J.P. Morgan and the Zero Sum Game

It's interesting to observe the performance of the Fed's and Wall Street's favorite sons. They have all the connections and insider info that most of us could only dream of and they routinely make lots of money, quarter by quarter. But are they really so smart?
If money supply and growth were constant, investing should be a zero-sum game. That is, if someone is making money, someone has to be losing money. But in these times of rampant money creation, it is possible for most of us to win most of the time, at least in nominal inflated dollars. The part that I find interesting is that every time the money creation machine slows down a bit (we are awaiting QE3/4, no?) and markets waver a bit, folks like Jamie Dimon often start tripping over their shoelaces, even though the odds are seemingly so stacked in their favor. It happened with Lehman and AIG a few years ago. Maybe Morgan won't go that way. But I can't help thinking that these mega-remunerated CEO's could not run a real business in the real world without being back-stopped by bailouts when things go wrong, without counting on huge money creation off which they can skim almost risk-less profits and without their priveleged connections and information sources. After all, who runs the Federal Reserve?
Yes, in spite of the supposed odds, they still manage to make mistakes, really big ones, sometimes. Sometimes big enough to bankrupt the company. How long can the world's central banks accelerate their printing and backstopping operations to keep these guys and our supposed economy afloat? Methinks that the zero-sum game will return with a vengeance one of these days.

John Corzine can't find the money!

So John Corzine, former Chairman and CEO of MF Global, has no idea where the firm's missing money might be found. Interesting people, the likes of John Corzine. These are the people under whose direction all sorts of clever investment vehicles and trading algorithms have been created over the years. We've been assured by these same folks that countless derivatives and trading mechanisms are OK, in fact - good. When challenged, we sometimes get told that we don't have the necessary basics to understand these complex instruments. But of course he has an MBA and is a former Goldman Sachs Chairman and CEO and even former U.S. Senator and State Governor as well. His membership in the Bilderberg Group further establishes his luminary qualifications. Along the way, he and his cohorts have earned hundreds of millions of dollars for the services they have rendered humanity. Anyway, I digress.
My question is this: If a firm like MF Global with all its computer and investment resources and savvy can't find its investors' missing money, wouldn't you have to conclude that either they are crooks and are lying or that they really didn't understand their business so well, after all, and might not even understand basic accounting that well either? Well, there seem to be enough facts on the table already to support the "crooks" part, as the firm is known to have co-mingled its clients' funds with the firm's funds when they "needed" it. Further investigations will likely reveal a lot more illegalities, cover-ups, lying etc. But I suspect my other suspicion has played a role, too. Do these guys really know what they are doing? If they did, they wouldn't be in the pickle they are in right now, I would think.
As a matter of fact, I suspect that John Corzine would have plenty of company if some of his peers in the investment, brokerage, insurance and banking businesses were suddenly cut off from the bailout/stimulus/insider info train of the Federal Reserve. Most of their Ponzi schemes would collapse within a week. Look what happened to Lehman. But it doesn't help if for whatever reason you are no longer part of the club?

Why do Nations Borrow ?

As the world gets increasingly mired in debt, Every day I listen to economists, talking heads as well as regular folks using terms such as "excessive debt", "manageable debt", "excellent (or poor) debt to GDP ratio", "low deficit", manageable deficit", etc. Debt and deficits may or may not be manageable but it is a slippery slope at best. Shakespeare had it right in Hamlet: "Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry." When individuals enter into significant debt, it is usually to borrow money for a major purchase, such as a home with the idea of repaying this debt over one's working life. Many people, maybe most, especially in the past, have done exactly that. In addition, they have usually saved some money along the way and managed to leave something for their children. Individuals normally don't have chronic deficits because this would mean that such an individual was adding to his outstanding debt every year, rather than paying off the debt. This wouldn't make sense and would lead to bankruptcy. So, do individuals need to borrow in the first place? Well, maybe not, but if the idea is to acquire something like a home early on in one's career, or to start a business, this can make sense, provided that the repayment terms are not too onerous relative to one's earnings and spending habits and of course, that the loan is repaid.

But why would nations ever need to borrow, especially chronically (i.e. run deficits)? Since a nation is a very large collection of individuals, it would seem that whatever expenditures governments contemplate should be paid for by passing the hat around, usually in the form of taxes and duties. If you need to spend more, tax more. Why would any nation ever want to borrow money so future taxpayers would be on the hook? And why would you borrow chronically? Will it be easier to pay those taxes tomorrow than today? Do nations around the world expect some big infusion of money down the road from the equivalent of rich old aunt Millie passing away? Let's face it. Short of possibly having to repel an invading force where the very existence of a nation is at stake, sovereign borrowing just does not make any sense. What's worse, future interest payments will only serve to reduce the outlays available to provide citizens with government services. No, in fact, nations should purposefully run small surpluses for that rainy day to defray the unusually high costs of repelling aggressors or to deal with natural or man-made disasters.

