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?

US Banks

The United States has a unique banking system that allows just about anyone to open a bank if they meet certain regulatory conditions set by the Federal Deposit Insurance Corporation. The result has been a plethora of banks of all different sizes across the country.

Prior to the financial crisis in 2009, about 100 new banks opened in the USA every year.  Since 2010, only 3 new banks have opened in the USA.  This is unprecedented.

In the five years prior to 2008, 10 banks failed in the USA.  Between January of 2008 and the end of 2012, a total of 465 US banks failed.  Since the start of 2013 a further 23 have failed, including 6 so far this year.

What seems clear is that, for the US banking system the 2008-2009 recession did not really end until at least the end of 2012.  Even now, the US banking system may be exceptionally fragile.

The recovery in real estate prices in the USA over the past few years has no doubt rendered literally thousands of US banks technically solvent again, as the mortgages on their books are now theoretically sound.  But this price recovery has only been possible with the lowest interest rates in history.

Can the remaining US banks survive a rise in interest rates and a possible corresponding drop in real estate prices, which is probably the real litmus test for both the real health of those banks and of the US economy as a whole?  With most analysts predicting the first rise in rates in 8 years this September, we may soon find out.

Chinese Gold

The Shanghai Composite Index crashed again today - dropping about 8% from the open, for its largest drop since the crash in 2007.  Markets around the world followed it down.  At the same time, the price of Gold also fell; in fact, the price of Gold has been collapsing all  month.  A number of things are happening at once, none of which suggest a bright future for the world's economy.

The Chinese Purchasing Managers Index - a gauge for Chinese economic activity - signalled contraction when released last Friday.  This has sent commodity prices, notable for copper, plunging.  China absorbs about half the world's supply of copper.  If China's economy stalls or reverses, commodity prices will collapse, likely to price levels not seen in decades.  All recent evidence suggests that China is at least stalling.  The clear implication is that the world's economy may soon follow.

But why is the price of Gold falling?

In bad times, the price of Gold usually rises as a hedge against declining asset prices, especially in equities, and rising inflation.  It's recent decline would normally signal that all is well, and getting better.  And yet, the price of Gold has been falling as the Chinese stock markets have started to collapse.

Gold prices collapsed in the recent recession as well.  The reasons may have included that with equities falling and margin debt being called in, investors dumped all the Gold they had in order to stay afloat and satisfy creditors.

The Chinese have been allowed to buy Gold for some years now.  At one point, the government was actually encouraging citizens to buy the stuff, and for the past few years Chinese investors have been buying record amounts of Gold.  Many Chinese probably still have substantial profits, as they were buying as early as 2009 when the price of Gold was as low as just over $800 an ounce.

It seems that as their equities markets stumble, Chinese investors are either taking profits in Gold, or they are scrambling for cash or both, and as they sell the price of Gold is pulling back.  The fact that Gold production has expanded in recent years to meet Chinese demand, and that mining companies keep producing Gold at a mad rate, hasn't helped things.

There are now a record number of short positions in Gold, suggesting that the "smart money" thinks the price will keep falling.  We are in uncharted waters here - no one knows what Chinese investors will do in the coming weeks and months, not even Chinese investors themselves.  It is very possible that these investors, having burned in equities and to some extent in real estate as well, could turn on a dime and flock right back into Gold as a traditional safe haven.  For now, the price just keeps dropping, but short sellers need to take care - the short term for this market is now mostly unpredictable.

The price of Gold is the latest "canary in the coal mine" to become ill and threaten to collapse.  The drop in price is not, as some US news outlets have implied, a sign that all is well with the world's economy - quite the opposite; just look at copper.  Gold's recent price decline is part of a slowly spreading investor panic, that is staring to take hold in China, and that is almost guaranteed to spread.

Let Them In...With an Explanation

Roger Clemens...7 Cy Young Awards.  Barry Bonds...73 home runs in the 2001 season, and 762 home runs in his career.  It is hard to believe that these men will not get into The Baseball Hall of Fame one day.

Both of these men have been accused of using banned substances to further their careers. It is important to note that "using banned substances" means cheating, plain and simple.  It seems clear that, based on a balance of probabilities, if all of the evidence were to be heard regarding these accusations, they would very likely be found to have used these substances.  Certainly. almost no one believes that they did not knowingly use them.  Because of this, they have not been voted into the Hall of Fame, and it looks like they never will.

