Black Swan Event: Has China’s Bubble Been Pricked?

The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception. Friedrich August von Hayek

There seems to be another brewing risk that the mainstream seems to ignore.

China’s Shanghai (SSEC) index seems at the verge of breaking down from a 3-year consolidation phase.

I previously explained how China’s non-recession bear market has actually signified as a boom bust cycle that has only shifted from the stock market to the real estate sector where the non-resolution (and even the expansion) of this cycle has only extended the duration of the bear market of the Shanghai index[1].

While important indicators suggest that China’s economy has materially been on a downdrift, such as the signs of slowing growth of air travel[2], decelerating electricity consumption and as well as a slowdown air cargo[3], may not signify as recessionary, my source of concern lies with the recent signs of increased credit stress.

The rising rates of the 6 month bill discount rate and the Shanghai Interbank Offered (SHIBOR) rate appear to be heightened signs of credit stress[4].

This is very important because a huge segment of the current property boom has been financed by state owned and private owned off balance sheet companies estimated at US $1.7 trillion[5]

As Mises Institute President Douglas French in a book review writes[6],

The upshot from following the alphabet soup of entities, created to make loans to the state sector and friends of the state, is that when the loans go bad, which an extraordinary percentage do, then new entities are created into which to move the debts: from good banks to bad banks to worse banks…

Chinese bank depositors provide the capital to finance the insiders. But when the loans go bad and the banks go bankrupt, it's left to the party to provide continuous bailouts. "In short, China's banking giants of 2010 were under-capitalized, poorly managed and, to all intents, bankrupt 10 years ago."

As nonperforming loans are pushed from good banks to bad, with China's Ministry of Finance providing its guarantee to the bad loans at par, banking life goes on, and the economic miracle remains alive, backstopped by the lender of last resort, the People's Bank of China, levered at 1,233 to 1. The result is underlying assets are never liquidated and zombie banks and crony-led corporations are left in place to squander capital.

It’s one thing to see an economic growth slowdown, but it’s another thing for a bursting of massive Keynesian policies fuelled bubble.

And since China has been a major force in the growing demand for commodities worldwide which has partly driven up commodity prices (see chart below from Business Insider[7])…

..a bubble bust in China would send commodity prices crashing. Aside, there would be a risk of a disruption in the globalization model of transnational supply chain networks.

Also since hot money flows has functioned as a significant part of China’s bubble conditions, the likelihood is that such money flows could stampede for the exits, as shown by the January 2010 chart from Danske Bank[8].

In observation of the annual National Day celebration, China’s financial markets had been closed for the week

The coming sessions will be very interesting and crucial.

We will see if current market spasms in the Chinese markets are reflective of an economic slowdown or of an imploding bubble. And most importantly, how Chinese authorities will be dealing or responding to these events.

Bottom line:

The mainstream appears to be discounting events in China or has unduly been focusing on Europe or a potential recession in the US.

While it is unclear if the China has merely been experiencing a slowdown or a bursting bubble, growing signs of a credit stress could highlight risks of the latter similar to the developments in the Eurozone today or to the US Mortgage crisis of 2008.

A realization of the implosion of China’s bubble cycle would exacerbate the current market stress that would catch many off guard. Financial markets would gyrate wildly with a downside bias. This would function as the black swan (low probability, high impact event) for financial markets.

Of course we should expect Chinese authorities to step in and intervene as they did in 2008, by injecting a $586 billion stimulus package[9], and to parallel the activities with those of their Western contemporaries. However, again the timing, the size and the duration of the potential bailouts would serve as crucial factors in determining the market’s future trend.

Lastly in the event that China’s bubble has indeed imploded, then we could expect major central banks to reengage in more QEs (inflationism) and most possibly see more coordination of their activities.

Because of government’s management of our money, we indeed live in very interesting times.

For the meantime, buckle up for a roller coaster ride!

---

[1] See Phisix-ASEAN Market Volatility: Politically Induced Boom Bust Cycles, October 2, 2011

[2] Bloomberg.com China Air Travel Trails Capacity Growth in Golden Week Holiday, October 6, 2011 Businessweek.com

[3] Chang Gordon Is China's Economy Contracting? September 25, 2011 Forbes.com

[4] See Chart of the Day: Is China Suffering from a Credit Crunch?, October 4, 2011

[5] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion, June 28, 2011

[6] French, Douglas The China Model Is Unsustainable, Mises.org October 3, 2011

[7] Blodget Henry JEREMY GRANTHAM: We're Headed For A Disaster Of Biblical Proportions, June 13, 2011

[8] Danske Bank China: Hot money inflow heats up further, January 15, 2010

[9] Wikipedia.org Chinese economic stimulus program

US Banks are Exposed to the Euro Debt Crisis

Recently I wrote about how US banks have been dependent on Bernanke’s QEs, where the unfolding Euro debt crisis could heighten risks a contagion on the US banking industry.

Also given that US banks have substantial exposures to European banks, it isn't farfetched to perceive a potential contagion from any further deterioration in the latter's banking sector.

The Huffington Post gives some numbers (bold emphasis mine)

If European politicians are unable to contain their sovereign debt problems, Wall Street could be on the brink of another financial crisis, according to economists.

