Tag: finance

One of the biggest mistakes we can make, Saxo Bank's CEO warns, is to assume that rationality will prevail, that just through superior economic performance, freedom will capture enough peoples' hearts in a democracy to win the day. In the last of his three-part series (part 1 and part 2), Lars Seier Christensen focuses on the broader relevance of Ayn Rand in society today, noting that she remains among the few that recognised with crystal clarity, that we will not win the battle through just proving that freedom and capitalism works. This, he warns, creates a major problem for those of us that like to argue rationally, rather than emotionally.

Excerpted from Saxo Bank CEO, Lars Seier Christensen's blog,

…

[The current irrational world] creates a major opportunity for politicians that intuitively know that in a rational world, there would be little demand for their services. Only in an irrational, emotional universe, where opportunists can gain access to media and visibility to express “feelings” and try to take the moral high ground, no matter how unfounded in reality it is — only in such an environment can you survive without having to produce practical, productive results, and instead prosper and benefit from empty talk and third-rate acting performances.

This tendency, unfortunately, has only strengthened during the recent crisis. There is often a complete disconnect between the reality and the words used to describe it, the actions pretending to deal with it. In particular, this is very noticeable in the Eurozone these days.

…

Ayn Rand has gained renewed relevance and attention, because her predictions have been fulfilled in many different areas.

First, the politicians assign ever greater powers to themselves, as they manage to convince the citizens of the need for even more interference, although the problems are created by interference in the first place.

There are endless examples of this in both the US and the Eurozone, where one mistake invariably leads to call for even more powers, leading to new mistakes.

Second, freedom and capitalism, the only real answer to the current crisis, gets ever more restricted and prevented from working efficiently, meaning that the underlying strength of human ingenuity and creativity is stopped from working and becomes increasingly powerless to pull us out of the morass we are in.

Another of Rand's predictions of business people using government favours in return for giving up their independence, has sadly been confirmed better than anywhere else in my own industry. It is embarrassing to see the extent the banking industry has relied on support from governments, and how ruthlessly it is currently exploiting the offers of cheap money available from the central banks.

Very little of the bailouts filter down to the real economy…

…

Pick-a-winner, corporate social responsibility, employment rules, affirmative action, the creation of fictional jobs and plain political popularity and obedience will then rule who prospers and survives in all industries, not just banking. Beware of this development, it is poison to capitalism, growth and to prosperity for all of you.

…

In fact, the undemocratic, power-grabbing, emotional, populistic Washington that takes over in Atlas Shrugged is today most closely resembled by the EU and the Eurozone in the real world.

…

In France, we now have a President that by his own admission, hates the rich. So much so that he is trying to circumvent his own constitution to introduce punitive taxes on them, although illegal.

…

Well, it seems that the rich also hate their president, judging by the number of them leaving — famously spearheaded by Gerard Depardieu — for places like Belgium, that amazingly actually acts as a tax haven for the French in spite of all the EU rhetoric, or Switzerland, where inflows of new immigration requests are, according to my sources, at record highs, particularly from Scandinavia, UK and France. Depardieu, of course, chose Russia, which speaks volumes as to the deep trouble Western Europe is in.

…

This leads to a very interesting question, a question full of hope. Is there indeed also a solution to the problem, such as the one Ayn Rand foresaw with the flight to Galts Gulch? It will be difficult to find a place entirely outside of the reach of aggressive governments eager for tax dollars, as Switzerland has learned to its misfortune.

…

So nowhere seems safe from populism and irrationality any longer. It is difficult to see the necessary reforms forthcoming, and sadly, we may have to go through a much more severe economic collapse before change will be forced upon us. Unfortunately, that change may also be totalitarian in nature, of course. In fact, that is the more likely outcome in the short run.

I don't believe the battle will be won by economic rationality. This goes out the door, once more than 51 percent of the voters live off the government — and probably even long before.

…

If we don’t succeed in changing the values and direction of at least the next generation, I fear the full prediction of Atlas Shrugged will become reality and while that may hold some promise for the distant future, it is not something that I think people of my age feel like going through if we can avoid it.

 

Read Christensen's full Ayn Rand discussion here (Part 1, Part 2, and Part 3)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GyGmJq4SaSs/story01.htm Tyler Durden

One of the biggest mistakes we can make, Saxo Bank's CEO warns, is to assume that rationality will prevail, that just through superior economic performance, freedom will capture enough peoples' hearts in a democracy to win the day. In the last of his three-part series (part 1 and part 2), Lars Seier Christensen focuses on the broader relevance of Ayn Rand in society today, noting that she remains among the few that recognised with crystal clarity, that we will not win the battle through just proving that freedom and capitalism works. This, he warns, creates a major problem for those of us that like to argue rationally, rather than emotionally.

