A Most Magnificent Speech

From one Robert Wenzel:

I will now give you more warnings about the economy.

The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or, if you stop printing, another massive economic crash will occur. There is no other way out.

Again, thank you for inviting me. You have prepared food, so I will not be rude, I will stay and eat.

Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.

And let the people say amen.
[Hat tip: Vox.]
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Decline

Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”

But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.

Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.

How can the reality and the image be so different? And can the United States learn from Japan’s experience?

It is true that Japanese housing prices have never returned to the ludicrous highs they briefly touched in the wild final stage of the boom. Neither has the Tokyo stock market.

When the talking heads speak of a decline, what they really mean is a loss of stock portfolio value. Or, more accurately, a decline in the prices of stocks, bonds, real estate, and other forms of capital. The wealthy abhor this potentiality because it would effectively destroy their wealth. While this concern isn’t altogether problematic (why shouldn’t they be self-interested, just like everyone else in the world?), the proposed solutions are.

Preventing “decline” is largely contingent on keeping capital prices afloat, which is itself contingent on leverage (which, it should be noticed, will be subsidized by taxpayers in some way), debt, and/or inflation. This is the only way. Capital asset prices are already significantly overvalued; the only way to keep it this way is to continue the policies that enabled this in the first place.

The only alternative is to let capital asset prices crash and then recover. This is the optimal strategy, in the sense of doing what’s best for the most people, for this strategy only requires non-intervention in the economy, which is unsurprisingly cheaper than intervention and bailouts. The reason why the talking heads never propose this is because the timeline for recovery is fuzzy at best.

Quite simply, once the market crashes and capital prices return to their pre-malinvestment valuations, it will be some time before those prices go back up again. This poses a problem to the wealthy employers of the talking heads, for said employers have spent their lifetime accumulating this imaginary wealth and, now that they are beginning to look at retiring, they do not want to see it simply vanish.

Therefore, the mainstream argument against decline—which is prevented only by bailouts and leverage—is entirely founded on the assumption that maintaining capital asset prices is desirable. Given the costs of doing so, and given that the result only benefit wealthy crooks, it seems clear that the best course of action is to welcome decline with open arms. This way, as is seen in Japan, living well will not simply be the privilege of the wealthy.

Crash!

In case you did not notice it, the much discussed “range” on the SP500 broke in spectacular fashion yesterday as the short rollers bypassed the 1250 mark in the same style as the Germany pantzer passed the Maginot line back in the early stages of WWII.

Basically, two many people tried to catch the knife of the falling market (everywhere) in anticipation of just one good data point or perhaps CB intervention but nothing came. As such the pain trade is still down I think. Of course, we DID walk into the office to some JPY selling by the BOJ and the ECB finally looked outside the ivory tower to see the badlands that its stfu policy has so far engineered even if the continuing mention of inflation risks somehow strikes me as beyond crazy.

With most market participants probably now sitting shivering in a corner wishing that yesterday was Friday, there is indeed a day today and one has to assume that a bad jobs report will bring the whole world down on the back of stock investors. Blood is currently flowing but it can get worse, much worse than this.

Given the feedback loop between our recession indicators and the SP500 with the former taking the latter as an input there is clearly now a real risk of a recession in the US and on my casual calculation it is well above 50%.

Now, if the pain trade is still down the decision by BNY Mellon today to charge customers for holding large piles of cash indicates to me that the pendulum has swung extremely fast into uber fear mode. My feeling is that the market has much further downside from here in the short term, but nothing goes down in a straight line forever. In this sense a US recession market level is likely to be very close to this level, it may still squeeze the longs yet awhile.

More generally, I am constructive on how this might impact emerging markets in the sense that inflation is now likely to be even more a non issue. This is especially the case in economies who have mainly been combatting headline inflation (e.g. Chile with India as a rather more sinister case of demand pull inflation too). There will be no recession in EM and therfore a re-rotation into EM from here on as DM slumps into a recession is one way to stay constructive even in the midst of the bloodbath taking place.

Swiss Banking Laws Key To Rescuing Wall Street and Consumers?

In a recent move, Switzerland’s second largst bank, Credit Suisse, has agreed to buy back more than half a billion dollars in securities and a hefty fine of fifteeen million dollars. The settlement arose due to an investigation by New York’s Attorney Genera;, Andrew Cuomo. The agreement stipulates that Credit Suisse will buy back securities from “individuals, charities and small businesses with accounts valued up to $10 million” according to

North American Securities Administrators Association (NASAA) – the oldest international organisation devoted to investor protection.

In consideration of the settlement, American states will agree to terminate their investigation of Credit Suisse’s marketing and sale of such securities to individual investors.

The ARS market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as every seven days.

Market meltdown

They were sold as being as safe as cash but the market fell apart amid the downturn in credit markets.

Investigators have been trying to work out who was responsible and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

In a statement from New York, the Zurich-based bank noted: “Credit Suisse neither admits nor denies allegations of wrongdoing.”

Eligible individual investors must have bought their ARS through Credit Suisse before February 14, it added.

The bank joins a growing list of major financial institutions – including Switzerland’s largest bank UBS – to reach settlements, with more than $51 billion targeted for repurchase, and state and federal penalties totalling an estimated $537 million.

“The industry is taking responsibility for correcting a problem they helped create, and that’s a good thing,” Cuomo commented in a statement.

« The industry is taking responsibility for correcting a problem they helped create… »

Andrew Cuomo, New York State Attorney General

“Return money”

“The fundamental goal has been to return money into the hands of investors, and that’s what these deals do.”

NASAA President Karen Tyler was also satisfied with the Credit Suisse settlement.

She described it as “another step on the road to recovery for thousands of Main Street investors who have been trapped in the auction rate securities meltdown”.

UBS last month announced a comprehensive settlement, in principle, for all clients holding auction rate securities at an estimated cost to the bank of $900 million.

It pledged to buy a total of $8.3 billion of ARS at face value from most private clients during two years from January 1, 2009. However, private clients and charities holding less than $1 million in household assets would be able to obtain this relief from October 31.

It said it would also provide solutions to institutional investors and agreed to buy all or any of the remaining $10.3 billion at face value from its institutional clients from June 30, 2010.

In July, UBS announced its intention to buy back up to $3.5 billion in auction-rate securities in the face of a lawsuit by Massachusetts’ authorities.

swissinfo with agencies

UBS, Switzerland’s largest bank, has similarly agreed  to reimburse shareholders

Andrew Cuomo, New York state’s Attorney General, “The industry is taking responibility for correcting a problem they helped create

NASAA President Karen Tyler  the Credit Suisse settlement.

She described it as “another step on the road to recovery for thousands of Main Street investors who have been trapped in the auction rate securities meltdown”.

UBS last month announced a comprehensive settlement, in principle, for all clients holding auction rate securities at an estimated cost to the bank of $900 million.

It pledged to buy a total of $8.3 billion of ARS at face value from most private clients during two years from January 1, 2009. However, private clients and charities holding less than $1 million in household assets would be able to obtain this relief from October 31.

It said it would also provide solutions to institutional investors and agreed to buy all or any of the remaining $10.3 billion at face value from its institutional clients from June 30, 2010.

In July, UBS announced its intention to buy back up to $3.5 billion in auction-rate securities in the face of a lawsuit by Massachusetts’ authorities.