Well, in fact, I think most of us know why nations borrow. It is human nature combined with politics. Politicians love to bribe the citizenry with their own or future taxpayers' money. And citizens? For the most part, they love to bribed. They vote for a better today, for their pet projects, etc. Tomorrow's pain is something that can be set aside for . . . tomorrow.  Unfortunately, history demonstrates that with time, borrowing costs mount and lenders become scarce, leading to debt crises. Then central banks are urged to print some of the shortfalls. This process is often disguised to reduce the rate at which confidence is eroding. We engage in stimulus, quantitative easing, blah, blah, blah. Eventually, as confidence erodes even more, increasingly massive printing becomes the only short-term measure available to avoid banking and institutional failures and finally city, state and sovereign failures. Unfortunately, history also shows that such a remedy eventually destroys that nation's currency in addition to that nation ultimately succumbing economically. If a minor currency is destroyed in this way, that country's transactions and trade can be substituted in some other currency, such as the $US. However, should that currency be the world's principal reserve currency . . .

Fear in Europe over Greece Default

Europe is fretting over Greece. While the future of the EU and the Euro may indeed be at risk, the bigger concern probably actually relates to the exposure of French and German banks and their governments to a possible Greek default. The citizens of Europe might be even less likely to support what is actually a French/German banking bailout than a Greek bailout if this aspect is highlighted. Take a look at the chart below.

If Greece defaults, then a banking bailout would be almost a certainty. Otherwise, a domino effect would probably take down the world's whole banking system. So the choices are: 1) Bailout Greece (again and again) or 2) Let Greece default and bail out the banks instead. Neither seems to be an attractive option when considering the likely backlash from voters.

QE3 Gets Closer as U.S. Economic Indicators Falter

As economic storm clouds gather (see CNBC for example), pressure mounts on the Federal Reserve to launch QE3. They will deny and obfuscate as long as possible but at a certain point they will mount their white stallions again and sally forth to the "rescue". Trillions more will be printed and trillions more in debt accumulated. Currencies, stock/bond markets and commodities will gyrate. Gold and silver will make new highs while U.S. credit ratings will be downgraded. But I'm getting ahead of myself a bit. The economic situation and especially the stock markets will first need to suffer a bit, enough to be noticed by the general public, maybe even some panic drops in market values, for example. Political and public consensus will then build around the new imperative of QE3 although it may be called something else to avoid the obvious embarrassment of creating a string of failed initiatives.

European Contagion Spreading to more Banks

The debt contagion is spreading rapidly, almost virulently at this time. Here is a good article from Toronto's Globe&Mail newspaper illustrating why bailouts have gotten so much traction with superficially reluctant France and Germany. These two countries hold the lion's share of Portuguese and Spanish debt. Guess whose banks would collapse if Portugal and Spain are allowed to default (or if Ireland and Greece had been allowed to default).

Europe's PowderKeg: The Financial Cracks Deepen Some More

Not at all surprisingly, the financial dismemberment in Europe is continuing unabated. The Spanish situation is  described here. The Belgian and Italian situations are described here. Let's leave Portugal et alteri for another day. Some nations (France, Ireland and Hungary) have taken to absconding with their national pension funds to help relieve short term financial pressures.

Europe's PowderKeg: The Financial Cracks Deepen

Ireland has followed Greece while Portugal and Spain are looming larger on the horizon. The now familiar pattern continues. Spain and Portugal deny they will need assistance. The EU dismisses reports that it is preparing further bailouts. This is all nonsense. Why do they bother with such transparent posturing? A recent summary on Europe's Powderkeg here, courtesy of the Globe and Mail.

Double-Dip Gaining Traction

The mainstream press is belatedly starting to talk double-dip in the economy as a near-certainty as opposed to the 10-20% likelihood oft quoted earlier. Of course, this outcome was predicted at the outset by independent observers on the basis that the best that the stimulus could do was to postpone the day of reckoning at huge taxpayer expense. So we may now be entering the same situation but with considerably deteriorated public/private finances.
With a few exceptions, most Central Banks and Treasuries around the world will nevertheless likely pursue the same discredited and philosophically and morally bankrupt policies of the past, so we can except Quantitative Easing 2 (QE2) and associated stimulus and bailout policies to emerge shortly. My guess is that the amounts involved this time will dwarf QE1 by a considerable margin. In the process, national/sovereign debts will skyrocket to new levels and the world's financial system and underpinnings will decay further and tremble anew. These folks continue to peddle the notion that the answer to problems created by excessive debt, leverage, fraud and make-believe accounting is even more excessive debt, rigged accounting and rigged markets, be it bonds, equities, real estate or commodities. Be very, very wary of all markets!