Excerpted from Saxo Bank CEO, Lars Seier Christensen's blog,

…

[The current irrational world] creates a major opportunity for politicians that intuitively know that in a rational world, there would be little demand for their services. Only in an irrational, emotional universe, where opportunists can gain access to media and visibility to express “feelings” and try to take the moral high ground, no matter how unfounded in reality it is — only in such an environment can you survive without having to produce practical, productive results, and instead prosper and benefit from empty talk and third-rate acting performances.

This tendency, unfortunately, has only strengthened during the recent crisis. There is often a complete disconnect between the reality and the words used to describe it, the actions pretending to deal with it. In particular, this is very noticeable in the Eurozone these days.

…

Ayn Rand has gained renewed relevance and attention, because her predictions have been fulfilled in many different areas.

First, the politicians assign ever greater powers to themselves, as they manage to convince the citizens of the need for even more interference, although the problems are created by interference in the first place.

There are endless examples of this in both the US and the Eurozone, where one mistake invariably leads to call for even more powers, leading to new mistakes.

Second, freedom and capitalism, the only real answer to the current crisis, gets ever more restricted and prevented from working efficiently, meaning that the underlying strength of human ingenuity and creativity is stopped from working and becomes increasingly powerless to pull us out of the morass we are in.

Another of Rand's predictions of business people using government favours in return for giving up their independence, has sadly been confirmed better than anywhere else in my own industry. It is embarrassing to see the extent the banking industry has relied on support from governments, and how ruthlessly it is currently exploiting the offers of cheap money available from the central banks.

Very little of the bailouts filter down to the real economy…

…

Pick-a-winner, corporate social responsibility, employment rules, affirmative action, the creation of fictional jobs and plain political popularity and obedience will then rule who prospers and survives in all industries, not just banking. Beware of this development, it is poison to capitalism, growth and to prosperity for all of you.

…

In fact, the undemocratic, power-grabbing, emotional, populistic Washington that takes over in Atlas Shrugged is today most closely resembled by the EU and the Eurozone in the real world.

…

In France, we now have a President that by his own admission, hates the rich. So much so that he is trying to circumvent his own constitution to introduce punitive taxes on them, although illegal.

…

Well, it seems that the rich also hate their president, judging by the number of them leaving — famously spearheaded by Gerard Depardieu — for places like Belgium, that amazingly actually acts as a tax haven for the French in spite of all the EU rhetoric, or Switzerland, where inflows of new immigration requests are, according to my sources, at record highs, particularly from Scandinavia, UK and France. Depardieu, of course, chose Russia, which speaks volumes as to the deep trouble Western Europe is in.

…

This leads to a very interesting question, a question full of hope. Is there indeed also a solution to the problem, such as the one Ayn Rand foresaw with the flight to Galts Gulch? It will be difficult to find a place entirely outside of the reach of aggressive governments eager for tax dollars, as Switzerland has learned to its misfortune.

…

So nowhere seems safe from populism and irrationality any longer. It is difficult to see the necessary reforms forthcoming, and sadly, we may have to go through a much more severe economic collapse before change will be forced upon us. Unfortunately, that change may also be totalitarian in nature, of course. In fact, that is the more likely outcome in the short run.

I don't believe the battle will be won by economic rationality. This goes out the door, once more than 51 percent of the voters live off the government — and probably even long before.

…

If we don’t succeed in changing the values and direction of at least the next generation, I fear the full prediction of Atlas Shrugged will become reality and while that may hold some promise for the distant future, it is not something that I think people of my age feel like going through if we can avoid it.

 

Read Christensen's full Ayn Rand discussion here (Part 1, Part 2, and Part 3)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GyGmJq4SaSs/story01.htm Tyler Durden

As was well-known in advance, today JPMorgan entered into a deferred prosecution agreement with the DOJ, whereby Jamie Dimon’s enterprise, where legal fees and litigation charges are no longer “non-recurring” items but a cost of doing business, paid $1.7 billion (non tax-deductible) to settle all criminal charges that it was aware well in advance that Madoff was a ponzi scheme and did nothing to alert authorities or the general public. What was less known is just how acutely JPM was aware of the developments at Madoff’s pyramid scheme, and that while apparently JPM was not convinced enough of Madoff’s criminality to alert regulators using “Suspicious Activity Reports”, it had seen enough to quietly reduce its exposure with the Ponzi from $369 million at the beginning of October 2008, or just after the Lehman collapse, to just $81 million at the time of Madoff’s arrest.