Although U.S. banks have limited their direct exposure to Greece, they have loaned hundreds of billions of dollars to European banks and governments that may not be able to pay them back, according to the Bank for International Settlements. If some European governments and banks are forced to default on at least part of their debt, American banks could lose a significant amount of money on that account alone.

The resulting panic from investors could compound the losses. Short-term borrowing costs would spike, bank stock prices would plummet and investors could demand their money from banks, several economists say. In a repeat of the liquidity crisis of 2008, some U.S. banks could run out of the money necessary to fund their day-to-day operations…

Some predict that a European financial crisis would spread quickly to U.S. shores. The pain would not come directly from government defaults; U.S. banks have loaned just $36.2 billion to the five European governments that are in danger of defaulting: Greece, Ireland, Portugal, Spain and Italy. But U.S. banks have also loaned $60.6 billion to banks in those five countries, and $275.8 billion to banks in Germany and France, according to data from the Bank for International Settlements.

A string of sovereign debt defaults would endanger the survival of major European banks, including those in France and Germany, which hold a large amount of troubled sovereign debt on their books, some economists note. According to Bryson, French banks' exposure to the five European countries that are in danger of defaulting amounts to 25 percent of France's gross domestic product, and the exposure of German banks to those countries is worth 15 percent of Germany's total output…

It remains largely unknown which U.S. banks are particularly exposed to the risks in Europe, so investors have drawn their own conclusions. The insurance market reveals that investors believe Morgan Stanley is most at risk, followed by Bank of America, Goldman Sachs and Citigroup, respectively, according to market data provider CMA. Bank of America's debt now is more than three times more expensive to insure than during the height of the financial crisis in October of 2008.

Morgan Stanley and Goldman Sachs are particularly vulnerable to the crisis in Europe because they rely largely on short-term borrowing from other banks and do not have a large deposit base, according to an economist who requested anonymity because he is not allowed to comment on specific banks. During a financial crisis, short-term borrowing costs could spike as banks cut back on short-term lending to protect themselves, putting banks such as Morgan Stanley and Goldman Sachs in danger of running out of money, the economist said.

The cartel like existence and the depth of interconnectedness of the banking system of major economies makes them highly vulnerable to any shocks which the current Euro crisis has been exhibiting.

And that’s why bailout policies will likely continue and may even become coordinated with increased participation from outsiders, particularly the IMF and some of the major emerging markets.

Solyndragate: Emails Implicate the Obama Administration

More evidences of crony capitalism from President Obama’s ‘green jobs’ policies.

From the Business Insider (bold highlights mine)

The White House released a bunch of emails related to the Solyndra bankruptcy scandal to Congressional investigators today, in what has become a regular Friday evening email dump.

The emails, obtained by several news organizations, implicate the most senior levels of the Obama administration in scandal, which has tainted the White House since the solar company went bankrupt last month, leaving taxpayers on the hook for a $534 billion federal loan.

Here are the highlights:

One email, obtained by the Washington Post, suggests that Obama and/or his chief of staff Rahm Emanuel was actively involved in trying to get Solyndra's loan application approved in time for a September 2009 press conference.

“Ron said this morning that the POTUS definitely wants to do this (or Rahm definitely wants the POTUS to do this?),” one White House staffer told an Obama scheduler on Aug. 17, 2009, referring to Ron Klain, former chief of staff for Vice President Joe Biden.

Steve Spinner, an Obama fundraiser who worked in the DOE loan department, repeatedly pushed the chief loan officer to expedite approval of Solyndra's loan — despite the fact that his wife worked for the law firm representing Solyndra. The firm received at least $2.4 million in fees related to the loan, according to the AP. DOE officials have previously stated that Spinner did not "actively participate" in Solyndra's application.

“How [expletive] hard is this? What is he waiting for? Will we have it by the end of the day?” Spinner wrote on Aug. 28, 2009. “I have OVP [Office of Vice President] and WH [White House] breathing down my neck on this. They are getting itchy to get involved if needed. I don’t want that.”

Read more here

Political distribution of scarce resources extrapolates to favoritism, nepotism and cronyism which results to the gaming of the political economy that ultimately leads to corruption.

As Ludwig von Mises wrote,

Corruption is an evil inherent in every government not controlled by a watchful public opinion.

Occupy Wall Street: Do as I say but NOT as I do

hat tip Prof Mark Perry

The policy of democracies is suicidal. Turbulent mobs demand acts which are contrary to society’s and their own best interests. They return to Parliament corrupt demagogues, adventurers, and quacks who praise patent medicines and idiotic remedies. Democracy has resulted in an upheaval of the domestic barbarians against reason, sound policies, and civilization. The masses have firmly established the dictators in many European countries. They may succeed very soon in America too. The great experiment of liberalism and democracy has proved to be self-liquidating. It has brought about the worst of all tyrannies.

This pertinent quote from the great Ludwig von Mises in Omnipotent Government: The Rise of the Total State and Total War [1944] (hat tip Prof Don Boudreaux)

Quote of the Day: Charity of the Markets

it is impossible to assess Mr. Jobs’s philanthropic legacy without discussing how Apple’s technology has changed the way nonprofits operate.

Devices like the iPhone and iPad have helped many organizations communicate more efficiently. They have allowed groups to improve the way they respond to disasters, communicate with supporters, and carry out their day-to-day work.

