Words of Wisdom

"Speculative manias gather speed through expansion of money and credit.  Most expansions of money and credit do not lead to a mania; there are many more economic expansions than there are manias.  But every mania has been associated with the expansion of credit.  In the last hundred years or so the expansion of credit has been almost exclusively through the banks and the financial system..." (Kindleberger, Manias, Panics and Crashes)

Central banks in the West have kept interest rates at absurdly low levels for more than 6 years, during which there has been regular economic growth and declining unemployment rates almost everywhere.  They should have started raising rates years ago, and they likely know it.  They have almost exclusively caused irresponsible borrowing and associated asset bubbles in equities, bonds and real estate across the planet.

Anyone can read Kindleberger.  The question central bankers will have to answer after The Great Collapse that is looming will be why they could have been so utterly blind to the clear and completely predictable outcome of their policy? Sometimes smart people just do not "get it".  This is one of those times.

Market Crashes...What's Next?

With China's stock market and exports seemingly collapsing, all eyes will be on the USA this week to see if it can carry the world's economy, and provide the calm that the stock markets crave to mover investors from Fear back to Greed again. Here is the news that is coming...

Tomorrow - S&P Case-Shiller House Price Index (Has been heading down lately.); New Home Sales (High, but have been slowing.); and Consumer Confidence (Has been dropping.)

Wednesday - Durable Goods Orders (Has been declining, and has been negative since the Spring.  The Consensus is for a decline of 0.4%.)

Thursday - Revision of GDP for Q2 (Expected to be 3.2%, up from initial estimate of 2.3%. It was negative in Q1); Jobless Claims (Has been below 300,000 for months - 270,000 is the Consensus.)

Friday - Personal Income and Outlay (The Consensus is for a 0.4% increase month over month; it has been flat lately.)

The key indicator is probably Durable Good Orders on Wednesday, as it is a very accurate reflection of underlying, non-services sector GDP.  If this is negative again in this exceptionally fragile environment, all bets are off, especially if GDP then comes in below estimates as well, which suggests the US economy is not well, but the Jobless Claims look good, which suggests there will be an interest rate hike in September.  Yes, this is contradictory...welcome to the world of the Managed Economy where policy often has a logic all its own.

Have you noticed?  The Consensus is for a decline in Durable Goods Orders on Wednesday, but a whopping 3.2% growth in GDP on Thursday.  Apparently growing economies don't need to produce stuff anymore.

Investments strategies in this Fearful New World?

The experts are now recommending one or more of, "Buy now...you'll never have an opportunity like this again!", and "It is time to reposition your portfolio (i.e. after a crash...thanks)...", and "Here are the stocks that you need to look at in a down turn!", and a weird one, "All will be well! Governments and central banks will bail in to raise stock prices...viva the free market!", and of course, "A long term strategy can survive the dips...stay in for the long haul and all will be well." (True, but how long is "long"?)

The writer bailed on all equities and bonds four months ago, as it became clear that an investor could not make more money between then and a market pull back than they would lose in the pull back, whenever it came.  The path forward from here is not clear.  It is suggested that investors be highly suspicious of anyone's advice at this point.  If they didn't tell you to "bail out" over the last three or four months as things were getting "frothy", and especially after the Chinese market signaled problems so clearly over the last month, why would you depend on their advice to "bail in" now?

They Got Him!!!!

Former Trader Tom "Fall Guy" Dayes Sentenced to 14 Years for Libor Rigging

Conviction and sentence represent major "victory" for British financial authorities

LONDON—Former bank trader Tom "Fall Guy" Dayes was sentenced to 14 years in prison on Monday after a London jury convicted him of trying to fraudulently rig the London interbank offered rate, or Libor.

The unanimous jury verdict, followed about an hour later by the judge’s 14-year prison sentence, delivers one of the harshest penalties meted out against a banker since the financial crisis. While several big banks have pleaded guilty to manipulating Libor - and have used tens of millions provided to them via Quantitative Easing from various Central Banks run by their friends and former employees to pay all of their fines -  it was the first criminal conviction of an individual for rigging the widely used benchmark.