There is much more on the sequence of events in JPM’s realization that Madoff was a fraud (see filing below), but the punchline is the following extract from lengthy internal email in October 2008 by a JPM trading analyst that raised concerns about Madoff’s investment returns, and which explains why frauds are never caught until it is too late: “The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.… personnel at one feeder fund seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.”

And there you have the biggest failing of modern capital markets in a nutshell: nobody dares to ask any serious questions as long as the performance is good, and where there a cult-like following of the ringleader (see Central Banks). By the time the performance turns bad, and all the overdue questions are finally asked, it is always too late, and the cult blows up.

What is strangely missing in today’s action by the DOJ, which slams JPM (rightfully), is any mention of the SEC, you know – the regulators – those people whose job it was to catch Madoff in the act. Because while pocketing $1.7 billion from JPM may be an enjoyable exercise in populist propaganda for an administration that suddenly realizes it has created an unprecedented social class hatred schism and needs to punish bankers on a recurring, monthly basis, where is there any mention of the SEC’s fault for being completely oblivious to what JPM uncovered on its own? And yes, JPM did not alert the authorities, but at the end of the day its fiduciary obligations are first and foremost to its shareholders, which it executed, and not to a gullible public which opted for yet another “get rich quick” scheme, hoping foolishly that the SEC has some idea what it is doing.

Finally, we can’t help but wonder: when the current bubble to end all bubbles implodes, who will be punished for failing to point out that the emperor is naked, and that it is the cult of the Federal Reserve and its central bank peers around the globe, that have created the biggest Ponzi scheme the world has ever seen?

For those curious about the details of how JPM succeeded in realizing what the SEC failed to grasp, despite numerous vocal warnings from Harry Markopolos, read on.

From U.S. v. JPMorgan Chase – Deferred Prosecution Agreement Packet, Exhibit C

October 2008: JPMC Concludes In A Report To U.K. Regulators That Madoff s Returns Are Probably Too Good To Be True

In mid-September 2008, following the collapse of Lehman Brothers and growing concerns about counter-party risk, JPMCs Head of Global Equities directed investment bank personnel to substantially reduce JPMC’s exposure to hedge funds, which had increased following JPMCs March 2008 acquisition of Bear Stearns. This directive was reiterated by the Investment Bank Risk Committee on October 3, 2008. Acting at the direction of the Head of Global Equities, the Equity Exotics Desk began analyzing which hedge funds to reduce exposure to, including by directing the Desk’s due diligence analyst (the “Equity Exotics Analyst”) to scrutinize investments in various hedge funds, including the Madoff feeder funds. The Equity Exotics Analyst conducted this due diligence by, among other things, analyzing the reported strategy and returns of Madoff Securities, speaking to personnel at Madoff feeder funds and financial institutions administering Madoff feeder funds, and unsuccessfully seeking from the feeder funds and administrators documentary proof of the assets of Madoff Securities.

On October 16, 2008, the Equity Exotics Analyst wrote a lengthy e-mail to the head of the Equity Exotics Desk and others summarizing his conclusions (the “October 16 Memo”), The October 16 Memo described the inability of JPMC or the feeder funds to validate Madoff s trading activity or custody of assets. The October 16 Memo noted that the feeder funds were audited by major accounting firms, which had issued unqualified opinions for 2007, but questioned Madoff s “odd choice” of a small, unknown accounting firm. The October 16, 2008 Memo reported that personnel from one of the feeder funds “said they were reassured by the claim that FINRA and the SEC performed occasional audits of Madoff,” but that they “appear not to have seen any evidence of the reviews or findings,” The October 16 Memo also questioned the reliability of information provided by the feeder funds and the willingness of the feeder funds to obtain verifying information from Madoff. For example, the memo reported that personnel at one feeder fund “seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.” The Equity Exotics Analyst further wrote that there was both a “lack of transparency” into Madoff Securities and “a resistance on the part of Madoff to provide meaningful disclosure.”

The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.” The October 16 Memo concluded: “I could go on but we seem to be relying on Madoff s integrity (or the [feeder funds’] belief in Madoff s integrity) and the quality of the due diligence work (initial and ongoing) done by the custodians . . . to ensure that the assets actually exist and are properly custodied, If some[thing] were to happen with the funds, our recourse would be to the custodians and whether they had been negligent or grossly negligent.”