From Peter Panepento of the Philanthropy.com (hat tip Jeff Tucker).

Mr. Jobs’s philanthropic legacy can be seen from the largely 'unseen' factors, i.e. the consumer surpluses, wealth creation and in making people's lives significantly better.

Video: Steve Jobs on Education, Life and Death

Steve Jobs shares his life's lessons in this stirring commencement address at the Stanford University in 2005 (hat tip Bob Wenzel)



Transcript here

Some noteworthy passages (bold emphasis mine)

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting...

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life...

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle...

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

Fat Taxes and the Road to Serfdom

From Yahoo

On Oct. 1, consumers in Denmark saw a sudden jump in the cost of many of their favorite bread-friendly products. The average price of a half-pound package of butter increased by 2.5 krone (or 45 U.S. cents). A pound of cheese rose from 34.5 krone ($6) to 36 krone ($6.50). And don't even think about lard. In a single day, the cost of a half-pound block of pork fat skyrocketed from 12 krone ($2.15) to 16 krone ($2.85) — a 35% increase. Thanks to a new fat tax, Danes are paying more for just about anything they might want to slather on a piece of bread.

Other countries have imposed tariffs on food and drink considered unhealthy, but Denmark is taking the "fat tax" appellation literally. In the name of reducing cardiovascular disease, obesity, and diabetes, the law that went into effect on Saturday specifically targets saturated fats — the fats found most commonly in animal products like butter, cream, and meat. But few outside the government seem to think it's a good idea — or even a healthy one.

Social engineering policies like the above, which attempts to “nudge” people’s behavior, are expressions of how political leaders think of us. They see as incorrigible idiots who don’t know what is the best interest for ourselves. They essentially are imposing their value preferences on us.

While waging war against the 'fat' or 'obese' seems noble sounding, the unintended consequence is to politically stigmatize people who are ‘fat’ or ‘obese’. In short, such paternal nudging policies promote discrimination and societal divisiveness. Shouldn’t we also tax skinny people too who may also signify as health hazards?

The other unintended effect has been to raise consumer prices which affects not only the fat but even the non obese. So the social costs of rectifying such aberrations will unfortunately befall to everyone.

Social engineering policies signify as slippery slope or incremental steps towards total control of people—a totalitarian state.

As Ludwig von Mises wrote,

The "social engineer" is the reformer who is prepared to
"liquidate" all those who do not fit into his plan for the arrangement of human affairs.

On the other hand, the welfare state, whom have increasingly been burdened by financial strains as a result of the ballooning of the unsustainable system, has been using such ‘sin taxes’ as pretext or as propaganda to raise funds in order to maintain or preserve on the privileges of the political class.

Quote of the Day: Underlying Social Contract

From the ever eloquent George F. Will:

Society — hundreds of millions of people making billions of decisions daily — is a marvel of spontaneous order among individuals in voluntary cooperation. Government facilitates this cooperation with roads, schools, police, etc. — and by getting out of its way. This is a sensible, dynamic, prosperous society’s “underlying social contract.”

Read the rest here

European Central Bank expands QE to include Covered Bonds

Global central bankers appear to be coordinating their actions closely.

Just hours following the reactivation of Bank of England’s QE, the European Central Bank (ECB) announced that they will be expanding their bond purchases to include Covered Bonds or debt securities backed by cash flows from 'cover pools' composed of mortgages or public sector loans

From Bloomberg, (bold emphasis mine)

European Central Bank President Jean- Claude Trichet, fronting a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign debt crisis threatens to lock money markets.

The ECB will spend 40 billion euros ($53 billion) on covered bonds starting next month and will offer banks two additional unlimited loans of 12 and 13-month durations, Trichet said at a press conference in Berlin today after policy makers left the benchmark interest rate at 1.5 percent. He also said the ECB will continue to lend banks as much money as they need in its regular refinancing operations at least until July 2012.

The ECB is resisting calls to reverse its two rate increases this year even as the debt crisis threatens to tip Europe back into recession, turning instead to tools it has previously used in an effort to calm financial markets. With European leaders still hammering out a new plan to stop the region’s debt crisis, Trichet’s final decisions may be among the most critical for the future of the euro -- the currency he has championed as a symbol of European unity…

The ECB purchased 60 billion euros of covered bonds in a one-year program that expired in June last year and was aimed at freeing up banks’ balance sheets and encouraging lending during the region’s worst recession since World War II.

The 2.5 trillion-euro market for covered bonds -- assets backed by mortgages or public-sector loans -- underpins much of Europe’s real estate lending, which almost ground to a halt in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.

“The new purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases,” Trichet said. They will start in November “and are expected to be fully implemented by the end of October 2012,” he said.

Trichet said all the measures announced today are designed to improve transmission of the ECB’s monetary policy.

Will Ben Bernanke’s US Federal Reserve be next?

Bank of England Activates QE 2.0

The Bank of England has redeployed her version of QE 2.0

From Bloomberg,

The Bank of England expanded its bond-purchase plan for the first time in almost two years as government budget cuts and Europe’s debt crisis jeopardize Britain’s economic recovery.

