It will not be surpising to see US equities pullback 2 to 3 percent from here, and then push higher to a new rally high near the end of August. This will help to pull in the public money as the insiders continue to sell, distributing their stock and taking their gains.
But from what we are seeing, September and October look to be particularly 'risky' months this year, and now might be a good time to become more defensive in those accounts that are not agile, like 401k's.
What is 'defensive?' Cash is good, and short term government bonds of less than 2 years duration. No need to get fancy if you are an investor.
This is not a prediction or a recommendation. This is what we are doing for ourselves and some friends.
If the market can hold support through November, then we will reconsider.
13 August 2009
Time to Get Defensive
12 August 2009
The Banks Must Be Restrained and the Financial System Reformed...
As Simon Johnson points out in his essay previously cited here, the reform required to support a sustainable recovery will not happen while the financial oligarchs control the government, the media, and the banks. Ken Rogoff reaches the brink of a similar conclusion.
The lengths and ways to which Americans go to avoid their reality grows increasingly surreal. Most economists and thought leaders prefer to lose themselves in non-controversial details, traditional team politics, and of course the spinning of propaganda in support of their patrons or prospective employers in the think tanks, institutes, and corporate enclaves.
In a way who can blame them? I am finding it increasingly difficult to watch financial television these days, because the speakers are so cruelly deformed, devoid of humanity, pale figures washed in the strident din and flickering torches of a concrete stadium hosting a desperate rally as the night closes in.
Truth is becoming such an increasingly scarce commodity in 'the fog of numbers,' so that one might think that a war is fast approaching.
And so it is, that events may unfold as they have done so many times before. As the ancient maps would say as they marked the boundary of the unknown, "Here there be monsters."
In 1940 the American essayist and poet Archibald Macleish wrote a book titled "The Irresponsibles."
Indeed.
Project Syndicate
The Confidence Game
by Kenneth Rogoff
CAMBRIDGE – Next month marks the one year anniversary of the collapse of the venerable American investment bank, Lehman Brothers. The fall of Lehman marked the onset of a global recession and financial crisis the likes of which the world has not seen since the Great Depression of the 1930’s. After one year, trillions of dollars in public monies, and much soul searching in the world’s policy community, have we learned the right lessons? I fear not.
The overwhelming consensus in the policy community is that if only the government had bailed out Lehman, the whole thing would have been a hiccup and not a heart attack. Famous investors and leading policymakers alike have opined that in our ultra-interconnected global economy, a big financial institution like Lehman can never be allowed to fail. No matter how badly it mismanages its business – Lehman essentially transformed itself into a real estate holding company totally dependent on a continuing US housing bubble – the creditors of a big financial institution should always get repaid. Otherwise, confidence in the system will be undermined, and chaos will break loose.
Having reached the epiphany that financial restructuring must be avoided at all costs, the governments of the world have in turn cast a huge safety net over banks (and whole countries in Eastern Europe), woven from taxpayer dollars.
Unfortunately, the conventional post-mortem on Lehman is wishful thinking. It basically says that no matter how huge the housing bubble, how deep a credit hole the United States (and many other countries) had dug, and how convoluted the global financial system, we could have just grown our way out of trouble. Patch up Lehman, move on, keep drafting off of China’s energy, and nothing bad ever need have happened.
The fact is global imbalances in debt and asset prices had been building up to a crescendo for years, and had reached the point where there was no easy way out. The United States was showing all the warning signs of a deep financial crisis long in advance of Lehman, as Carmen Reinhart and I document in our forthcoming book This Time is Different: Eight Centuries of Financial Folly .
Housing prices had doubled in a short period, spurring American consumers to drop any thought of saving money. Policymakers, including the US Federal Reserve, had simply let the 2000s growth party go on for too long. Drunk with profits, the banking and insurance industry had leveraged itself to the sky. Investment banks had transformed their business in ways their managers and boards clearly did not understand. (And willfully so he should add - Jesse)
It was not just Lehman Brothers. The entire financial system was totally unprepared to deal with the inevitable collapse of the housing and credit bubbles. The system had reached a point where it had to be bailed out and restructured. And there is no realistic political or legal scenario where such a bailout could have been executed without some blood on the streets. Hence, the fall of a large bank or investment bank was inevitable as a catalyst to action.