The Head of Due Diligence responded by complimenting the Equity Exotics Analyst on the October 16 Memo, making reference to other long-running fraud schemes, and suggesting in a joking manner that they should visit the Madoff Securities accountant’s office in New City, New York to make sure it was not a “car wash.”

* * *

JPMC’s Redemptions From Madoff Feeder Funds

On October 16, 2008 — the day of the October 16 Memo — an Equity Exotics employee requested by e-mail a “list of all external trades and the exact counterparty trade” for each of the Madoff-related feeder funds, noting that “[t]le list needs to be exhaustive as we may be terminating all of these trades and we cannot afford missing any.” The Equity Exotics Desk, which had already placed redemption orders for approximately $78 million from the Madoff feeder funds between October 1 and October 15, thereafter sought to redeem almost all of its remaining money in the Madoff feeder funds.

In addition to redeeming its positions in the Madoff feeder funds, JPMC sought, with the assistance of legal counsel, to cancel or otherwise unwind certain of the structured products issued related to the performance of the Madoff feeder funds. In an attempt to unwind these transactions, JPMC told the distributors of the Madoff notes that it was invoking a provision of the derivatives contract that enabled it to de-link the notes from the performance of the Madoff feeder funds if JPMC could not obtain satisfactory information about its investment. For example, in a letter dated October 27, 2008, JPMC warned that it would declare a “Lock-In Event” under the terms of the contract unless the recipient — a distributor that the Equity Exotics Analyst had spoken to as part of his due diligence underlying the October 16 Memo — could provide the identity of all of Madoff Securities’ options counterparties by 5:00 PM the following day.

In the Fall of 2008, the amount of JPMC’s position in Madoff feeder funds fell from approximately $369 million at the beginning of October 2008 (which was down slightly from its high-water mark of $379 million, in July 2008) to approximately $81 million at the time of Madoff s arrest, on December 11, 2008 — a reduction of approximately $288 million, or approximately 80% of JPMC’s proprietary capital invested as a hedge in Madoff feeder funds. During the same period, JPMC spent approximately $19 million buying back Madoff-linked notes and approximately $55 million to unwind a swap transaction with a Madoff feeder fund that eliminated JPMC’s contractual obligation with respect to those structured products. When Madoff was arrested, JIPMC booked a loss of approximately $40 million, substantially less than the approximately $250 million it would have lost but for these transactions.

At the same time, the Equity Exotics Desk also held through the time of Madoff s arrest a gap note providing JPMC with $5 million in protection if the value of a Madoff feeder fund collapsed completely. In a November 28, 2008 e-mail, an Equity Exotics banker declined a third party’s request to buy this protective gap note from JPMC, and described the gap note as being “as of today. . . very valuable” to JPMC.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dbJpdXnWYB8/story01.htm Tyler Durden

As was well-known in advance, today JPMorgan entered into a deferred prosecution agreement with the DOJ, whereby Jamie Dimon’s enterprise, where legal fees and litigation charges are no longer “non-recurring” items but a cost of doing business, paid $1.7 billion (non tax-deductible) to settle all criminal charges that it was aware well in advance that Madoff was a ponzi scheme and did nothing to alert authorities or the general public. What was less known is just how acutely JPM was aware of the developments at Madoff’s pyramid scheme, and that while apparently JPM was not convinced enough of Madoff’s criminality to alert regulators using “Suspicious Activity Reports”, it had seen enough to quietly reduce its exposure with the Ponzi from $369 million at the beginning of October 2008, or just after the Lehman collapse, to just $81 million at the time of Madoff’s arrest.

There is much more on the sequence of events in JPM’s realization that Madoff was a fraud (see filing below), but the punchline is the following extract from lengthy internal email in October 2008 by a JPM trading analyst that raised concerns about Madoff’s investment returns, and which explains why frauds are never caught until it is too late: “The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.… personnel at one feeder fund seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.”

And there you have the biggest failing of modern capital markets in a nutshell: nobody dares to ask any serious questions as long as the performance is good, and where there a cult-like following of the ringleader (see Central Banks). By the time the performance turns bad, and all the overdue questions are finally asked, it is always too late, and the cult blows up.

What is strangely missing in today’s action by the DOJ, which slams JPM (rightfully), is any mention of the SEC, you know – the regulators – those people whose job it was to catch Madoff in the act. Because while pocketing $1.7 billion from JPM may be an enjoyable exercise in populist propaganda for an administration that suddenly realizes it has created an unprecedented social class hatred schism and needs to punish bankers on a recurring, monthly basis, where is there any mention of the SEC’s fault for being completely oblivious to what JPM uncovered on its own? And yes, JPM did not alert the authorities, but at the end of the day its fiduciary obligations are first and foremost to its shareholders, which it executed, and not to a gullible public which opted for yet another “get rich quick” scheme, hoping foolishly that the SEC has some idea what it is doing.