The nine-member Monetary Policy Committee led by Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. Twenty- one of 32 economists in a Bloomberg News survey forecast no change, and the rest predicted increases ranging from 50 billion pounds to 100 billion pounds. The bank expects to complete the new round of purchases in four months.

The yield on the U.K.’s 10-year government bond dropped after the announcement, falling to as low as 2.228 percent from 2.352 percent before the statement. The central bank said slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” It also said it is now “more likely” that inflation will undershoot its 2 percent goal in the medium term.

The MSCI All-Country World Index slid into a bear market last month as European officials tried to contain a crisis that the International Monetary Fund said presents “acute” risks to the global economy.

Again note of the use of crisis in order to rationalize political action.

Well, readers of this blog have seen this coming.

Chart of the Day: America’s Fast Expanding Welfare State

From the Wall Street Journal Blog,

Families were more dependent on government programs than ever last year.

Nearly half, 48.5%, of the population lived in a household that received some type of government benefit in the first quarter of 2010, according to Census data. Those numbers have risen since the middle of the recession when 44.4% lived households receiving benefits in the third quarter of 2008.

The share of people relying on government benefits has reached a historic high, in large part from the deep recession and meager recovery, but also because of the expansion of government programs over the years. (See a timeline on the history of government benefits programs here.)

Means-tested programs, designed to help the needy, accounted for the largest share of recipients last year. Some 34.2% of Americans lived in a household that received benefits such as food stamps, subsidized housing, cash welfare or Medicaid (the federal-state health care program for the poor).

Another 14.5% lived in homes where someone was on Medicare (the health care program for the elderly). Nearly 16% lived in households receiving Social Security.

Aside from the bailout policies, this serves as one significant reason why prospective US economic growth, as manifested by the current elevated rate of unemployment and low output, will progressively become lethargic as scarce resources are diverted towards more non-productive, capital consuming activities.

Importantly, US politics will increasingly be sensitive to the maintenance and the advancement of the unsustainable system of the welfare state.

To wean away dependants from this system, which has become more entrenched, will be considerably difficult and destabilizing.

Perhaps it may come to a point where the markets will force a tragic resolution, partly similar to what’s been happening to Greece.

Moreover, the US political spectrum will likely be dominated by class divisions, where welfare beneficiaries and their political patrons will call for more taxation in support of the pocket picking welfare policies.

The result of a recent poll exudes this political climate

From another Wall Street Blog,

Poll after poll shows that a majority of Americans support higher taxes on the wealthy, even when “wealthy” is defined as those making more than $250,000 a year.

Presumably, most of those polled don’t make the income cut-off, so it’s easy for them to demand that someone else pay for the nation’s debt.

Political divisions, from such class warfare, would only encourage instability and abet on violence.

In addition, the welfare state will continually be funded by debt that will ultimately lead to an outright default or will be inflated upon.

Ludwig Wilhelm Erhard, former economic minister and Chancellor, architect of Germany’s postwar economic reform and economic recovery popularly known as "Wirtschaftswunder" or "economic miracle", in his book Prosperity through Competition wrote a very apropos admonition on the dangers of the welfare state (p.187) [emphasis added]

if this mania increases we shall slide into a social order under which everyone has one hand in the pocket of another. The principle would then be: I provide for someone else and someone else provides for me.

The blindness and the intellectual inertia which are pushing us towards a Welfare State can only bring disaster. This, more than any other tendency, will serve slowly but surely to kill the real human virtues—joy in assuming responsibility, love for one’s fellow being, an urge to prove oneself, a readiness for oneself—and in the end there will probably ensue not a classless but a soulless mechanical society.

Quote of the Day: Legacy

It's one thing to miss someone, to feel a void when they're gone. It's another to do something with their legacy, to honor them through your actions.

That’s from marketing guru Seth Godin’s eulogy for Steve Jobs. Read the rest here

Video: Fiat Money Basics: The Root of the World's Imbalances

Here is a concise explanation of the mechanics of the legal tender based paper money system, a system that rewards the political and the banking class at the expense of everyone else.

Celebrating Heroes of Capitalism: Apple's Steve Jobs

Apple's founder Steve Jobs passed away today at age 56.

Although I have not had the opportunity to patronize Apple's marvelous products such as the iPhone wireless handset, iPad tablet or iPod digital music player or MAC or Macintosh computers, I recognize Mr. Steve Job's immense and revolutionary contributions in bringing about transformative technology-based personalized connectivity through his magnificently consumer directed innovative ways.

As the Bloomberg aptly describes

Jobs proved that complex technologies could be designed into simple, beautiful products that people would find irresistible

For Mr. Jobs, the consumer was king. And because of this, Mr. Jobs, through Apple, has been reciprocally rewarded by the markets (see AAPL's chart here).

Mr. Jobs' personal net worth according to the same Bloomberg article was at least $6.7 billion as of September 6, mostly from his Disney (Pixar) stake [$4.4 billion] and from Apple [$2.1 billion].

The following video is a short tribute to Steve Jobs. [hat tip Russ Roberts]

Thank you Steve. RIP.

US Debt up $162 Billion in Three Days; now 98.9% Debt/GDP

The US government is on a spending spree.