They should be in.  Their careers, even absent any drug use, would have warranted a first ballot entry into the Hall of Fame.  One way to deal with this, and to clear their way into the Hall, is to make sure that Major League Baseball's official record book reflects their actual careers - probable drug use and all.

Roger Maris hit 61 home runs in 1961, earning him an "asterisk" which emphasizes that he needed 8 more games to hit those 61 home runs than the beloved Babe Ruth took to hit 60 homers in 1927.  In fact, there is no asterisk, but there is a bracket after Maris' record indicating the number of games he took to hit those 61 home runs.

Bonds and Clemens do not have anything after their various records to indicate how, in part, they likely earned some of those records. There should be brackets after their various records - and those of anyone else who, on a balance of probabilities, likely used drugs to further their careers and to cheat - saying something like "probably, in part, through performance enhancing drugs".  These men would be furious at such an inclusion in the record books.  Let them sue - they will likely lose.

With the official records book reflecting their actual carers, these men should be included in the Hall of Fame.  There are many in the Hall who were less than perfect men.  It is the Hall of Fame, not the Hall of Perfection.  Expose their warts, then let them in.

A Senate Proposal

For tabling and consideration in either of the two House of Parliament, or both...

Resolved:

That the people of Canada are anxious for a more democratic and representative Senate which more fairly reflects the various provinces, territories and regions of Canada;

That the recent events concerning the Senate suggest that the continuation of an unelected Senate, as honourable, effective and hard-working as this body has been throughout its history, is unacceptable to the vast majority of citizens;

That the people of Canada prefer that the Senate continue as it was originally intended by the framers of Confederation, that is as a body of “sober second thought” that will continue to canvas dispassionately the measures passed by the House of Commons, and that Canadians prefer that the Senate and the House of Commons not become adversarial as is the case in some other jurisdictions with bicameral systems of government;

That the abolition of the Senate is inappropriate in a federal state where the provinces and territories, and the regions of the country, have real interests and require a legitimate voice at the federal level;

That fairer representation of provinces and territories, and regions of the country, in the Senate may be obtainable by revisions to the rules of Parliament governing how bills are examined and voted on;

That a constitutional framework for the reform of the Senate, while preferable, may not be absolutely necessary, especially if the Senate continues to exercise its role as a body of “sober second thought”; and,

That the following could serve as one possible basis to inform the evolution of the Senate:

1. The Prime Minister may recommend persons to the Governor General for nomination to the Senate who had first been recommended by the Provinces and Territories to fill vacancies as they occur.  One condition for these recommendations and appointments could be that these people may first agree in writing to the Governor General to serve for only nine years (or until they are 75) and to not run for re-election.

2. The Provinces and Territories may recommend any persons to the Prime Minister to fill vacancies, but they may also choose to arrange for the election of Senators to fill such vacancies with the method of election being entirely a matter for the Provinces and Territories in question. Should they fail to recommend any persons to fill the vacancies, the seats may remain vacant for up to a year or until quorum in the Senate is threatened, at which time the Prime Minister could appoint persons to participate in an open, transparent and public process to be established for choosing persons to fill such vacancies, by recommending such persons to the Prime Minister who may then be recommended to the Governor General for that purpose.

3. The Senate could continue to operate according to existing rules and conventions until such time as all members of the Senate may be elected, or appointed by way of a public process, should such appointments be necessary.

4. Should all sitting Senators be appointed as a result of recommendations by the Provinces and Territories, or by way of a public process should such appointments be necessary, the following rules could come into force, whether by law, or by convention:

(a) The House of Commons, at Third Reading of any legislation, should declare whether the bill is a national bill or a regional bill in terms if its primary impact, and if it is the latter then the House of Commons could indicate which of the Provinces and Territories that are affected by such legislation.

(b) The Senate sitting as a committee of the whole would examine and vote on any legislation that is declared to be national legislation, which may also be referred to any standing committee. The Senate sitting as a committee of the whole would vote on any legislation that was declares to be a regional bill.

(c) Only those Senators from the Provinces and Territories that have been declared by the House of Commons to be affected by a regional bill would examine such legislation, with said examination to be undertaken by a special committee of Senators from those Provinces and Territories established for that purpose. This special committee would be free to invite the participation and membership of Senators who are not from the Provinces and Territories that have been declared by the House of Commons to be affected by a regional bill, if the Senators in question are known to have special expertise and/or knowledge that could aid the examination by the special committee.