Finally, we can’t help but wonder: when the current bubble to end all bubbles implodes, who will be punished for failing to point out that the emperor is naked, and that it is the cult of the Federal Reserve and its central bank peers around the globe, that have created the biggest Ponzi scheme the world has ever seen?

For those curious about the details of how JPM succeeded in realizing what the SEC failed to grasp, despite numerous vocal warnings from Harry Markopolos, read on.

From U.S. v. JPMorgan Chase – Deferred Prosecution Agreement Packet, Exhibit C

October 2008: JPMC Concludes In A Report To U.K. Regulators That Madoff s Returns Are Probably Too Good To Be True

In mid-September 2008, following the collapse of Lehman Brothers and growing concerns about counter-party risk, JPMCs Head of Global Equities directed investment bank personnel to substantially reduce JPMC’s exposure to hedge funds, which had increased following JPMCs March 2008 acquisition of Bear Stearns. This directive was reiterated by the Investment Bank Risk Committee on October 3, 2008. Acting at the direction of the Head of Global Equities, the Equity Exotics Desk began analyzing which hedge funds to reduce exposure to, including by directing the Desk’s due diligence analyst (the “Equity Exotics Analyst”) to scrutinize investments in various hedge funds, including the Madoff feeder funds. The Equity Exotics Analyst conducted this due diligence by, among other things, analyzing the reported strategy and returns of Madoff Securities, speaking to personnel at Madoff feeder funds and financial institutions administering Madoff feeder funds, and unsuccessfully seeking from the feeder funds and administrators documentary proof of the assets of Madoff Securities.

On October 16, 2008, the Equity Exotics Analyst wrote a lengthy e-mail to the head of the Equity Exotics Desk and others summarizing his conclusions (the “October 16 Memo”), The October 16 Memo described the inability of JPMC or the feeder funds to validate Madoff s trading activity or custody of assets. The October 16 Memo noted that the feeder funds were audited by major accounting firms, which had issued unqualified opinions for 2007, but questioned Madoff s “odd choice” of a small, unknown accounting firm. The October 16, 2008 Memo reported that personnel from one of the feeder funds “said they were reassured by the claim that FINRA and the SEC performed occasional audits of Madoff,” but that they “appear not to have seen any evidence of the reviews or findings,” The October 16 Memo also questioned the reliability of information provided by the feeder funds and the willingness of the feeder funds to obtain verifying information from Madoff. For example, the memo reported that personnel at one feeder fund “seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.” The Equity Exotics Analyst further wrote that there was both a “lack of transparency” into Madoff Securities and “a resistance on the part of Madoff to provide meaningful disclosure.”

The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.” The October 16 Memo concluded: “I could go on but we seem to be relying on Madoff s integrity (or the [feeder funds’] belief in Madoff s integrity) and the quality of the due diligence work (initial and ongoing) done by the custodians . . . to ensure that the assets actually exist and are properly custodied, If some[thing] were to happen with the funds, our recourse would be to the custodians and whether they had been negligent or grossly negligent.”

The Head of Due Diligence responded by complimenting the Equity Exotics Analyst on the October 16 Memo, making reference to other long-running fraud schemes, and suggesting in a joking manner that they should visit the Madoff Securities accountant’s office in New City, New York to make sure it was not a “car wash.”

* * *

JPMC’s Redemptions From Madoff Feeder Funds

On October 16, 2008 — the day of the October 16 Memo — an Equity Exotics empl
oyee requested by e-mail a “list of all external trades and the exact counterparty trade” for each of the Madoff-related feeder funds, noting that “[t]le list needs to be exhaustive as we may be terminating all of these trades and we cannot afford missing any.” The Equity Exotics Desk, which had already placed redemption orders for approximately $78 million from the Madoff feeder funds between October 1 and October 15, thereafter sought to redeem almost all of its remaining money in the Madoff feeder funds.

In addition to redeeming its positions in the Madoff feeder funds, JPMC sought, with the assistance of legal counsel, to cancel or otherwise unwind certain of the structured products issued related to the performance of the Madoff feeder funds. In an attempt to unwind these transactions, JPMC told the distributors of the Madoff notes that it was invoking a provision of the derivatives contract that enabled it to de-link the notes from the performance of the Madoff feeder funds if JPMC could not obtain satisfactory information about its investment. For example, in a letter dated October 27, 2008, JPMC warned that it would declare a “Lock-In Event” under the terms of the contract unless the recipient — a distributor that the Equity Exotics Analyst had spoken to as part of his due diligence underlying the October 16 Memo — could provide the identity of all of Madoff Securities’ options counterparties by 5:00 PM the following day.