Quoting the anonymous writer who comes by the name of Tyler Durden of the Zero Hedge (bold highlights original)

total debt is now at, obviously, a new record high of $14,856,859,498,405.73, which is a $20 billion increase overnight, $67 billion in the past two days, and $162 billion in the last three days. We will repeat the last part: total US debt has increased by $162 billion in three days. Said otherwise, total US Debt/GDP is now 98.9%.

Politicians and their allies believe they can spend their way to prosperity. They believe in the Santa Claus principle.

They have to be reminded that, to quote Ludwig von Mises,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

In a world of scarcity, there is simply no such thing as a free lunch. Eventually markets will expose such tomfoolery.

The US Banking Sector’s Dependence on Bernanke’s QEs

Is the US banking sector having a déjà vu of 2008?

The Economist suggests so (bold emphasis mine)

Wild gyrations in stockmarkets; banks' share prices falling like stones; politicians stepping in to back-stop lenders for fear of collapse. The echoes of 2008 are alarming. Morgan Stanley is one of the big casualties: fears apparently caused by its exposure to European assets led its share price to fall by 17% over the past two days of trading. You have to go back to December 3rd 2008 to find the last time the bank's stock closed at the same price as it did yesterday, even if it still sits 36% above its 2008 nadir. A French bank, Société Générale, has already breached its 2009 low, hitting €15.31 in late September, although it has bounced back by 24% since then. Bank stocks may now be approaching levels seen in the depths of the financial crisis but broader stockmarket indices still have a long way to go to reach that mark. That won't last if the banks get into real difficulties.

Bank stocks have not been only suffering from depressed share prices but have likewise seen their default risks surging.

According to Bespoke Invest (chart above from Bespoke)

“a gain in CDS prices is a bad thing, as it means that default risk has gone up. And it has gone up significantly for financial companies once again this year. For the majority of financials, CDS prices are still not as high as they were during the financial crisis, but they're starting to get close. And interestingly, while the European banking system is the one that is supposedly in trouble, two US financials are up the most this year -- Morgan Stanley and Goldman Sachs.”

I’d further add that banking sector looks highly dependent on Bernanke's Quantitative Easing (QEs) programs.

I previously noted of the timeline for the previous QEs,

The timeline for QE 1.0 is officially from March 2009 to March 2010, and QE 2.0 from November 2010 to June 2011

The Philadelphia Bank Index exhibits that since the closure of the previous two quantitative easing programs by the US Federal Reserve, shown by the green ellipses, the banking index either wobbled (as in post QE 1.0) or has been in decline (post QE 2.0).

What this implies is that despite the trillions thrown by the US Federal Reserve, the balance sheets predicaments of the banking system have not gone away. Think of all the resources wasted just to save the Bernanke's most preferred sector.

To add, the still foundering property sector continues to weigh on the banking sector’s balance sheets.

Such dynamic seems no different with the Dow Jones Financial Index.

This means that interventions had only masked the problems, which resurfaces everytime such government support ended.

Also given that US banks have substantial exposures to European banks, it isn't farfetched to perceive a potential contagion from any further deterioration in the latter's banking sector.

So either we see the team Bernanke redeploying the modified version of the 'helicopter option' through QE 3.0, to bolster the flagging US banking and financial sector soon, or we will see many bankruptcies and mass liquidations that would exacerbate the current pressures on the global financial markets.

My guess is Ben Bernanke won’t like to have his hands bloodied and would rather resort to the “kick the can" option.

Occupy Wall Street: President Obama’s Stealth Re-election Strategy?

There has been a brewing grassroots discontent at Wall Street, and they are partly right, Wall Street has been party to America’s social woes.

But the political solution to this has been divided; on the one hand, one camp blame Wall Street as inextricably tied to the US government and the US Federal Reserve. The other believes in the socialist resolution.

As Anthony Gregory writes,

Although there is no single ideology uniting the movement, it does seem to have a general philosophical thrust, and not a very good one at that. OccupyWallStreet.org has a list of demands, and while the website does not represent all of the protesters, one could safely bet that it lines up with the views of most of them: A "living-wage" guarantee for workers and the unemployed, universal healthcare, free college for everyone, a ban on fossil fuels, a trillion dollars in new infrastructure, another trillion in "ecological restoration," racial and gender "rights," election reform, universal debt forgiveness, a ban on credit reporting agencies, and more power for the unions. Out of over a dozen demands there is only one I agree with — open borders — and, ironically, many on Wall Street probably favor that as well.

All in all, this wish list is a terrible recipe for moving far down the road toward socialism. On the way to achieving these goals, totalitarian controls on the population would be necessary. Some of these demands are merely horrible ideas that would injure the economy severely — such as the huge expansion of public infrastructure. But others are so fancifully utopian — such as a living wage guaranteed to all, especially when combined with free immigration — that their attempted implementation would confront the many disasters and horrors we have seen in every nation that has seriously attempted socialism. Such policies would vastly expand the government, including its manifestations in the corporate state and police power that these protesters find so unsavory. All of the corruption and brutality they think they oppose are symptoms of the same essential political ideology they favor.

It must NOT be forgotten that Wall Street’s political and economic privileges emanates from the role it plays in the current political economy of the US.

Fundamentally, Wall Street functions as the major conduit in the financing of the US government.

