Fragility: What Has the Watchers Worried In the US Debt Markets

As you know I am on the lookout for a 'trigger event' that might spark another financial crisis, given the composition of the economy and the financial markets. 

In the last financial crisis 2008, it was the failure of the two Bear Stearns hedge funds that exposed the grossly mispriced risks in mortgage backed financial assets, and the generally flawed nature of the market's collateralized debt obligations.  This led to a cascade of failures in fraudulently priced assets, and resulted in increasingly large institutional failures, including the collapse of Lehman Brothers.

One can draw some parallels with the financial crisis before that, which was the gross mispricing of risk and inflated values of internet-related tech companies that had grown to obviously epic proportions by 2000. A failure of several key tech bellwethers to make their numbers, and some negative results in the economy, showed the flaws in the underlying assumptions in what was clearly an asset bubble. And once the selling started, it was Katy-bar-the-door.

 

The failure of two relatively minor hedge funds was not a great event. The failure of a tech bellwether to make its quarterly numbers is not either. But their interconnectedness to the other portions of the world markets through the financial institutions on Wall Street, and more importantly, the fragile nature of the entire pyramid scheme of fraudulently constructed and mispriced risk of financial assets, caused an inherently shaky system to fall apart.  What was most shocking was how quickly it happened once the dominos started falling.

The debt market in the US, with its deep ties to private equities, is probably not a trigger event, the fuse itself.  But it well might serve as the powder keg that will transmit the effects of some more individual event throughout the world's markets and economies.

The gross mispricing of risks in financial paper, again, and the lack of reform in the financial system along with excessive leverage and mispricing of risk, the fragility of long distorted markets if you will, has certainly risen to impressive levels again.

 

It is a familiar template of recklessness, fraud, and  then reckoning.  Afterward there is the usual attempt to blame the government officials which have been corrupted, and the people who have been duped and swindled.  Quite often some scapegoat will be found to be demonized.

 

I am thinking that this time the problem will arise overseas, with the failure of some major financial institutions there.  Perhaps Greece will provide the spark.  Or the Ukraine, or Mideast, or something yet unforeseen.  The failure of some major European bank certainly has historical precedent.

 

And if we do experience another crisis, do not be surprised if the moguls of finance come to the Congress through their proxies again, with a sheet of paper in hand demanding hundreds of billions of dollars, or else.

Last time it was a bail-out, which was the printing of money by the Fed to monetize the banking losses and shift them to the public.  This time they are thinking of something more direct, talking about a bail-in.   What if they eliminated cash, and started utilizing and redploying financial assets like savings and pensions.   The uber-wealthy already have their wealth parked in hard income-producing assets and offshore tax havens.  Who would stop them?

Like war, there will be an end to this kleptocratic economy of bubble economics and financial crises when the costs are borne by those responsible for it, and who so far are benefitting from it, enormously.

 

Tell us why you think it might be different this time.   What has really changed?  From what I can tell, it has not only stayed the same for the most part under the cosmetics of change, and significant portions of the financial landscape have gotten decidedly more dangerous, larger, and more leveraged.

 

Wall Street On Parade

Here Is What’s Fraying Nerves Among the Financial Stability Folks at Treasury

By Pam Martens and Russ Martens

June 10, 2015

On Monday, Richard Berner worried aloud at the Brookings Institution about what’s troubling the smartest guys in the room about today’s markets.

Berner is the Director of the Office of Financial Research (OFR) at the Treasury Department. That’s the agency created under the Dodd-Frank financial reform legislation to, according to their web site, “shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose,” and, ideally, provide the analysis to the folks sitting on the Financial Stability Oversight Council in time to prevent another 2008-style financial collapse on Wall Street.

Two notable concerns stood out in Berner’s talk. First was a concern about liquidity in bond markets evaporating rapidly for reasons they don’t yet “sufficiently understand.”

...Another major concern are the bond mutual funds and ETFs that have mushroomed since the 2008 crisis and are stuffed full of illiquid assets or assets which might become illiquid in a financial panic.

Read the entire article here.

52nd Anniversary of John F. Kennedy Address To the Nation On Civil Rights 11 June 1963

I remember seeing this broadcast live on one of the three black and white network television channels that evening.  I don't think a younger reader can really sense how unusual and remarkable this was.  In taking on the deeply embedded forces for injustice, Kennedy was engaging in a revolutionary act for justice, that certainly cost him politically, and probably much more than that. 

 

Despite any personal failings, which despite his office he had, as he was still a man, he was unmistakably driven by principles and a sense of honour and obligation to rise above himself, to do the right thing, because it was the right thing to do.

