White Smoke Over the Vatican

Jorge Bergoglio of Argentina has been elected pope, Francis I.

Jorge Bergoglio was born in Buenos Aires, Argentina, one of the five children of an Italian railway worker and his wife. After studying at the seminary in Villa Devoto, he entered the Society of Jesus on March 11, 1958. Bergoglio obtained a licentiate in philosophy from the Colegio Máximo San José in San Miguel, and then taught literature and psychology at the Colegio de la Inmaculada in Santa Fe, and the Colegio del Salvador in Buenos Aires. He was ordained to the priesthood on December 13, 1969, by Archbishop Ramón José Castellano. He attended the Philosophical and Theological Faculty of San Miguel, a seminary in San Miguel. Bergoglio attained the position of novice master there and became professor of theology.

As Cardinal, Bergoglio became known for personal humility, doctrinal conservatism and a commitment to social justice. A simple lifestyle has contributed to his reputation for humility. He lives in a small apartment, rather than in the palatial bishop's residence. He gave up his chauffeured limousine in favor of public transportation, and he reportedly cooks his own meals.

His motto as a cardinal is 'miserando ateque eligendo' which is a phrase from the writings of Venerable Bede.
Vidit ergo Jesus publicanum, et quia miserando atque eligendo vidit, ait illi, Sequere me.

Gold Daily and Silver Weekly Charts - The US Dollar: Keeping Up Appearances

Ron Paul: "I had a Federal Reserve Board Chairman testify before the committee that the gold standard had some merits but it was unnecessary because central bankers have now learned how to manage a Fiat currency in a manner in which it would mimic the gold standard. Would anybody care to comment about where the flaw is in that thinking?"

Mr. Lehrman: "I am anxious to comment on that, Dr. Paul. Under--and I must say Mr. Greenspan made the same insipid remark. Mr. Greenspan and Mr. Bernanke will have to then explain why it was that two of the greatest booms in American history, and two of the greatest panics and busts in American financial history, occurred under their 25-year watch..."

Mr. Grant: "The failure of AIG is so instructive in this respect. AIG, this immense insurance company with this ever so brilliant financial products group, didn't do one thing. It didn't mark its positions to market. Finally came the day of judgment and it argued with Goldman Sachs about what these things were worth, AIG said 100 cents on the dollar, Goldman Sachs said not close, Goldman Sachs won that debate and AIG failed.

As with AIG and Goldman Sachs, so it is today with the United States and its Asian trading partners. We never clear our trades. Our dollars go there, and they come right back here. We run twenty five consecutive years of debts on a current account and there will be for us, as there was for AIG, a moment in truth in which we must settle."

U.S. House of Representatives, Committee on Financial Services, Testimony of March 17, 2011

The US will settle, in paper dollars.  And if the payment is insufficient, they can always create more.

That is the long and short of it, and the sophistry of modern money.  Because the value of the money is self-referential, it is in essence a literal confidence game.  The dollar is worth what we say it is, and it is worth it because we say it, without regard to other opinions and considerations to the contrary. And as long as people believe this, or even pretend to believe this even if they don't but are afraid of the consequences of their disbelief, the dollar hegemony is secure.

Money is a matter of force and confidence; and when confidence wavers, force must provide. Force can take many forms, from persuasion to deception and even compulsion.

So the appearance of solidity and confidence must be maintained no matter what.   It must, as apparently Messrs. Greenspan and Bernanke have said, must 'mimic the gold standard.'  And they are right.  Caesar's wife must be above reproach, and the fiat dollar is the dowager queen of empire.

That is why the chat board gimmickry of the platinum coin was such a remarkably dangerous folly. Even given that money is a somewhat specialized area of study, it was shocking that a distinguished economist like Paul Krugman did not seem to understand it.  I could attribute that to a moment of political weakness. 

But the rest of the world did understand exactly what was happening, and held its breath.  Would the US dare to cynically impugn the basis of its debt, even by implication? 

Perhaps the greater question, such silliness as trillion dollar platinum coins aside, is how far the Anglo-American financial system is willing to go to keep up the appearance and dignity of a stable global reserve currency in the dollar, even while the dollar is being used and abused by the financiers like a 12th Avenue hooker?