As explained by Professor Philipp Bagus,

For governments, the mechanism works out pretty well. They usually spend more than they receive in taxes, i.e., they run a deficit. No one likes taxes. Yet, most voters like to receive gifts from their governments. The solution for politicians is simple. They promise gifts to voters and finance them by deficits rather than with taxes. To pay for the deficit, governments issue paper tickets called government bonds such as US Treasuries.

An huge portion of the Treasuries are bought by the banking system, not only because the US government is conceived as a solvent debtor, thanks to its capacity to use violence to appropriate resources, but also because the Fed buys Treasuries in its open-market operations. The Fed, thereby, monetizes the deficit in a way that does not hurt politicians.

In other words, the incumbent architecture of the welfare state applies Financial Repression by channeling the savings of the private sector to the US government via the banking system which has been backed, coordinated and supervised by the US Federal Reserve.

I would like to add that capital adequacy laws have likewise been designed to designate US sovereign liabilities as ‘risk free’ which ‘incentivizes’ banks to hold government securities as its main assets.

Not only that, major Too Big to Fail Banks of Wall Street are the chief conductors of the US Fed’s monetary policy, which goes to show the depth of their intertwined relationships. A list of Primary dealers here.

And further proof that Wall Street benefits from the welfare state is the example of JP Morgan’s role as processor of food stamp benefits.

From the Economic Collapse Blog

JP Morgan is the largest processor of food stamp benefits in the United States. JP Morgan has contracted to provide food stamp debit cards in 26 U.S. states and the District of Columbia. JP Morgan is paid for each case that it handles, so that means that the more Americans that go on food stamps, the more profits JP Morgan makes. Yes, you read that correctly. When the number of Americans on food stamps goes up, JP Morgan makes more money.

And it is no doubt that such cozy relationship represents a classic text book example of regulatory capture —when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating (Wikipedia.org)

And an ostensible symptom of this has been the revolving door relationships—the movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation and on within lobbying companies (Wikipedia.org)—between Wall Street and the US government.

The Business Insider shows 29 famous revolving door cases where Wall Street personalities went on to work for the government and vice versa, and the list includes Hank Paulson, Robert Rubin, Lawrence Summers, Martin Feldstein and many more

Bottom line: While it would seem right to put the load of the blame to the financiers of the government, solutions that further socializes Wall Street would only serve to perpetuate the current malaise or even worsen them.

And given the penchant of the emerging grassroot’s movement for bigger government, it would seem that such actions could signify as a stealth political strategy to promote President Obama’s re-elections. After all, Wall Street as scapegoat has been used before and at the end of the day had been settled amicably.

Looks and smells like the same old trick.

Reported Bailout of Belgium’s Dexia Spurs a fantastic US Equity Market Comeback

Another day, another sharply volatile markets.

US equity markets made another spectacular comeback.

The actions of the US S&P exhibits the amazing turnaround today. Down by over 2%, the major US bellwether hit the bear market threshold then sharply recovered during the last hour to make a dramatic 4.1% swing as shown in the above chart from stockcharts.com.

The reported trigger: another bank bailout in the Eurozone.

This from Bloomberg (bold emphasis mine)

U.S. stocks rallied, driving the Standard & Poor’s 500 Index up 4.1 percent in the final 50 minutes, amid speculation European Union officials are examining how to recapitalize the region’s banks. Treasuries fell and the euro rallied.

The S&P 500 surged 2.3 percent to 1,123.95 at 4 p.m. New York time, sparing the benchmark measure of U.S. equities its first bear market, or 20 percent retreat from a peak, since 2009. Yields on Treasury 10-year notes climbed 6 basis points to 1.82 percent. The euro appreciated 1.1 percent to $1.3322. Futures on Germany’s DAX Index pared their loss to 1 percent from 4.9 percent.

Equities rebounded after the S&P 500 fell below 1,090.89, the closing level required to give the index a 20 percent slump from the three-year high reached on April 29. Stocks rose after the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. After U.S. markets closed, Belgian Prime Minister Yves Leterme said a “bad bank” to hold Dexia SA (DEXB)’s troubled assets will be set up.

It is important to note that US municipal bond markets (state, cities and etc.) has significant but dwindling exposure to Dexia, from previously $54 billion to the current $9.6 billion (Reuters). Thus, the reported bailout sent US financial stocks leading the way for the fiery rally in the broader equity markets.

To add, the US Federal Reserve has a big loan exposure on Dexia in 2008, which most likely postulates that the Fed will be part of the rescue package.

From the telegraph

At the height of the financial meltdown, on October 24, 2008, Dexia's New York branch was used to borrow $31.5bn (£19.6bn). The total borrowing from all banks during that week climbed to $111bn, according to lending data released by the central bank on Thursday.

This serves as another evidence manifesting how financial markets have become deeply dependent on government bailout or steroids.

Importantly, that the heightened volatility in the markets have been due to the whack a mole strategy applied by policymakers on bank rescues. Remember, this is just one of the many banks that would 'require' bailouts.

Lastly, the exposure by the US Federal Reserve and US banks to Europe’s imploding banking system only means that team Bernanke will be reengaged in his helicopter option soon

Obama’s Energy Policies and Crony Capitalism

Why are oil prices high? As I have repeatedly been saying this has been because of government policies, particularly restriction to access (aside from inflationism)

From the Global Warming Policy Foundation (emphasis added) [hat tip Matt Ridley]

Harold Hamm calculates that if Washington would allow more drilling permits for oil and natural gas on federal lands and federal waters, the government could over time raise $18 trillion in royalties. That's more than the U.S. national debt.