(d) The Senate may delay the passage of legislation from the House of Commons, other than budget implementation legislation or spending bills, for six months and it may amend legislation and return it to the House of Commons for consideration.

(e) If the Senate and House of Commons cannot agree on amendments to legislation that has been delayed by the Senate, the legislation could be considered as passed by both Houses as it was approved at Third Reading in the House of Commons, with any agreed-upon amendments, six months from the day that it was referred to the Senate.

(f) Legislation that does not require that the Federal Government spend money may be tabled for First Reading in the Senate without first having been approved by the House of Commons.

Once it has been adopted, this resolution shall be considered a joint resolution of the House of Commons and the Senate, and shall not be considered to be either an order of either house, or an exercise of parliamentary privilege affecting any person external to either house.

What is the Bank of Canada doing?

Canadians are carrying massive amounts of personal debt following an orgy of borrowing over the last seven years.  Personal debt now stands at an historic high of over 160% of average income.  Many international commentators, include the Economist which correctly predicted the housing price crash in the USA, have stated that Canada has a massive housing bubble.  In spite of this, the Bank of Canada made borrowing even easier last week by reducing the central bank rate to 0.5%, presumably driving even more borrowing and a larger bubble.  It is worthwhile looking at its possible motives for this latest rate reduction.

Interest rates were reduced starting in late 2007 from 4.5% to 0.5% by the start of 2009.  Rates were move up to 1% starting in mid-2010, to the end of 2010.  Interest rates were then set at 1% for over four years, from the start of 2011 until early 2015, when they were dropped again to 0.75%.  As noted, the Bank of Canada reduced the central bank rate again to 0.5% last week.  

During the over four years that rates were held to 1%, Canada's economic growth was 3% in 2011; 1.9% in 2012; 2% in 2013; and 2.5% in 2014.  The unemployment rate during this time went from over 8% to well under 7%.  Inflation has been tame. The recession that sparked the initial drop in interest rates ended about 6 years ago.

With year after year of positive economic growth over the last half-decade and a falling unemployment rate, it is puzzling why the Bank of Canada did not proceed to raise rates at some point in the last three years, especially in light of what even the Bank sees as localized housing bubbles in Canada.  While Canada now appears to be entering into a period of economic trouble, this has only become apparent in the last six months.  Prior to that, projections for economic growth in Canada were quite positive.  By not raising rates at some point from 2011 to early 2015, the Bank of Canada has left itself with virtually no policy tools to respond should the country sink into another recession.

Since rates were pegged at 1% at the start of 2011, the average price of a house in Canada has gone from an average of $350,000 to over $425,000, or about 17.5%.  In Toronto, prices have gone up by about 26% in a little over four years.  Average inflation has been below 2% a year throughout this period.  It has been impossible to miss this expanding housing bubble.  

One is left wondering what the Bank of Canada was thinking during this four year time period, and why they were not raising interest rates even a little in order to create a cushion in the event that bad times arrived again.  It wouldn't have been difficult to figure out that there will be another recession some day, and that it was important to prepare policy tools in advance - any student of the history of economics could tell you this.  The Bank of Canada has failed to prepare for a housing bubble that many others in the world have seen for years...and they are STILL lowering interest rates!

We need to get real.  A 0.25% drop in interest rates could not possibly compensate for the negative effects of a 50% drop in the price of oil on Canada's economy - but the Bank of Canada reduced interest rates anyway, even with a housing bubble and historic rates of personal borrowing.  A further 0.25% drop in interest rates will not stop the collapse of a housing bubble that threatens to drive unemployment well above 10%, at least for a while, especially in places like Toronto and Vancouver where hundreds of thousands of people who have made their living from that bubble will lose their jobs.

One has to ask if this is all smoke and mirrors at this point.  Having been utterly incompetent in its management of interest rate policy over the last half decade, is the Bank now playing with rates so that they can claim that this was still a real policy once the bubble bursts and they get blamed for it?  

In short, when millions of Canadians start to point fingers at the Bank of Canada as they each lose tens and hundreds of thousands of dollars in personal wealth as housing bubbles burst across the country, will the Bank defend itself by pointing to these recent rate reductions claiming that the low rates policy was still wise and thoughtful even in 2015, and they just got caught by "circumstances beyond their control"?  If this explanation is ever offered up, keep it simple.  The Bank of Canada sets the base interest rate - no one else.   They need to own what they have done.

