Tag: finance

Today gold slid under $1200 per ounce, dropping to a level not seen in three years. Judging by the price action one would think that gold is not only overflowing from precious metal vaults everywhere, but can be found thrown away on the street, where nobody even bothers to pick it up. One would be wrong. In fact, as Bloomberg’s Ken Goldman reports, “you could walk into a vault in London and they were packed to the rafter with gold, and the gold would trade from me to you to somebody else. You could walk into these vaults today and they are virtually empty. All that gold has been transferred out of London, 26 million ounces….” To find out where it has gone and why it is never coming back, watch the clip below (spoiler alert: listen for the line: “the Chinese don’t want US dollars anymore, they want gold“).

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GphWsjUZsU0/story01.htm Tyler Durden

Today gold slid under $1200 per ounce, dropping to a level not seen in three years. Judging by the price action one would think that gold is not only overflowing from precious metal vaults everywhere, but can be found thrown away on the street, where nobody even bothers to pick it up. One would be wrong. In fact, as Bloomberg’s Ken Goldman reports, “you could walk into a vault in London and they were packed to the rafter with gold, and the gold would trade from me to you to somebody else. You could walk into these vaults today and they are virtually empty. All that gold has been transferred out of London, 26 million ounces….” To find out where it has gone and why it is never coming back, watch the clip below (spoiler alert: listen for the line: “the Chinese don’t want US dollars anymore, they want gold“).

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GphWsjUZsU0/story01.htm Tyler Durden

While we joked on Monday this week with regard the Harvard evacuations, we were still a little shocked that, as the NY Post reports, a Harvard University student was due in court Wednesday after prosecutors said he made bomb threats to try to get out of a final exam. Eldo Kim, 20, acting alone, sent the bomb hoax messages to five or six Harvard email addresses he picked at random (via the Dark Web browser Tor), about half an hour before he was scheduled to take a final in Emerson Hall, one of the buildings threatened. The maximum penalties for a bomb hoax are five years in prison and a $250,000 fine – plenty of time to study there…

 

Via NY Post,

The U.S. attorney’s office in Boston filed a criminal complaint Tuesday against Eldo Kim, 20, alleging he sent hoax emails saying shrapnel bombs would go off soon in two of four buildings on the Cambridge, Mass., campus. The emails came minutes before he was to take a final exam in one of the buildings

 

The threats led to the buildings’ evacuation Monday, shutting them down for hours before investigators determined there were no explosives.

 

Harvard said it was saddened by the allegations but would have no further comment on the investigation.

 

…

 

An FBI affidavit says Harvard determined Kim had accessed TOR, a free Internet product that assigns a temporary anonymous Internet protocol address, using the university’s wireless network.

 

The affidavit says Kim told an agent Monday night that he had acted alone and sent the messages to five or six Harvard email addresses he picked at random.

 

He said he sent them about half an hour before he was scheduled to take a final in Emerson Hall, one of the buildings threatened…

Of course, in a world of little to no consequences, why would we be surprised at the awful lengths Kim went to in order to avoid the finals…?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/09QCCbOa87M/story01.htm Tyler Durden

Relatively little is known about the Office of Financial Research. The OFR is an Office within Treasury established by Congress “to serve the Financial Stability Oversight Council, its member agencies, and the public by improving the quality, transparency, and accessibility of financial data and information; by conducting and sponsoring research related to financial stability; and by promoting best practices in risk management.” In short, this is where some of the smarter people in the US Treasury department can (or should) be found, and certainly those who are paid to anticipate the risks to the financial system. The reason the OFR is relevant is because earlier this week it released its annual Report to Congress that “identifies threats to financial stability and tools to monitor them.” Or, stated simply, in its 152-page report, the US Treasury revealed what it believes are the biggest threats to the US financial system.

The four main risks (in our opinion) as listed by the Treasury are Credit risk (the bond bubble identified by Jeremy Stein in early 2013), Duration risk (the impact on balance sheets from a 100 bps blow out in rates), Impaired Trading liquidity, as noted most recently by the TBAC, and finally Emerging Market capital outflow spillover risk.