Mr. Dayes, a mildly autistic mathematician whose quirky personality earned him the nickname "Blame Man" among his various bosses, was accused by British prosecutors of conspiring with a few others to manipulate Libor to make more money for himself and his employers.

The 34-year-old Briton initially argued that his behavior while at certain unnamed major banks was in line with industry standards, many which included ripping off all borrowers worldwide for profit and gain, and that his bosses knew about, directed, personally benefitted from and condoned what he was doing and that he never realized his behavior was improper because "We rip the world off all the time...since when is this wrong?"

But the 12-person jury, after deliberating for almost ten minutes before being whisked away to all-expense paid holidays in the Bahamas, dismissed those arguments and convicted him on all eight counts of conspiring to defraud.  The trial itself had run for almost twenty minutes. Mr. Dayes faced a maximum sentence of 10 years for each of eight counts of fraud, possibly to be served concurrently.

The judge, Jimmy "Eight-eight Fingers" Crook, said he was imposing a stiffer-than-expected sentence “to send a signal” to the low level pions in the banking industry. “Probity and honesty are essential, as is trust,” he said to Mr. Dayes in announcing the sentence. “The Libor activities in which you took part put all that in jeopardy....we need to send a signal that the entire price of this shameful episode has been paid by you, and only you."

Mr. Dayes, sitting in a locked, glass-enclosed dock with a guard, alternately shook his head and held his head in his hands, his face red, as the judge read aloud his sentence. His wife, Cheryl "WTF" Tiger, sat nearby, staring straight ahead and looking stunned, then yelled, "That's not the sentence we paid you for, Bitch!"  After the judge composed himself and finished his remarks, the guard took Mr. Dayes, toting a blue-green duffel bag packed with his clothes, a pile of cash he received as pay offs from countless senior bank executives for taking the fall, and other belongings into custody.  He began serving his sentence immediately.

Mr. Dayes’s conviction and long sentence represent a landmark victory for British financial authorities, which have long battled a reputation for being weak on white-collar crime, and even in bed with the big banks.  D.B. Cooper, director of the U.K.’s Serious Fraud Office, which brought the case, has described the Libor prosecutions as his priority and a key proving ground for the agency. "We wanted to make an example of someone who was likely a minor and even pathetic player so the big guys who actually matter could continue to enjoy their ill-gotten gains worry free.  We think this did the trick, and we are happy no one noticed that Mr. Dayes was only 12 years old when the Libor manipulation started more than 25 years ago."

The outcome also represents a symbolic win for authorities elsewhere in the world that have spent as long as seven years investigating the manipulation of Libor, while also applying for jobs with the same large financial institutions.  Said Ernest P Pays, soon to be director of compliance at a major unnamed bank, "When applying for these jobs, it helps to show up with classified dossiers in hand showing just how far our investigations into these institutions have progressed...once hired, you just start counting your bonuses!"

U.S. and British authorities portrayed Mr. Dayes, a low-level pion in a massive international conspiracy that ran for almost a quarter-century, as the ringleader of the entire international scheme to skew the Libor benchmark, which underpins interest rates on everything from mortgages to giant corporate loans, to enhance the profitability of his trading positions.  Judge Crook on Monday agreed with that assessment, calling Mr. Dayes “...the hub of the entire conspiracy.  It was ENTIRELY his fault...the esteemed leaders of the various unnamed international banks that he worked for would be SHOCKED, yes SHOCKED to learn that he was manipulating such a base market measure for their illicit gain!  Shame on you Mr. Dayes for making them so much money! You are a real baddie!”

In London, several people who worked in or around the same office as Mr. Dayes are scheduled to stand trial starting in September, all of whom face life in prison or even death in a little known "Blame the Pions" section of an ancient British law devoted to oppressing the lumpenshit.  The others to be charged include the lady who swept the floor in the room Dayes worked in, the elevator guy, the crazy guy who begs outside the door of the major office tower where Dayes worked, and Mr. Dayes' cat.