I think you know that I believe that the paper metals markets are an accident waiting to happen, particularly with regard to silver.

It appears that the exchange and the regulators are managing the markets with reckless disregard for their soundness.

So let's see what happens.

SP 500 and NDX Futures Daily Charts - Quick Flip

We had a little backtracking today, but stocks bounced into the close.

VIX climbed a bit, and I took the highly levered bets off the table remarkably near its apogee. Thanks.  Every little bit helps. 

I have a balanced short riding just for grins, but it is greatly reduced. 

So what next. I still am thinking that the wiseguys will have a go at 1570 on the SP futures before this thing falls apart, but keeping the leverage under tight control at such a dodgy time is not so bad either.  To put it in a briefly pithy statement, these Wall Street jokers are barking mad, and Washington is living on their own planet.   Words do not quite capture how I feel about this.

The event risk here is enormous. These markets remind me of a big fat souffle, full of the air of HFT, QE, arrogance, and leverage. If someone slams the oven door it could go quite flat without much more provocation.

Kyle Bass On Japan and Two Key Slides

I was listening to Kyle Bass' forecast of what he sees as the coming financial collapse of Japan.  A link to that presentation at the Booth School is included below.

Here are two key charts that I obtained from Wikipedia that weigh on the economic situation in Japan.  They are a bit particular to that country.

Japan has a largely homogeneous population sharing a common racial heritage and language.  There is little immigration other than a few guest workers, and a shortage of natural resources.  It does have a strong store of intellectual human capital, a highly motivated and capable work force, and a remarkably strong central planning structure.  The public is unusually cohesive and oriented towards the common good. 

I think that although it is packed with facts, Kyle Bass's analysis is a little overly simplistic, and not completely fungible to other countries as he implies in the Q&A as indicated in the talk below. 

I am a little disappointed that Mr. Bass deals with the externalities through the numbers, but never discusses the structure of Japan's economy and the keiretsus, which is very important, and far from incidental.  He also gives a nod to Japanese culture and then dismisses it.  That also is an error, but it is a very common Western error, and he has plenty of company.  After all, inside every foreigner is a greedy, self-serving American style plutocrat just waiting to get out, right?

He also ignores the enormous private losses from the real estate bubble that were never realized, and were essentially buried by the industrial-financial combines together with a single party government of well-intentioned insiders.

He says that Japan is already in the zone of insolvency, and it is obvious that they will collapse.  I think that this is possible, but not inevitable.  If there ever was a case to be made for MMT,  or some sort of debt restructuring in the model of Iceland, another island nation, Japan might be it.  I suggest the latter might be more fruitful because of their dependency on natural resource imports.

Japan's strength, as always, is in what is not seen, not so readily apparent, to Western eyes. 

The primary obstacles to restructuring are the scarcity of natural resources which presumably must be imported, and the lack of population growth with immigration as a threat to racial homogeneity.  Available real estate and population density on an island are also key factors.  These are the classic scenario inputs that lead to colonial expansion which seems not to be a viable option at this time.

The comparisons to the US situation are overly glib and miss the key differences.  The solution for the US is growth, and it has all the options open that are so problematic for Japan.   

What the US lacks is a more public spirited policy making apparatus, one that is not captive to special interests.  It labors under the corruption of big money, and suffers from growing wealth inequality that is beginning to approach a third world oligarchy.  Japan has a GINI coefficient of 38, whereas the US has a coefficient of 45, and increasing.

I am not so much concerned for Japan, but for the tangled web of carry trades, derivatives, fraudulent misrepresentations, and leverage that is the Western financial system.  Japan would certainly be large enough to give it a stress test beyond the Fed's most rigorous scenarios. 

The financiers such as Kyle Bass might be more concerned about this, and not look so greedily at the situation as just another money making opportunity, if they were not so arrogantly sure of a US dollar bailout at any and all costs, even in the event of a major financial dislocation that begins abroad.

Here is a recent talk by Kyle Bass regarding 'The Coming Financial Crisis in Japan.'