and a proper one, was laughter by the students. The fact that Obama continues to place stock with that incompetent man is mindboggling.

Re hacking.

The proper response is to keep quiet and to wage a powerful counter hacking war. Here, the US has been playing catch up for decades. A famous Newsweek cover story a few years back documented how Chinese hackers had infiltrated the Pentagon servers for years and had been downloading files for at least a decade if not more, like you and I having access to George Soros's private ATM machine. It was a painful article to read because it showed how clueless the brass had been at the Pentagon.

If cyperspace security is so important to national security, then Washington should mobilize Silicon Valley to stand firm to commercial blackmail. Those firms have been selling just about every security related hard and software to China hurrying the country to become a top IT country at accelerated speed.

So far the profit motive of Californian IT companies has been dismally shameful. They would rather hang onto this market even if that meant cutting away from their own country's national security.

The question remains. Can Obama/Clinton playing rough with China leveraging off Google's problem lead to any where or is it yet another path to nowhere.

There are consequences of doing too much of "nowhere" exercises. If one day your enemies figured out your pattern of behavior, you will lose credibility in future policy initiatives, and pretty soon, backed into a corner, both sides can easily miscalculate with disastrous consequences.

Oh, just to make your day, you must be aware by reading today's headlines that US troops are now directly involved in open military clashes with Al Queda and their sympathizers in Pakistan.

The US is now fighting in 3 fronts: Iraq, Afghanistan and in Pakistan. The war is spreading. Have a good day.

Tuesday, February 02, 2010

The Fall of Pax Americana

The American "empire", yes I know America does not believe it ever was though it has always behaved like one since WWII, has to be the shortest on record. It has set a record in being the world's shortest superpower.

How did it get that way is the stuff of volumes. Throughout history, the demise of an empire was always preceded by the degradation of the nation's balance sheets.

In America's case the decay followed a familiar pattern of past empires: expensive overseas wars got too large relative to the productive capacity of the country.

Like fallen empires in the past, USA is now deeply in debt and has been for sometime.

Now, it is even in debt to its principal strategic competitor: China, a country ruled sternly by a communist party that proudly puts into its Constitution the guiding principles of Marx, Lenin and Mao.

You don't need an economics PhD from MIT to know that just as in a person, a nation cannot keep on borrowing to finance its many needs, especially capital-destroying wars, without having one day to pay for it one way or another. The de-leveraging process will be long and painful. When it happens to an empire, well, the empire will be no more.

The British Empire upon which the sun once upon a time never set collapsed after WWII because it had exhausted its moral and financial resources: morally because de-colonization became the dominant value of civilized nations under the United Nations charter heralding in a new world order.

Financially the "motherland" could no longer keep its far flung empire under its Sterling standards that was the glue of its global empire. It was borrowing mainly from the United States.

When the UK and France were trying to re establish their Middle East influence in their clumsy attempt to invade Egypt to recapture the Suez Canal, President Eisenhower, the largest creditor to the UK and France just picked up the phone and told these two former imperial powers to stop it. The two debtors promptly obliged.

The creditor in one stroke ended forever the British Empire. Ho Chi Minh finished off the French empire once and for all in Dien Bien Phu in Vietnam.

We are witnessing a similar, though not exactly identical process, unfolding right in front of us.

I recently posted a hart showing how US debt/GDP, one indicator of a country's leverage, has been going up like a rocket.

The geopolitical implications, too, are clear. You certainly don't need a PhD in politics from Harvard to understand them.

Here is a telling excerpt from today's NY Times:

..."as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”

The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade"...

The British didn't want to tell itself its imperial days were over until the new empire, America, led by Dwight Eisenhower, told London to get out of the Middle East. How come his words counted so much? Elementary. UK was borrowing to maintain its military strengths abroad. America was its largest supplier of credit.

The Chinese communists, men from violent struggles who understand only too well that power comes from the gun barrel and it takes real not borrowed money to produce guns (not to mention butter) know America is well on its way to the exit door.

The Obama budget, as is clear from this report here, is a confirmation of the ending of Pax Americana.

The country, barring a miracle, has little wriggle room in its national budget for the next decade because the deficits are going to remain in the stratosphere.

There is a way to reduce debt. Higher taxes, higher savings, less private consumption, less government spending, domestic or overseas.

America can, like a phoenix, rise again, in theory. It's been pointed out by any number of thoughtful analysts that America has to do some serious "nation building" at home as a prerequisite to regain its superpower status, one that until recently had not been called into question.

Unless you can rebuild your own nation, you just don't have the resources to do much abroad. Build up your productive capacity, strengthen your national balance sheet, and then, we can discuss once again your global "responsibility" -- one day.

Monday, February 01, 2010

Obama is in serious trouble.

At the beginning of 2009 nearly 70% of Americans approved of Obama with 13% disapprove. It's been downhill ever since. Now the country is split down the middle, 48% pro, 46% against.

See the chart here and note the trend.