In the Fall of 2008, the amount of JPMC’s position in Madoff feeder funds fell from approximately $369 million at the beginning of October 2008 (which was down slightly from its high-water mark of $379 million, in July 2008) to approximately $81 million at the time of Madoff s arrest, on December 11, 2008 — a reduction of approximately $288 million, or approximately 80% of JPMC’s proprietary capital invested as a hedge in Madoff feeder funds. During the same period, JPMC spent approximately $19 million buying back Madoff-linked notes and approximately $55 million to unwind a swap transaction with a Madoff feeder fund that eliminated JPMC’s contractual obligation with respect to those structured products. When Madoff was arrested, JIPMC booked a loss of approximately $40 million, substantially less than the approximately $250 million it would have lost but for these transactions.

At the same time, the Equity Exotics Desk also held through the time of Madoff s arrest a gap note providing JPMC with $5 million in protection if the value of a Madoff feeder fund collapsed completely. In a November 28, 2008 e-mail, an Equity Exotics banker declined a third party’s request to buy this protective gap note from JPMC, and described the gap note as being “as of today. . . very valuable” to JPMC.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dbJpdXnWYB8/story01.htm Tyler Durden

Submitted by John Cochran, via the Ludwig von Mises Institute,

In his The General Theory of Employment Interest and Money, John M. Keynes criticized, without citing or mentioning him explicitly, Hayek’s (Austrian) primary policy recommendation: the best way to avoid a bust is prevention. Hayek knew that avoiding the credit-created boom prevents the associated malinvestments and over-consumption while boom-bust cycles will be avoided through prevention or significant reductions in credit creation. Keynes, however, thought differently:

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

A good interpretation of the Bernanke Fed monetary central planning since the end of the “Great Recession” with its near zero-interest rate policy coupled with multiple rounds of quantitative easing (QE) driven by apoplithorismosphobia, is that the Fed has been attempting to follow Keynes’s advice. The way to avoid a new slump is to keep interest rates low for as far as the eye can see as a way to overcome a lack of “animal sprits” and thus sustain a quasi-boom. As long as inflation is low, no harm, no foul. In fact, as the thinking goes, a little more inflation might be beneficial.

Comments by Peter Schiff in Reaction to the Federal Reserve Policy Statement “following the Fed’s announced limited tapering of QE III support this interpretation of Fed intentions.” Schiff points out, “There can be little doubt that today’s Fed announcement is an epic attempt at rhetorical audacity. The message they hope to convey is that they are tightening monetary policy by loosening it.” He then points out, “There is little evidence to suggest that the trends are self-sustainable. But seemingly strong data had made the arguments in favor of continued QE increasingly untenable. As they could no longer stay the course the Fed had to do something. Ultimately they decided to play it both ways.” Schiff then explains what is unstated, but between the lines — continued ease is the Fed’s intent:

But these “Open Mouth Operations” likely represent the full inventory of the Fed’s policy options. I suspect that when the economic data begins to disappoint, the Fed will quickly reverse course and increase the size of its monthly purchases. In fact, today’s Fed statement was careful to avoid any commitments to additional tapering in the future. It merely said that further changes in the amount of purchases will be dependent on the data. This means that QE could go in either direction.

If yields move much higher I feel that the Fed will have to intervene to bring them back down. In other words, the Fed will find it much harder to exit QE than it was to enter.

Austrians long ago showed the folly in such policies. Hayek’s lead essay in Profits, Interest and Investment (1939) provides an early Austrian response to Keynes’s nonsense. In what is one of Hayek’s most difficult articles, Hayek explicitly argues that such a policy will ultimately not only fail to achieve its stated objective, but will lead to significant long-run harm to the economy. The policy might temporarily appear to increase employment, but the effect is an illusion. Credit creation and artificially low interest rates, even if applied to an economy with currently unused resources still misdirects production leading to boom-bust episodes and higher future unemployment. Adrián O. Ravier updates these arguments in his two excellent QJAE articles, “Rethinking Capital-Based Macroeconomics” and “Dynamic Monetary Theory and the Phillips Curve with a Positive Slope”. In the first, Ravier provides

an explanation of why expansionary monetary policies fail in the longer term to solve the unemployment problems associated with recessions. This extension provides a fresh perspective on the debates between Hayek and Keynes in the 1930s and over “quantitative easing” today.