The problem with letting Lehman go under was not the concept but the execution. The government should have moved in aggressively to cushion the workout of Lehman’s complex derivative book, even if this meant creative legal interpretations or pushing through new laws governing the financial system. Admittedly, it is hard to do these things overnight, but there was plenty of warning. The six months prior to Lehman saw a slow freezing up of global credit and incipient recessions in the US and Europe. Yet little was done to prepare. (Why was nothing done? Why is nothing being done even today to prepare for the next wave of defaults one might ask? - Jesse)
So what is the game plan now? There is talk of regulating the financial sector, but governments are afraid to shake confidence. There is recognition that the housing bubble collapse has to be absorbed, but no stomach for acknowledging the years of slow growth in consumption that this will imply.
There is acknowledgement that the US China trade relationship needs to be rebalanced, but little imagination on how to proceed. Deep down, our leaders and policymakers have convinced themselves that for all its flaws, the old system was better than anything we are going to think of, and that simply restoring confidence will fix everything, at least for as long as they remain in office.
The right lesson from Lehman should be that the global financial system needs major changes in regulation and governance. The current safety net approach may work in the short term but will ultimately lead to ballooning and unsustainable government debts, particularly in the US and Europe.
Asia may be willing to sponsor the west for now, but not in perpetuity. Eventually Asia will find alternatives in part by deepening its own debt markets. Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three. As painful as it may seem, it would be far better to start bringing fundamentals in line now. Restoring confidence has been helpful and important. But ultimately we need a system of global financial regulation and governance that merits our faith.
Remember, Remember, the Twelfth of November (1999)
"On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act
(GLB) into law. This landmark legislation does much to unravel the influence of
the Glass-Steagall Act on the United States' financial system. Now banks and
other providers of financial services have far greater freedom to compete
against each other. No doubt, the legislation will prompt an altering of the
financial landscape in this country."John Krainer, Federal Reserve Bank of San Francisco Economic Review,
2000
Federal Reserve August 12 Statement
The following is the Federal Open Market Committee statement following its August policy meeting:
Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.
Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. (So much for the "V" recovery - Jesse)
The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. (Dream on - Jesse)
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.
In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
11 August 2009
If You Read Nothing Else About the Financial Crisis Read (and Remember) This...
"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.
If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."
The Atlantic
The Quiet Coup
By Simon Johnson
May 2009
...But I must tell you, to IMF officials, all of these crises looked depressingly similar...
...The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions — now hemorrhaging cash — and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.
Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large...
From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:
• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.
The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights...
Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support...
At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle...
In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign...confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced? (This is where the US is today - Jesse)
The second scenario begins more bleakly, and might end that way too...
Read the complete essay here.
Simon Johnson, a professor at MIT’s Sloan School of Management, was the chief economist at the International Monetary Fund during 2007 and 2008. He blogs about the financial crisis at baselinescenario.com, along with James Kwak, who also contributed to this essay.
J P Morgan Chase Caught Speculating with Customer Money
Why the surprise? This is what the Wall Street banks do, even under a 'reform' administration. They use their customer money and public funds, for which they pay a pittance, to wildly speculate in markets, distorting prices and taking enormous risks, in order to pay themselves outrageous bonuses. They buy politicial influence to enable regulatory capture and support their financial schemes. And when their bets go wrong, the public absorbs the losses. This is the model of US gangster banking in the 21st century.
The Obama Administration cannot energize their health care reform because the public demands reform in the financial sector, and quite frankly Obama has lost the 'high ground' of the reformer by his inability to free his administration from the growing taint of scandal.
So it remains for the rest of the world to begin to rein in the outrageous behaviour of the US financial institutions that treat the world's bourses as their private casinos.
For a party that spent eight years on the sidelines, the American Democrats have proven themselves to be particularly inept at doing anything to promote their agenda once presented with a solid majority by the voting public.
The banks must be restrained, and the financial system reformed, before there can be any sustainable recovery.