Mr. Dayes, who moved to Kuala Lumpur with a major unnamed bank in 2007, quickly became one of the market’s elite traders.  He generated hundreds of millions of dollars in revenue for a major unnamed bank by trading complex instruments known as interest-rate swaps.  He joined a different major unnamed bank in late 2009.  In September 2010, less than two weeks before his wedding in England, the major unnamed bank fired him for being the audacity of being caught up in the Libor manipulation from which they had made so much money.  At the time, Mr. Dayes told the major unnamed bank that he denied wrongdoing, partly because his bosses knew about and participated in what he was doing. The major unnamed bank has denied everything, blaming not only the Libor fraud but also the kidnaping of the Lindbergh baby, hurricane Katrina, and all evil on Earth on Dayes.

His case was closely followed—the riverside Southwark Crown Court, anticipating capacity crowds, issued tickets in advance—as the first instance of a trader being put on trial for manipulating Libor. Angry, toothless, unkempt crowds of lumpenshit, financed by major unnamed banks, gathered in advance of the opening of court, yelling "burn him, burn him" as their pitchforks gleaned in the late night sky.

But it was also unusual, because Mr. Dayes entered an agreement in 2013 to cooperate with the SFO, to plead guilty and to testify against his alleged co-conspirators. As part of that process, he gave 3 hours of taped interviews to SFO investigators in which he repeatedly admitted that he had acted dishonestly, and during which he kept repeating, "Although I first accused my bosses and employers, I must reiterate that no one else at the bank above my level knew about this, especially my senior officials who profited so handsomely from my activities.  I was encouraged in my illicit activities by the cleaning lady, the elevator guy, the crazy guy who begs outside the door of the major office tower where I worked, and my cat.  Fry them!!  Are you sure I'm out soon so I can spend that massive wad of cash that I 'found' in my backyard last week?"  His lawyers at the time expected him to serve a couple of years in jail if he pleaded guilty.

Laffing at Tax Cuts

The Laffer Curve took The Right by storm in the mid-1970s.  Stemming from a meeting between Dick Cheney, Donald Rumsfeld with economists Jude Wanniski and Arthur Laffer, the Laffer Curve became the cause celebre of the New Right in the United States and elsewhere by the 1980s.

The Curve postulates that above a certain level, the higher the nominal income tax rate, the lower will be government revenue.  So, within a progressive income tax regime, a 90% top income tax bracket will actually pull in less revenue than having a 40% top income tax bracket.  The reason is pretty simple.  If a working person is in the highest income tax bracket, and they know that for every extra dollar they earn the Government will take 90 cents, they will not work that extra hour, at a new cost to both the economy and the government.  Above a certain level, the higher the rate the lower the revenue from that highest bracket.

The Laffer Curve became the primary philosophical driver behind what has been two generations of tax cuts throughout the Western world....even tax cuts unrelated to tax brackets.  For example, in the mid-1970's, the maximum tax bracket in the United States was about 70%.  By the end of the 1980's this had been reduced to about 28%.  It was thought that dramatically reducing the maximum tax bracket would not only increase government revenues, but also stimulate economic growth and even allow governments to run a surplus and reduce debt.  The Laffer Tax Cut Experience was to be a Win-Win-Win...growing economy, growing government revenue, and balanced budgets with debt reduction all at the same time.  

There seems no question that cutting maximum tax rates did stimulate economic growth.  People who had hitherto avoided work to avoid paying the majority of that income to government did in fact work resulting in economic growth, and new revenues to government.  That part of the theory did what it was supposed to do.