In the second article, Ravier shows:

While it is true that after the boom and bust the economy returns to the natural rate of unemployment, the crucial point is that the “natural rate” at the end of the cycle is quite different from the one evident at the start. This requires an “Austrian” Phillips curve with a positive slope.

During an artificial boom, employment may initially decline. However after a return to “normalcy,” unemployment may actually be higher than what would have been the norm before the policy-induced boom.

Joe Salerno cautions that besides the long run risks discussed above, an artificial low interest rate environment based on deflation fears may actually be preventing a healthy recovery. Salerno points out:

For recovery to begin again, there needs to be a steep rise in the “real,” or inflation-adjusted, interest rate observed in financial markets. High interest rates do not stifle the recovery but are the sure sign that the readjustment of relative prices required to realign the production structure with economic reality is proceeding apace. The mislabeled “secondary deflation,” whether or not it is accompanied by an incidental monetary contraction, is thus an integral part of the adjustment process. It is the prerequisite for the renewal of entrepreneurial boldness and the restoration of confidence in monetary calculation. Decisions by banks and capitalist-entrepreneurs to temporarily hold rather than lend or invest a portion of accumulated savings in employing the factors of production and the corresponding rise of the loan and natural rates above some estimated “true” time preference rate does not impede but speeds up the recovery. This implies, of course, that any political attempt to arrest or reverse the decline in factor and asset prices through monetary manipulations or fiscal stimulus programs will retard or derail the recession-adjustment process.

Current Fed policy is a policy of illusion, or better yet, of delusion.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/LFuibwSYQkE/story01.htm Tyler Durden

With Washington fighting over whether to stop emergency unemployment benefits in the US, the Saudi Arabian government has re-written their economic textbooks with some wonderful new logic. In an effort to encourage its citizens to seek jobs in private companies (as opposed to the majority in government jobs – which the IMF sees as unsustainable), the Saudis are introducing compulsory unemployment insurance for all citizens with jobs. As Reuters reports, "It may not be the most cost effective solution in the near term but if it helps normalise the labour market it is a price worth paying." With unemployment at 12%, and only 30-40% labor force participation, the costs could be significant.

 

Via Reuters,

Saudi Arabia will introduce compulsory unemployment insurance this year for all citizens with jobs, the world's top oil exporter said on Monday.

 

Saudi Arabia, an absolute monarchy that has no income tax, is trying to push more citizens into work to tackle long-term unemployment that officials see as unsustainable in light of high population growth and uncertainty over future oil revenue.

 

The introduction of unemployment insurance is designed to make it more attractive for young Saudis to seek jobs in private companies, where the starting salary and other benefits are less generous than in government jobs.

 

While the official unemployment rate is around 12 percent, economists say only 30-40 percent of working age adults participate in the labour force. Most Saudis who do not have jobs are financially supported by a relative.

 

Most of those who work are employed by the state, but the government cannot support such a large wage bill in the long term, and the International Monetary Fund has warned that the private sector must meet future job demand.

 

"If there is a guarantee of income, particularly when that is connected to the level of previous earnings, it should make people more comfortable with taking positions in the private sector," said Paul Gamble, director, sovereign group, Fitch Earnings.

 

…all Saudi workers in both the private and public sectors will be charged one percent of their monthly salary as a subscription…Their employer will pay the same amount into the scheme

…

Those who lose their jobs will be entitled to up to 12 months of compensation, set at 60 percent of the average salary they earned in the previous three years for the first three months and then 50 percent for the following nine months.

…

Riyadh has raised spending on social benefits in the past three years in response to the 2011 "Arab Spring" uprisings. While Saudi Arabia escaped mass protests, its leaders were uncomfortably aware that unemployment spurred demonstrations elsewhere.

…

 

It is not yet clear if the payments Saudis will make into the scheme will cover the cost of insurance payments.

 

"It may not be the most cost effective solution in the near term but if it helps normalise the labour market it is a price worth paying," said Gamble.

 

Besides the new unemployment insurance, Saudi Arabia has also introduced tough new quotas for companies to employ Saudi nationals as well as foreign workers, who are cheaper and easier to fire.