Massive Interventions and Manipulations

The world financial and securities trading systems are increasingly being characterized by massive interventions and manipulations. If governments or government agencies are doing it, it's called "intervention". Coupled with rising fear and uncertainty regarding the stability of the world's financial systems, this has resulted in increasingly chaotic and volatile market conditions with wildly gyrating markets.

 Unfortunately, again, none of these interventions and bailouts address the root causes of the problems which include debt, fraud and mismanagement on a broad scale across most nations. We continue to fight the symptoms and to attack the markets themselves in a form of shoot-the-messenger syndrome.

While much breast-thumping continues from world capitals about new regulations governing banks and market players, existing rules are not being enforced. Governments themselves openly break their own rules that were established for good reason in the first place.

My advice to retail investors: Stay away! You cannot compete with governments and hedge funds with massive resources and instant computerized trading capability creating an increasingly frenetic and schizophrenic marketplace. I get the feeling that a series of collapses will occur in a number of markets because everything is so artificial with normal markets pushed, pulled, constrained or strangled. Free markets are basically gone for the time being. Governments are the worst offenders in all this, beginning with the so-called zero-interest policy (ZIRP) which robs the world's middle-class savers who can either toss the dice in the increasingly casino-like stock and bond markets or park their savings in cash to take a loss after taxes and inflation.

The beneficiaries of most of these ill-conceived policies, on the other hand, comprise the irresponsible, incompetent and fraudulent. It seems clear to me that only a major collapse in a number of markets would finally force governments to their senses. Sad.

Bailouts not the solution to too much debt

Bailouts have now proceeded from the corporate, securities, banking and insurance sectors to the sovereign nation/state and even to regional sovereign blocks (EU). None of this has addressed the basic problem of rising debt. In fact, the bailouts are almost certainly just making things much worse.

We tend to get confused because we think that different rules somehow apply than those with which we are more familiar, such as bringing up our own kids. In the past, if our teenagers got into debt, we would probably have had a little chat with them about the potential dangers of debt. If they ignored our advice and got into debt further and got beyond their ability to service that debt, they might show up on our doorstep and ask for a bailout. Some of us might choose to help out, but only if the kids handed over their credit cards for shredding and agreed to a balanced or surplus budget regime. In other words, they would have to live within their means. At the same time, they would be told that if this happened again they would be on their own.

Now let's compare this with what we are doing in the financial world. We are telling nations that we will bail them out if they tighten up a bit and run smaller deficits (increase their outstanding mortgages at a slower rate). And even that is  a lot of hogwash, coming from the "parent" states who themselves are running deficits. So it's like telling your children not to keep borrowing faster than you are. The only thing temporarily keeping things afloat is that people still have some (misplaced) confidence in the parent states (like the U.S.). When you look at the skyrocketing deficits and growing debts of the U.S., it is sheer lunacy but this is where we have come.

Getting back to the parenting analogy, the big risk of these uncontrolled and spreading bailouts is that the kids are going to take the parents down with them. So instead of a relatively nasty and uncomfortable but small and containable default, we are risking the entire financial structure.

The only solution to too much debt is less debt, not more debt!

European Bailout in need of a Bailout

The much-heralded European $ 1 Trillion bailout seems to have largely fizzled. The Euro is trading at well below its value in US$ before the bailout announcement on Sunday. Also, Gold has hit an all-time record in many currencies. Things are getting more and more unsteady. When will the world learn that bailing out irresponsible banks, corporations or nations is not the answer and threatens a far worse global collapse as we are pledging more and more collateral in this exponentially expanding poker game.

More on Sovereign Bailouts and Moral Hazard

Toronto's Globe and Mail newspaper had a good article today by Gwyn Morgan on the costs of the Greek and other bailouts to taxpayers of various countries and, more importantly, the link between bailouts and Moral Hazard, which engenders a cycle of even greater financial promiscuity and then more bailouts.

Moral Hazard Expands from Private to Sovereign Bailouts

The Moral Hazard problem which I first wrote about in 2008 (see http://bondbubble.info/ ) is now threatening to expand to Sovereign Debt as Europe worries what kind of precedent a bailout of Greece would have on Portugal, Spain, etc. On the other hand, withholding support to Greece (and Portugal and Spain, etc.) could spell the end of the EU. A good article summarizing the quandary can be found here.