But once politicians got the tax-cut bug, they went too far.  The Laffer Curve not only postulates that above a certain rate of taxation government revenues will drop, but at the other end of the curve it also shows that below a certain tax rate, the same thing happens...governments lose revenue. Moving from a 70% maximum tax bracket to a 28% maximum bracket was too much of a drop.  By the mid-1980s the United States Government was running what was then a massive deficit of some $220 Billion a year. The maximum rate was raised to 40% by 1993, and by the end of the decade the US Government ran what was the first of four consecutive surpluses.

Regardless of this experience, which suggests that governments maximize revenues when tax brackets are high enough to generate revenue but not so high as to discourage people from working, the "cult of the tax cut" continued well into the 1990s, and continues even today.  It is fair to say that the Laffer's original rationale has long since been exhausted, and we are now in an age where tax cuts are recommended for reasons entirely divorced fro Laffer; primarily the need to "grow the economy" by returning cash to tax payers.  The cult still maintains that all taxes should be reduced regardless of the deficit and debt situation that a government faces, as any economic growth will more than off-set loses to government revenue from the tax cuts.  This made sense when maximum tax rates were, say 70%.  It makes no sense after 40 years of tax cuts, when maximum rates are everywhere below 50%.

One great example of this cult in action was in Ontario in the mid-1990s.  At the time, the Harris government oversaw a $20 Billion cut in taxes over four years.  The Government of Ontario ran a budget deficit throughout this time, with a total of $22 Billion added to the debt during those four years before the Ontario Government started a string of surpluses. The surpluses were so small that this debt has never been paid.  

The interest that Ontario residents have paid for this $20 Billion tax cut has now just about exceeded...you guessed it....$20 Billion!  Paying billions in interest occasioned by the need to borrow billions so that a government can to give tax cuts that will eventually be worth less than the total amount of interest paid on that same debt is simply stupid. Put another way, cutting taxes while running a deficit and never running a surplus to pay off that new debt is a recipe for even more taxes in the long run. It may be time to consign Laffer to the dust heap.

All Fair and Balanced!

A quick tour through the headlines, and what they actually mean...

Fox News...

Police Chiefs, Sheriffs blast ICE over policy they say frees violent illegal immigrants

Which means...we are really, really sorry that we offended Donald Trump with questions regarding his unrepentant sexism.  We will do whatever we can to keep coasting his celebrity for profit and fame.

CBC News...(Note - cannot comment on Canadian political reporting...)

Internet sees Vladimir Putin's face in flock of birds over New York City

Which means...it is summer time at the CBC, and we are all on holidays.

New York Times...

To many in Crimea, corruption seems no less at home under Russian rule

Which means...we think the Government of Ukraine is as bad as the government of Vladimir Putin, and can't understand why Americans care about Crimea.

The National Post...

"I think I made my point", Montreal mayor Coderre takes a jackhammer to Canada Post community mailbox base

Which means...we think our average reader is about 80 years old.

The Globe and Mail...

Montreal mayor's destruction of Canada Post property might be illegal

Which means...we think the average age of our readers is about 30 years old.

Ottawa Sun...

ISIS executions show a progression of depravity

Which means...we think you all need to be afraid all the time.

Wall Street Journal...

Bush tried to turn up the heat in Iowa

Which means...we need to keep supporting the wealthy oligarchs who run our country.

Al Jazeera...

Evacuations as chemical fears grow at China blast site

Which means...we like reporting actual news.

BBC...

China orders evacuation of blast area

Which means...so do we.

Epoch Times...

China Blast Zone Evacuated Over Chemical Contamination Fears

Which means...so do we...especially if we can blame the Commies in China for nasty stuff.

The Onion...

Poll: 89% of Americans believe Obama has failed to bring America Closer to Celestial Utopia of Endless Pleasure

Which means...expectations of what Obama would be able to do as President of the USA were too high.

Russia Today (Now RT)...

Questions remain over Assad's motivation over alleged chemical attacks

Which means...the journalists for this new agency went to the TASS School of Propaganda and Selective Reality and are members of the Cult of the New Homo Sovieticus

Race to the Bottom

China has devalued its currency.  Countries only do this if they face significant economic challenges - excess debt, looming recession - and they want to stimulate exports to jump-start economic growth. Recently, Japan and the Euro Zone also devalued their currencies in the hopes of stimulating growth.