 

It has also introduced a fee that companies must pay for each expatriate they hire over the number of Saudi workers, and has cracked down on visa irregularities to reduce the number of foreigners looking for jobs inside the kingdom.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/j4orTP_T5Es/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/JeWSdIJ0kzo/story01.htm Tyler Durden

Despite the best day in the S&P (+0.6%) since the Taper (12/18), this remains the worst start to a year since 2005. The Dow stands out as the best of the bad bunch ( down only 0.25% from 2013 close highs) while Trannies remain the worst. Homebuilders tumbled back to recouple with Financials post-Taper. Treasuries decided to ignore the equity strength and rallied once again (with 10Y now -10bps on the year) even as the USD was well bid back to unch on the week (once again all the vol in the US open to EU close period) with notable CAD weakness to its lowest since May 2010. USDJPY was on-and-off in charge with stocks staying in sync until the EU close, reconnecting briefly in the afternoon, then taking off again. VIX dropped back under 13% (but stocks were relatively outperforming). Precious metals remained in the headlines, this time with weakness, but from the early spike down, they recovered half the losses.

 

Some recovery today but stocks remain off their 2013 close highs (and worst start to year since 2005)…

 

S&P 500 took out yesterday's pre-open highs and as opposed to yesterday found support at VWAP today… and dumped to it perfectly at the close

 

From the Taper, homebuilders have recoupled with Financials and Tech, Staples and Utes remain the underperformers…

 

Bonds continue to rally…10YTSY  -10bps but notably 30Y mortgages are +1bps!

 

VIX remained well correlated but stocks were notable outperformers from the open…

 

Once again, JPY carry was in charge into the European close – briefly reconnected – then disconnected into the US close…

 

Precious metals were monkey-hammered early but rallied back as the day wore on…

 

The USD rose back to unchanged on the week (led by notable CAD weakness – worst day since Nov 2011 to May 2010 lows)…once again all the vol occurred between US open and EU close…

 

Year-to-date, correlations are 'odd' across asset classes… strong USD, strong precious metals, strong bonds, weak oil and weak stocks…

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/x6lt5iqbRI4/story01.htm Tyler Durden

Despite the best day in the S&P (+0.6%) since the Taper (12/18), this remains the worst start to a year since 2005. The Dow stands out as the best of the bad bunch ( down only 0.25% from 2013 close highs) while Trannies remain the worst. Homebuilders tumbled back to recouple with Financials post-Taper. Treasuries decided to ignore the equity strength and rallied once again (with 10Y now -10bps on the year) even as the USD was well bid back to unch on the week (once again all the vol in the US open to EU close period) with notable CAD weakness to its lowest since May 2010. USDJPY was on-and-off in charge with stocks staying in sync until the EU close, reconnecting briefly in the afternoon, then taking off again. VIX dropped back under 13% (but stocks were relatively outperforming). Precious metals remained in the headlines, this time with weakness, but from the early spike down, they recovered half the losses.

 

Some recovery today but stocks remain off their 2013 close highs (and worst start to year since 2005)…

 

S&P 500 took out yesterday's pre-open highs and as opposed to yesterday found support at VWAP today… and dumped to it perfectly at the close

 

From the Taper, homebuilders have recoupled with Financials and Tech, Staples and Utes remain the underperformers…

 

Bonds continue to rally…10YTSY  -10bps but notably 30Y mortgages are +1bps!

 

VIX remained well correlated but stocks were notable outperformers from the open…

 

Once again, JPY carry was in charge into the European close – briefly reconnected – then disconnected into the US close…

 

Precious metals were monkey-hammered early but rallied back as the day wore on…

 

The USD rose back to unchanged on the week (led by notable CAD weakness – worst day since Nov 2011 to May 2010 lows)…once again all the vol occurred between US open and EU close…

 

Year-to-date, correlations are 'odd' across asset classes… strong USD, strong precious metals, strong bonds, weak oil and weak stocks…

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/x6lt5iqbRI4/story01.htm Tyler Durden

Remember when the Fed got its Series 7 and Series 63, and was solely engaged in the business of advising on stock valuation? Neiter do we. But that doesn’t prevent it from now openly opining on what it thinks is the fair value of stocks:

• FED’S WILLIAMS SAYS U.S. STOCKS AREN’T OVERVALUED

So, the implication is one should buy stock then?

And if the market craters tomorrow, the Fed will surely make everyone who listened to this non-voting moron who has made a complete mockery of the Fed’s inflation and full employment mandates and replaced them with the “fair stock value” mandate, whole at the expense of all the other taxpayers, right?

Finally, since the market is not overvalued here, what is the Fed’s price target on the S&P 500, oh unregistered financial advisors-cum-Princeton academics of the Marriner Eccles building.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Aw7zzTaAcn4/story01.htm Tyler Durden