Harold Hamm, the Oklahoma-based founder and CEO of Continental Resources, the 14th-largest oil company in America, is a man who thinks big. He came to Washington last month to spread a needed message of economic optimism: With the right set of national energy policies, the United States could be "completely energy independent by the end of the decade. We can be the Saudi Arabia of oil and natural gas in the 21st century."

"President Obama is riding the wrong horse on energy," he adds. We can't come anywhere near the scale of energy production to achieve energy independence by pouring tax dollars into "green energy" sources like wind and solar, he argues. It has to come from oil and gas.

You'd expect an oilman to make the "drill, baby, drill" pitch. But since 2005 America truly has been in the midst of a revolution in oil and natural gas, which is the nation's fastest-growing manufacturing sector. No one is more responsible for that resurgence than Mr. Hamm. He was the original discoverer of the gigantic and prolific Bakken oil fields of Montana and North Dakota that have already helped move the U.S. into third place among world oil producers.

How much oil does Bakken have? The official estimate of the U.S. Geological Survey a few years ago was between four and five billion barrels. Mr. Hamm disagrees: "No way. We estimate that the entire field, fully developed, in Bakken is 24 billion barrels."…

The White House proposal to raise $40 billion of taxes on oil and gas—by excluding those industries from credits that go to all domestic manufacturers—is also a major hindrance to exploration and drilling. "That just stops the drilling," Mr. Hamm believes. "I've seen these things come about before, like [Jimmy] Carter's windfall profits tax." He says America's rig count on active wells went from 4,500 to less than 55 in a matter of months. "That was a dumb idea. Thank God, Reagan got rid of that."

A few months ago the Obama Justice Department brought charges against Continental and six other oil companies in North Dakota for causing the death of 28 migratory birds, in violation of the Migratory Bird Act. Continental's crime was killing one bird "the size of a sparrow" in its oil pits. The charges carry criminal penalties of up to six months in jail. "It's not even a rare bird. There're jillions of them," he explains. He says that "people in North Dakota are really outraged by these legal actions," which he views as "completely discriminatory" because the feds have rarely if ever prosecuted the Obama administration's beloved wind industry, which kills hundreds of thousands of birds each year.

Obama’s policies have been designed at keeping energy prices elevated so that he can push his “green energy” projects to the benefit of his cronies, as the recent Solyndra scandal has manifested.

See video below

And more political blight from 'green energy' based crony capitalist policies are being exposed.

From Heritage Foundation,

Days before a recent deadline, the Department of Energy brazenly approved two additional loans for more than $1 billion for solar energy projects in the Obama Administration’s green jobs program. The latest ill-fated ventures include a $737 million loan guarantee to Solar Reserve for a 110-megawatt solar tower on federal land in Nevada and a $337 million guarantee for Mesquite Solar 1 to develop a 150-megawatt solar plant in Arizona.

Loan guarantees like these are destined to fail, because they are either granted to companies that could not remain viable without them or because the loan was supported by political connections; or both. This round of loans includes the latter—just as it appears Solyndra was aided.

For example, Solar Reserve lists PCG Clean Energy and Technology Fund (East) LLC as an investment partner. Ronald Pelosi, brother-in-law of the House Minority Leader Nancy Pelosi, is an executive with PCG. Another investment partner: Argonaut Private Equity, the employer of Steve Mitchell, who served on the Solyndra LLC Board of Directors.

Green energy is no more than political based redistribution. Yet as the above shows, big government or the politicization of allocation of resources results to corruption, the gaming the system, inefficiency or wastage of scarce resources and taxpayer losses.

Ron Paul on the Bubble Cycle

Ron Paul explains the bubble cycle (Austrian Business cycle) better than I do [bold emphasis mine]

Because of continued rising inflation and the Federal Reserve's suppression of interest rates, investing in traditional safe havens such as savings accounts, mutual funds, and Treasury bonds has become unprofitable. Lots of money is moving through the system seeking a return on investments or at least some measure of safety, as increasingly desperate investors move their funds around in search of long-term profits and stability. Until the Fed stops its monetary intervention and allows interest rates to be set by the free market, investors will move their money in a volatile manner. They will invest in commodities and stocks while prices swing upwards, but will flee to bonds and cash at the first sign of a downturn.

The uncertainty caused by the Fed does help some people – professional traders on Wall Street for example. Increased volatility and huge price swings mean more opportunities for profit, as sophisticated electronic trading programs can buy and sell huge positions within a fraction of a second of a major market movement. But small businessmen are misled by the artificially low interest rates into making unwise investments, and those whose jobs vanish when the Federal Reserve's latest bubble pops suffer. Without the knowledge or ability to move with the markets or diversify overseas, average Americans see their savings stagnate or depreciate-- along with their hopes and dreams for a better tomorrow.