China's devaluation was a shock to other nations in the world, and to the world's investors.  Stock markets declined worldwide on the news, and the price of oil plunged.  The reason is simple - a Chinese devaluation strongly implies that the Chinese economy is not doing nearly as well as the Government of China would have everyone believe.  If China is stalling, everyone may soon be stalling.

Evidence that the Chinese economy is stalling has been there for all to see for at least a few months now. Copper is a bell weather for international economic health.  In 2010, Copper cost about $4.50 a pound. Today the price is about half that - $2.30 a pound.  The demand, which is driven by economic growth, simply isn't there anymore.  China used to buy about half of the Copper production on Earth.

Closer to home, the Shanghai Containerized Freight Index, which tracks the cost of moving products from Shanghai to the world, crashed as recently as two months ago.  The index was as high as 1600 in 2010. It is now below 1000, which is below where it was at its low point during the 2008-2009 recession.  The index represents how much stuff is leaving China for export to the world.  The index has plunged about 30% this year, strongly suggesting that Chinese exports have been drying up...and low and behold, we had a currency devaluation yesterday.

There are canaries...there are coal mines.  They don't mix very well.  In the move from Greed to Fear, many investors prefer to ignore all evidence of looming problems until it is to late, as Greed is a powerful force.  A Chinese devaluation strongly suggests that the Chinese economy is not growing at 7% a year as claimed by the Communist government.  In fact, a devaluation strongly suggests that the economy there is already in recession. What the world does in response to China's move may tell us what everyone else really thinks of their economic prospects as well.

Ponzi World?

In the mid-2000's, the world witnessed the implosion of a real estate Ponzi scheme, primarily based in the United States, where millions of investors were bilked by way of an industry-wide, wholesale fraud wherein virtually worthless mortgage assets were bundled and sold to them as if they were grade A investments.  One bank later admitted to the US Congress that they were shorting this rancid market in one part of their operations, while selling the same products to little old ladies out another door as rock solid investments.  

The financial implications of this were serious - millions of investors lost hundreds of billions of dollars; significant "blue chip" corporations disappeared in a flash; governments and central banks took on trillions of dollars in new obligations as private greed was socialized; the world entered into a period of recession, and the effects on the world's banking industry are being felt even today.

Since then we have learned that...

...well, forget Enron, South Sea Bubbles, Tulips, Bre-X, LTCM, Worldcom, the original Ponzi Scheme, Nortel, and a host of other scandals and schemes that have plagued the business world for centuries...

Since the sub-prime mortgage debacle of the mid-2000's, we have learned that the LIBOR (London Interbank Offered Rate) rate was illegally manipulated for DECADES - at least since 1991 before being discovered in 2014 - potentially adding hundreds of billions to the cost of borrowing everywhere, including to the cost of about every mortgage worldwide throughout this period of time.

Think about this for a moment.  How is it possible that literally hundreds if not thousands of people were not either fully or at least partially "in the know" about this scheme, in some cases for decades?  In fact, some people may have spent their entire careers manipulating this rate and reaping the ill-gotten gains before they retired.

The implications of the schere magnitude of the LIBOR scandal have not been thoroughly explored as yet.  They are serious.  It used to be that Ponzi schemes were the exception to the rule of a basically honest and dependable international banking community.  The schemers and creeps have always existed, but they were never considered to be more than a very tiny minority of people working in a basically honest industry.  

In light of LIBOR, it may be that we have to face the reality that this industry has changed. For a much larger proportion of this workforce than ever before, honesty now appears to be a mugs game.  In short, the only rule for many in this industry now appears to be simple - if there is money to be made, it is to be made no matter what one has to do to make it.

To repeat - the LIBOR fraud went on for at least 23 years.  What else are these people up to that we haven't discovered yet?