Friday, May 25, 2012
Saturday, May 19, 2012
Capital Markets Update
By Louis S. Barnes Friday, May 18th, 2012
The few spatters of economic data this week did not change the plod-along US outlook. Meanwhile the priority story (Europe) was obscured by the media's demented focus on the Facebook IPO and the blown trade at Chase.
Today markets are on exhausted hold, hoping for some miracle at this weekend's G-8 meeting. German 10-year bunds hit all-time-low yields on successive days this week, the bottom at 1.41% while Spanish and Italian equivalents reached 6.38% and 5.91%,respectively. Inflation and deflation camps have been in balanced argument ever since Lehman, as have dollar-fearful and dollar-safe-haveners, but Europe has now tilted the show to deflation: gold has dropped from 1790 to 1590. Those still fearing inflation ran to dollar-denominated inflation-protected Treasurys (TIPS), driving the newest auction to a negative 0.391% yield. Yup, below zero: lose money to be ready for a 1970s replay. It's been forty years, but you never can be too prepared.
The G-8 gathering will be only seven (Czar Vladimir is busy): unstable Italy; stable for the moment Japan, UK, and France, none in a position to help anybody else; Germany ("Vee vil hit yu mit zis ztick until yu agree to hit yorzelf"); and the US and Canada ("Europe is a rich continent able to solve its own problems"). A new flurry of can-kicking may follow, but European markets are poised to implode before the next Greek election on June 17. Reversing the euro to local currencies would be briefly chaotic, and slow the global economy, but it is the one way to rationalize the economies involved. If Europe had done so two years ago the losses would have been far less than today, or will be tomorrow. The US 10-year fell to its all-time low, 1.70%.
There are some things to be learned from the Chase pratfall. The Left-side media are ascendant: "EEK! Bankers Found Gambling!" The Right-side doesn't get it (ever): "Private Sector Hurt By Government." Both wrong, of course.
The great post-Bubble fable holds that we can easily return to the safe banking of yore by removing profiteering bankers and their profits. Wrong three times. The fable rests on memory of US banking from 1933 to roughly 1973, but this period was extremely atypical. The sound regulation and deposit insurance of '33 was followed by a time of such overwhelming US/dollar dominance that banks struggled to lose money. Banks ever since have been in and out of systemic trouble just as ever before.
Modern economies (since, um…Rome) cannot grow without credit and banks. That means somebody has to bear the risk of monetary alchemy: depositors of all kinds require instantly available cash and a return on that cash, but to earn the return banks must run the risk of credit and illiquid investment. It is possible to run a (nearly) risk-free bank, and we have: the hyper-capitalized silk-stocking affairs who catered to the rich, who wanted only safety and did not care about return, and which provided little credit to the economy. Leaving the 99% out in the cold, as did the great, private, merchant banks, from Rothchilds to the old Wall Street partnerships. Real, beneficial banks must take risks that will go unpredictably bad. Always.
Chase's blown trade was not a hedge. It was crafted to look like one, in defiance of the spirit behind the misbegotten rigidity of the proposed "Volcker Rule." De-risking spirit is important today, while we are in post-Bubble hysterics, over-tightening credit, and every dumb-assed trick re-ignites the hysterics. However, this trade did not threaten Chase, even at an ultimate $4 or $5 billion loss, nor did it bring systemic risk, nor was it done in the dark. Chase's directors knew, and the on-site Fed team knew (all big banks since 2008 have had on-site Fed teams).
Perfect punishment is underway. Arrogant Jamie Dimon has a lot less to be arrogant about, and of course should resign. Even if he is not forced out (he has not the grace to do so un-prodded), his day is done, and a warning to the others. There will never be a way to de-risk banks in accordance with the post-Bubble fable; we will have to live with the risk, cycle in, cycle out, one bank after another. The worst error is to build an ever-thicker rulebook, instead of looking for ever-better people.
The few spatters of economic data this week did not change the plod-along US outlook. Meanwhile the priority story (Europe) was obscured by the media's demented focus on the Facebook IPO and the blown trade at Chase.
Today markets are on exhausted hold, hoping for some miracle at this weekend's G-8 meeting. German 10-year bunds hit all-time-low yields on successive days this week, the bottom at 1.41% while Spanish and Italian equivalents reached 6.38% and 5.91%,respectively. Inflation and deflation camps have been in balanced argument ever since Lehman, as have dollar-fearful and dollar-safe-haveners, but Europe has now tilted the show to deflation: gold has dropped from 1790 to 1590. Those still fearing inflation ran to dollar-denominated inflation-protected Treasurys (TIPS), driving the newest auction to a negative 0.391% yield. Yup, below zero: lose money to be ready for a 1970s replay. It's been forty years, but you never can be too prepared.