The only way to return to a sound economy is for the Federal Reserve to cease and desist its monetary manipulation and allow interest rates to be determined by markets, just as the price of goods, services, and labor should be determined by markets. Everything the Fed is doing by pumping money into the economy benefits only the insolvent, too-big-to-fail banks. Low interest rates encourage consumers to take on more debt, meaning more profits for the banks issuing those loans. Purchasing mortgage-backed securities, as the Fed has done, keeps housing prices inflated, helping the banks who have non-performing mortgages on their books. However, it hurts consumers who continue to be priced out of the housing market. In order to maintain a decent standard of living for the American people and to restore the vibrancy of the U.S. economy, it is time to end the Fed.

It’s time to liberate money from politics and return to sound money.

Chart of the Day: Is China Suffering from a Credit Crunch?

The Pragmatic Capitalist quotes a Nomura Study of what seems to be a simmering volcano waiting to explode

In order to understand better how serious the problem is, we monitor the bill discount rate, which is the financing cost for firms when they sell commercial acceptance bills to banks for cash. A higher bill discount rate is a signal that the imbalance between supply and demand for credit has worsened. The 6-month bill discount rate has worsened at alarming pace since 2011, rising to above 10%.

The gap between the bill discount rate and the interbank rate has widened to 5.7 percentage points, the highest level since the data was made available. China’s credit market is becoming more fragmented. Financing costs for firms without access to bank loans have risen much more than those for large state owned enterprises. The sharp rise in the bill discount rate may be partly driven by property developers who are facing worsening financing conditions given the lackluster sales.”

These indicators: China’s Bill discount rate and the Shanghai Interbank Offered Rate (SHIBOR) should be one very important indicator to watch

Obama’s Foreign Policy: Judge, Jury and Executioner

Paul Craig Roberts on the assassination of Anwar Awlaki and Samir Khan

But what Awlaki did or might have done is beside the point. The US Constitution requires that even the worst murderer cannot be punished until he is convicted in a court of law. When the American Civil Liberties Union challenged in federal court Obama’s assertion that he had the power to order assassinations of American citizens, the Obama Justice (sic) Department argued that Obama’s decision to have Americans murdered was an executive power beyond the reach of the judiciary.

In a decision that sealed America’s fate, federal district court judge John Bates ignored the Constitution’s requirement that no person shall be deprived of life without due process of law and dismissed the case, saying that it was up to Congress to decide. Obama acted before an appeal could be heard, thus using Judge Bates’ acquiescence to establish the power and advance the transformation of the president into a Caesar that began under George W. Bush.

Read the rest here

Any foreigners, for whatever reason which mostly will signify as political opposition, can be labeled a ‘terrorist’, and thus, subject to unilateral summary execution.

War on Commodities: More Credit Margin Hikes for Copper and Platinum

I pointed out US Federal Reserve Ben Bernanke’s most recent statement

If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation

It would seem that Mr. Bernanke has been applying the power of suggestion, in the implication that his favorite tool, the Helicopter option (QE), would only be used when the menace of a ‘deflation risk’ is present.

What better way to convey the impression of deflation than by having commodity prices fall.

And perhaps through indirect channels, the team Bernanke may be influencing credit margins policies of the CME.

From marketwatch.com,

CME Group the parent company of the New York Mercantile Exchange, on Monday raised margin requirements for trading copper and platinum futures contracts. The changes go into effect Tuesday. Margins are money investors must put up to be able to trade and hold futures contracts. Initial requirements for copper contracts on the Comex division rose to $7,763 per contract from $6,750, and maintenance margins climbed to $5,750 each contract from $5,000. For platinum futures on Nymex, initial requirements were hiked to $4,950 per contract from $3,850, and maintenance margins rose to $4,500 each from $3,500

This war against commodities has been in place since May.

Intervening in the markets essentially distorts price signals which consequently creates supply-demand imbalances that would lead to more volatile price actions.

Furthermore, manipulating policies to pick on winners (in this case favors the commodity shorts) only politicizes the markets.

Lastly, I would say that in piecing together the jigsaw puzzles, Ben Bernanke has earnestly been trying to achieve the perception of ‘deflation risk’ by adding more pressures to the marketplace

Quote of the Day: Government Infrastructure Spending

From Professor Tibor R Machan

There is no substitute for the planning done in the market place or at the local level where those doing the planning have at least a reasonable chance of knowing what is likely to be needed and when. The saying “all politics is local” should be supplemented with “all economics is local.” By that insight the best thing to do is not to extort funds from citizens and move them through the bureaucracy--where much of those funds is lost--but to leave them with the citizenry who have a reasonably good idea what needs to be done with it. And a huge side benefit of this is that those citizens have a better grasp on budgetary constraints than do politicians and bureaucrats who routinely forget about the source of the funds they spend and are subject to the dynamics of public choice, self-dealing and similar malfeasance that afflicts the public sector’s administrators.

For my money trying to figure out what is the best way to spend stimulus funds is akin to trying to figure out how best to spend loot gotten in a bank heist. There is simply no way to calculate such a thing. Stolen or extorted funds cannot be correctly, properly or rationally allocated. Recall, also, that when major infra-structure projects, such as highway systems or dams are built, not long after it priorities can change, such as when environmental concerns had develop and these huge projects turned out to become threats to endangered species or the wilds that some want desperately to preserve. But once the huge projects are there, it is very tough to change course--the damage may well have been done forever.