Middle East Explained

It is all so simple...

Iran is allied with Assad in Syria, who will no doubt benefit from the tens of billions of dollars that will eventually be released to Iran as a result of Iran's new nuclear deal with the UN, the West and others. Assad is also allied with Russia, which is also Iran's de facto ally.

Iran is a de facto ally of Iraq and the USA, the West and others including Saudi Arabia in their war against ISIL, although Saudi Arabia and Iran are otherwise political and economic competitors, and Saudi Arabia opposes the recent nuclear deal with Iran.  Iran is also the potential dire enemy of the USA, the West and others, including Saudi Arabia in respect of their nuclear ambitions.  So Iran is an enemy of the West; a de facto ally; and an ally of enemies of the West all in one.

Assad is the declared enemy of the West, which has demanded a regime change in Syria, but he is also the de facto ally of the West in the war against ISIL  It is not clear what the West would do if their de facto ally decided to use poison gas again against the common enemy, ISIL.  Is it only a war crime when our opponents do it?

Egypt is Assad's other ally in the Middle East, and Egypt is also allied to the West, and is opposed to ISIL. However, Egypt has recently moved closer to Russia, which an increasingly serious opponent of the West. It is worth noting that Turkey supports the Muslim Brotherhood, which is the sworn enemy of the Egyptian Government, while also being formally allied with the West through NATO.  The West therefore has two powerful allies who are at loggerheads over the future of Egypt.

China is also an ally of Assad.  It also supports the deal with Iran.  It is not clear what role China has in the Middle East, except perhaps as the natural successor to the American Empire at some point in the future. They buy a lot of oil.

Hezbollah is also a supporter of Assad, and a de facto enemy of ISIL.  It has been declared a terrorist organization by the West.  Hezbollah is supported by Iran, the West's de facto ally against even more horrible terrorists in ISIL  Hamas also opposes ISIL, and ISIL has formerly threatened Hamas with extermination for failure to implement ISIL's brand of Islam.  It is worth noting that ISIL's religious philosophy, if taken to its logical conclusion, would see the extermination of over 1.5 billion Muslims who don't practice their faith the way ISIL deems appropriate.  Just about everyone else on Earth would be enslaved.

ISIL is allied with the Sunnis in Iraq, who used to be secularists under Saddam Hussein.  The Sunnis are enemies of the Shiites and Kurds in Iraq, and ISIL's recent success in Iraq is directly attributable to Sunni complicity in the ISIL invasion of last year.  As Saddam's henchmen, many of the Sunni leaders who are now part of ISIL perpetrated crimes against humanity that make what ISIL does look like the work of rank amateurs.  ISIL beheads people...they don't feed them live into wood chippers, or send videos to people who escaped their grasp showing their female relatives who stayed behind being gang raped, at least not yet. ISIL's essential religious philosophy is also an extreme version of that of Saudi Arabia, which is its sworn enemy, and which has been spreading its Wahhabi version of Islam through the world for decades.

The Government of Iraq is allied with the USA, the West, Saudi Arabia, and Iran.  It is at loggerheads with the Sunnis and Kurds in Iraq, who have essentially set up separate governments within the same state.  The ISIL state in Iraq is in some ways the new Sunni state in Iraq.

Turkey appears to tolerate ISIL, in that it will not go to war with ISIL even with fighting spilling into Turkey, perhaps because it is opposed to the Kurds who are at war with ISIL  Ironically, the one country that could eliminate the ISIL state in about a week is Turkey.

Remember Al-Qaeda?  This terrorist organization opposes ISIL, considering them to be too extreme. Almost everyone is opposed to Al-Qaeda...they are so 2001.

The USA and the Gulf States, led by Saudi Arabia are involved in an economic war over oil.  The Gulf States have decided to pump so much oil that the price if oil will fall to a point that makes fracking in the USA uneconomical, and by doing this they will kill this nascent industry.  It is not clear what long term interest the USA has in protecting what are now its primary economic competitors in the area of oil extraction.

Finally, Israel is a de facto ally of some countries in the West, notably the USA.  It is at peace with Egypt and Jordan.  Iran, among others such as Hezbollah, have regularly sworn to wipe Israel off the face of the face of the Earth.

Don't expect peace and harmony to break out in the Middle East anytime soon.