The G-8 gathering will be only seven (Czar Vladimir is busy): unstable Italy; stable for the moment Japan, UK, and France, none in a position to help anybody else; Germany ("Vee vil hit yu mit zis ztick until yu agree to hit yorzelf"); and the US and Canada ("Europe is a rich continent able to solve its own problems"). A new flurry of can-kicking may follow, but European markets are poised to implode before the next Greek election on June 17. Reversing the euro to local currencies would be briefly chaotic, and slow the global economy, but it is the one way to rationalize the economies involved. If Europe had done so two years ago the losses would have been far less than today, or will be tomorrow. The US 10-year fell to its all-time low, 1.70%.
There are some things to be learned from the Chase pratfall. The Left-side media are ascendant: "EEK! Bankers Found Gambling!" The Right-side doesn't get it (ever): "Private Sector Hurt By Government." Both wrong, of course.
The great post-Bubble fable holds that we can easily return to the safe banking of yore by removing profiteering bankers and their profits. Wrong three times. The fable rests on memory of US banking from 1933 to roughly 1973, but this period was extremely atypical. The sound regulation and deposit insurance of '33 was followed by a time of such overwhelming US/dollar dominance that banks struggled to lose money. Banks ever since have been in and out of systemic trouble just as ever before.
Modern economies (since, um…Rome) cannot grow without credit and banks. That means somebody has to bear the risk of monetary alchemy: depositors of all kinds require instantly available cash and a return on that cash, but to earn the return banks must run the risk of credit and illiquid investment. It is possible to run a (nearly) risk-free bank, and we have: the hyper-capitalized silk-stocking affairs who catered to the rich, who wanted only safety and did not care about return, and which provided little credit to the economy. Leaving the 99% out in the cold, as did the great, private, merchant banks, from Rothchilds to the old Wall Street partnerships. Real, beneficial banks must take risks that will go unpredictably bad. Always.
Chase's blown trade was not a hedge. It was crafted to look like one, in defiance of the spirit behind the misbegotten rigidity of the proposed "Volcker Rule." De-risking spirit is important today, while we are in post-Bubble hysterics, over-tightening credit, and every dumb-assed trick re-ignites the hysterics. However, this trade did not threaten Chase, even at an ultimate $4 or $5 billion loss, nor did it bring systemic risk, nor was it done in the dark. Chase's directors knew, and the on-site Fed team knew (all big banks since 2008 have had on-site Fed teams).
Perfect punishment is underway. Arrogant Jamie Dimon has a lot less to be arrogant about, and of course should resign. Even if he is not forced out (he has not the grace to do so un-prodded), his day is done, and a warning to the others. There will never be a way to de-risk banks in accordance with the post-Bubble fable; we will have to live with the risk, cycle in, cycle out, one bank after another. The worst error is to build an ever-thicker rulebook, instead of looking for ever-better people.
Friday, May 11, 2012
Capital Markets Update
By Louis S. Barnes Friday, May 11th, 2012
In the absence of any meaningful economic data or market changes, Europe holds the stage. If this were burlesque — and of course it is — the audience yelling, “The hook! The hook!”, the impresario with the shepherd’s crook would long since have yanked Europe by the neck off-stage and dumped it in the alley.
Why, oh why is this dragging on, the euro such an obvious and total failure? Three reasons. Somebody who has kicked a can for years cannot be convinced that one day he will meet his wall. Second, this elaborate denial is a European specialty, today with less fatal consequences than 1900-1914 and 1933-1939, but the same show.
Third: culture. (Not that #1 and #2 were not.)
A lot of people from academia to commerce today are trying to understand changes in national and global leadership. The comfortable and predictable post-WW II and Cold War and post-Cold War structures have weakened and shifted greatly since 2000, and it is not at all clear what form of stability — or if — will replace the old.
Culture is a dangerous thing to talk about. The concept is easily twisted into racism, or the notion of “cultural Darwinism” (since I am superior, I can and should do to you as I please). Yet, any understanding of government and civilization must begin with who we are — our “nature.” Modern biology and genetics roil in nurture-versus- nature argument and discovery. Although those hardest of sciences can see the durable interplay of genes and environment, they and all of us are still just guessing at the rules and full impact on societies.
Ian Morris’ new “Why the West Rules — For Now” is a great read and starting place. It begins the human nature discussion a couple of hundred thousand years ago in a comparative history of East and West, and has a striking insight about Europe. Gifted with physical riches, Europe has for as long as we can detect received massive and violent migrations from the East. Morris suggests that Europe has survived because of unique geography — a collection of defensible peninsulae — which has also led to several unique and durable cultures in those natural forts. However, in his conclusion he flinches from culture as determinant, and defaults to Jared Diamond’s insistence that we are all the same people everywhere, and nothing matters but geography.