Daily Mail
Blair bank targeted in £8.5bn FSA probe
By Ben Laurance
10th August 2009
The bank where Tony Blair is an adviser is the target of an unprecedented probe involving billions of pounds of customers' funds, the Daily Mail can disclose.
JP Morgan Chase, whose chief executive Jamie Dimon last year recruited the former prime minister as an adviser, is being investigated by the City's watchdog, the Financial Services Authority for allegedly failing to keep track of £8.5billion of clients' money.
The FSA has called in a top firm of accountants to examine the bank's London activities after evidence emerged that JP Morgan had mixed customers' funds with its own.
Banks are meant to maintain a strict segregation of their own money from that which is held on behalf of clients.
But JP Morgan managers in London discovered last month that client and bank money used for trading futures and options - a way of speculating on movements in currencies, share prices and commodities - had apparently been put into a single pool.
They raised the alarm and notified the FSA. The scale of case is unprecedented, say City insiders. The FSA has penalised small firms in the past for mixing funds owned by clients and the banks themselves.
But this is thought to be the first case involving such a large household name.
JP Morgan Chase faces the threat of an unlimited fine if the watchdog decides enforcement action is necessary.
News of the FSA investigation will come as a huge embarrassment for the bank, which is valued on Wall Street at £100billion.
It is thought that the JP Morgan Chase problem dates back to late 2002. This followed the takeover of JP Morgan by Chase Manhattan two years earlier.
Assets were not segregated to protect clients as FSA rules demand, insiders believe.
When the issue first came to light last month and the FSA was told, the authority called in specialists from leading accountancy firm KPMG to investigate.
The cost of the probe - known as a section 166 review - will be met by the bank.
Sources say that KPMG's team of investigators has been working at JP Morgan Chase's offices on London Wall in the City, combing through records and e-mails and interviewing staff.
Bank employees who were involved in handling client funds in 2002 as well as those still responsible have been questioned. The KPMG team has been asked to find out what checks, if any, were made to ensure that clients' money has been kept safe and segregated.
The accountants have also been asked to calculate if clients lost out because they were not paid any interest they might have been due.
Senior figures at the bank could be reprimanded or even barred from working in the City if the FSA concludes that they were slack in setting up systems for separating customers' funds.
The accountants have been asked to deliver their preliminary findings to the FSA by the end of this month. A final report is due by the end of September. These reports will not be made public - unless the FSA subsequently decides that the bank should be punished.
JP Morgan Chase has been regarded as one of the more robust of the banks to emerge from last year's meltdown in the global financial system. Among the six largest U.S. banks, it is the only one to have stayed consistently in the black since the recession began in 2007.
But it still took £15billion last year under the U.S. government's programme to prop up the financial system. The money has since been repaid.
Last month, the bank reported quarterly earnings of £1.64billion, which was a major factor in spurring the recovery in its shares and in Wall Street prices as a whole.
A report last week showed that last year, the firm paid bonuses of £600,000 ($1m) or more to 1,626 employees. Of those, more than 200 received at least £1.8m. The top four earners received a total of nearly £45million between them.
JP Morgan Chase said: 'We have no comment.'
The FSA said: 'We wouldn't comment on whether we are doing an investigation.'
KPMG also declined to comment.
10 August 2009
Gordon Brown's Bottom and the Sale of England's Gold
This is of particular interest because Bundesbank has repeatedly denied the rumoured gold swaps with the the US Exchange Stabilization Fund (ESF) for 1,700 tons of gold, being held at West Point, NY with the designation "custodial gold."
Has the Bundesbank, like the Bank of England, sold (or lent if you will) half of its national gold reserves?
The other side of this rumour is that Bundesbank desperately wishes a 400 ton IMF gold sale to help it recover at least some portion of the 1,700 tonnes of gold which it has lent out to the bullion banks, who subsequently sold it into the market.
Why does it matter? It matters because of the lack of transparency of various Central Banks with regard to the size and timing of their gold sales, and their impact on the markets.
"The most fascinating thing that I learned is that all the gold 'in Germany' is in New York."
07 August 2009
Will the US Dollar Falter on an "Iron Cross"?
And in a related question, how absurd is it that AIG posted a 'profit?'