We take a lot for granted now, and tend to romanticize 'the good old days.' There were some good, and some bad. For they were just days, from which we made what we could from what we had and what we could bring.

There were severe racial tensions, an abundance of obvious injustice and inequality, recent memories of WW II and Korea, and a real and continuing fear of nuclear war. These were presences in our young, daily lives. And of course I was there for the rebellion and idealism of youth. Where is it now. Not in the young of this new generation, but in us.

We have lost a little ground on equality perhaps. And as our founding fathers themselves noted in their older age about the new generation, there certainly remains the need for a continuing commitment to the principles on which we have established this Republic.

Gold Daily and Silver Weekly Charts - The Inevitable Interconnectedness of It All

The Bucket Shop was very quiet today. There was no precious metal action noted in the delivery report from yesterday, and in the warehouses we saw the usual moving around of bullion.

This is certainly a change from the beginning of this active month for gold, which saw a sizable number of contracts being claimed for 'delivery.'  

 

Well, there is always some benefit in anything, and the quiet markets give one time to think, about things past in the light of the present.  I was thinking about the manipulation of the markets, and of the unfolding tragedy in Greece, and of the serial abuses of political power , enable by a remarkable harshness and willful ignorance which seems to be endemic to our times.

Earlier today in a short piece about the discouragement in the people I recalled a famous quote from William Gladstone, said during his efforts to extend suffrage to the working class people of Great Britain.   It was related to the long effort to achieve justice.  You may read it here. 

One may cite any number of other figures from different periods of time, who took the long hard fight with unfailing energy and good spirits.   More recently Gandhi and Martin Luther King come to mind.

 

I think that in his attempt to extend suffrage to the working, landless classes of Britain, Gladstone rightly assumed, or perhaps more properly believed, that the working poor of his day were educable, that no human being was without value, was useless. He is an interesting figure in a period of history that itself was interesting, with great figures who are too often forgotten now. 

 

How many educated people really know anything about an earlier figure from that century, William Wilberforce, who was a leading proponent in the long fight for the abolition of slavery? He provided an example and an inspiration for that same effort later in the US though an effort that was long and arduous.

The 19th century, in the wake of the post-Napoleonic victory, was a time of desperate differences and dichotomies in England, of the miserably poor and the incredibly rich, with London itself at the epitome of one of the world's greatest empires.  One encounters this sort of thing quite famously in Dickens, for example.  We marvel at the grandeur of empire, and forget to look at its foundations built on squalor and human misery.

I find that the times where certain key people notably consider the quality of human life, what it means to be human, to be often situated at pivotal moments in history.   The response to that question by a nation often plays an important role on the path that their society takes.

 

Justice is most often not an issue for a single person or a class of people per se. It is more often the manifestation of a more general disorder in thinking.   The same sort of thought process that sends the disabled to houses of death can propagate itself to the weak, the outcast, and the other. It is not a great leap once the threshold of inhumanity has been breached.

 

Injustice rarely travels alone.  It is always accompanied by a cohort of issues.  And therefore justice cannot be achieved in one matter, unless it has a more general place in the hearts of those who would pursue it.

 

So it would seem to be that those who ignore the manipulation of gold and silver, for example, might have a care that such abuse of power does not become so commonly accepted for the sake of expediency.  Because the abuse of one form of wealth by the state can quite easily be extended to any other holdings, whether they be pension, or savings, or even livelihoods.  As we saw so vividly in the past, the arguments that one form or wealth or person is unworthy is a malleable thing in the hands of the unscrupulous.

 

And further, those who fight for justice in the area of precious metals and other markets would do well to consider how hollow and uninspiring their fight might be, if they care only for those forms of justice that fill their pockets, but care little or even accept and promote other forms of injustice against other people and classes of property and human values.  Even the worst of the crooks will cry foul when they perceive an injustice done to themselves, and quite loudly as we have seen.

 

Justice in interconnected.  It is a well known platitude of course, but it is also a fact, that no man is an island, sufficient unto himself.   Our modern masters of the universe may fancy themselves to be exceptional, better than any in all of history, but like other they are standing not only on the shoulders of giants, but on the common base of all their fellows, of their own good will and pursuits of happiness.  

 

They make seek to distinguish and raise themselves up in their own minds and society by stigmatizing and stereotyping others as less worthy of justice and life.  But they may soon enough find themselves on the receiving end of that same sort of dehumanization at the hands of the more powerful.  History has proven this over and over again. 

 

As Edmund Burke famously observed,  'when bad men combine, the good must associate; else they will fall one by one, an unpitied sacrifice in a contemptible struggle.'

 

Or to more simply quote the Boss,  'no one wins unless everyone wins.'

 

Have a pleasant evening.