Francis Fukuyama’s newest, volume one of “Origins of Political Order” is a great study, beating to death all of the various structures of government, but hardly touching the natures of the governed peoples, and how those different natures complicate government. When we talk about government, types and options, we are really talking about civilization and its progress, a thought lost on those who oppose government. Steven Pinker’s newest, “Better Angels of Our Nature,” describes the profound decline in violence in human society, perhaps the greatest achievement of our civilizations.
Fukuyama does get to “legitimacy” as central to government, but solely on a tidy line of thought. Robert Caro’s newest on LBJ gets to a center of human nature with which we are all uncomfortable: power. Which individuals have power, what groups have it, how they got it, defend it, use it, lose it… that raw, elemental conflict is at the heart of civilization and attempts at government. And at the heart of culture. Durable and different in nation-states everywhere.
The euro has failed because to succeed would require three-quarters of Europe suddenly to behave as Germans for the first time in the industrial age. More: each local, cultural power structure must surrender its authority, and while doing so must inflict a falling standard of living on its own people. Further: the new supra-national power center in Brussels, enforced by Germany, would operate without any democratic legitimacy. Which leaves nothing but German enforcement.
Europe may stagger for quite a while longer, the euro “surviving” as abject failure solely because all fear worse if it were abandoned. The local economies will settle the fate of the local power structures. Beyond the global economics of the thing, the prospect of “failed states” and martial law is… um… daunting.
Friday, May 4, 2012
Capital Markets Update
On the first Friday of each month comes the elephant: fresh jobs data from the immediately prior month. No other indicator — maybe not all others combined — has the power of payrolls to move other markets, to describe the economy and the prospects for inflation, and to alter the course of public policy.
The headline is “non-farm payrolls,” today’s report a meager April gain of 115,000 jobs, about the same as March, but only half the figure in the three prior months, gains that made us think we were at last getting somewhere.
One generic problem with elephants, especially at close range: shades of grey. Another: estimating size. The inherent inaccuracy in each non-farm payroll report is a couple of hundred thousand jobs. All of the reports in the last six months have lain inside that range of error. Another element writ on wrinkled grey: everybody seems to understand that the official unemployment rate fails to describe anything useful.
So, watch other things: wages last month rose by $0.01 per hour, one whole cent, 1.8% year over year. A sustained increase in inflation is impossible without a wage spiral. Same for GDP. The average workweek in April — unchanged. The percent of the 24-54 age cohort at work is stuck at early-’80s levels, about 7,000,000 below the 2000 peak. Of those at work, another 8,000,000 are part-time because they can’t find full time, the U-6 measure at 14.5%, improved a bit in prior months, stalled in April. Demand for labor has improved, but remains very, very thin.
10-year T-notes today at 1.87% have cracked long-term resistance at 1.90%, bets going down that the Fed will ease again. Not until core inflation fades back below 2.00%, but the odds are up. Stocks are having a hard time despite Fed prospects, and today’s sinking-before-Fed is out of prior pattern. There is little follow-through in mortgages, a ten-day drift near 4.00% anticipating today’s going-nowhere report.
A story follows, typical of our overall predicament. Charlie Rose on the topic of fiscal hazard on successive nights interviewed Paul Krugman and senator Tom Coburn, R-OK. Krugman has debased his profession and his Nobel by pushing inflation as the free-money solution. The surprises were from Coburn, widely regarded as a nut case, who opened by saying, “Of course the wealthy should pay more.”
After 30 minutes as the soul of reason (one of many in Congress in both parties now acknowledging the need for Bowles-Simpson’s harpoon-all-whales), Coburn returned to his native, anti-government soaps, announcing that “Everything after 1929 was because the Fed did too much.” To which Rose nodded and replied with a Krugman line: “The Depression ended only because of war spending.”
Americans have always been able to select media tilted to their preference, but it’s a hell of a lot easier now. Every big city used to have newspapers offering competitive political leaning and fibbing, but nothing like the instantly available Fox and MSNBC, and acres of websites ginning up partisan lies. Thus citizens — even those trying hard to stay informed — are at risk to “silo” their information and corrupt their perspective.
Coburn and Rose were perfect examples, repeating silo fables. After 1929 the Fed did nothing as the US banking system collapsed, the primary factor making the Depression Great. And it remained inert. Deposit insurance, reflation via gold price, and Federal lending agencies combined by 1935 to restore GDP to the 1929 level. Coburn, bright and adaptable on the fiscal issue, is a captive parroting the Right’s endless effort to discredit the New Deal. His own jailer!
The Depression did double dip, but because of fiscal zeal, trying to balance the budget too soon, too fast. We didn’t know any better, then. We adopted Social Security, but raised taxes to fund it for three years before paying any benefits. The Depression ended because if state spending, but not ours, Europe’s, on war orders placed with our factories, not some free-money spigot from the Treasury.
Soapbox: It is the duty of each of us to stay out of silos, listen to the other side, and snopes everything we think we like.
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