From the US Treasury’s Office of Financial Research:

Since the last OFR annual report in July 2012, uncertainty about U.S. interest rates led to a broad sell-off across global markets, unveiling important fragilities. Figure 3 shows the performance of global asset markets relative to a three-year average and the relative shift in risk appetite. Green represents a lower appetite for risk, for example, as represented by lower equity prices,
wider credit spreads, or lower Treasury yields, while red represents a higher appetite for risk. The dotted line — an average of five asset classes — suggests that despite the decline in prices of certain risky assets, overall risk appetite remains above levels prevailing at the time of the last annual report. In particular, risks in the euro area have abated as its banking and sovereign debt crisis has morphed into a more manageable economic recession risk. Liquidity has improved, equity values have recovered, and credit spreads  have tightened on sovereign debt issued by Greece, Ireland, Italy, Portugal, and Spain.

There was a sizeable correction in asset markets in May 2013 and June 2013 on expectations that improvements in the U.S. economy could prompt the Federal Reserve to taper the asset purchase program sooner than expected. Underperformance was most  pronounced in emerging markets, with sovereign external and local currency debt spreads widening, implied default risk rising, and currencies coming under pressure.

Poor performance was also pronounced in high-risk sectors and sectors that had previously benefited most from excess liquidity. Those concerns have since partly abated and equity and credit markets have recovered, but the episode was an important mini-stress test for markets that could presage the potential reaction to monetary policy tightening when it does occur. In early October 2013, increased  sovereign risk concerns related to the U.S. debt ceiling impasse and government shutdown led to a sharp rise in interest rate volatility, a widening in near-term sovereign credit default swap spreads, and a rise in measures of risk in short-term secured and unsecured funding markets.

The episode was short-lived, and most sovereign risk measures returned to earlier prevailing benign levels after the debt ceiling was temporarily extended. Although market conditions have since calmed, challenges remain. Threats to stability can be generally categorized in two ways: (1) cyclical or structural, and (2) inside or outside the financial system (Figure 4).

Grouping threats in this way helps focus on the causes behind each threat, rather than just symptoms, although some threats contain both cyclical and structural causes. Many of the threats previously flagged by the Office and the Council in their respective annual reports remain  relevant.

This section highlights the following potential threats:

• the risk of runs and asset fire sales in repurchase (repo) markets;
• excessive credit risk-taking and weaker underwriting standards;
• exposure to duration risk in the event of a sudden, unanticipated rise in interest rates;
• exposure to shocks from greater risk-taking when volatility is low;
• the risk of impaired trading liquidity;
• spillovers to and from emerging markets;
• operational risk from automated trading systems, including high-frequency trading; and
• unresolved risks associated with uncertainty about the U.S. fiscal outlook.

These risks in isolation do not necessarily lead to systemic weakness. But, in combination, they may leave the financial system more susceptible to adverse shocks.

* * *

And the main threats (in our opinion) as summarized by the OFR:

Credit Risk

Among nonfinancial corporations, leverage has been increasing since 2012, and there are reasons to be concerned about a potential deterioration in corporate balance sheets once interest rates begin rising.

After the crisis, nonfinancial corporations managed their balance sheets conservatively to reduce debt and build liquidity, while profits grew at an accelerating rate. Since 2010, however, leverage on investment-grade and high-yield corporate balance sheets has been rising (see Figure 11). Early in the cycle, most of that increase was at corporations with strong credit ratings and low debt. More recently, weaker companies have followed suit. Corporate cash buffers have been steadily diminishing, reversing the hoarding that took place earlier.

Underwriting standards continue to weaken by some measures. Companies with low credit ratings have been among the biggest issuers of new debt, with recent transactions turning more aggressive. There has been a spate of payment-in-kind bonds, which pay interest or dividends to investors with additional debt. Also, less-strict terms are being used in legal covenants attached to leveraged loans. Another sign of weaker underwriting standards are dividend-refinancing loans, which increase leverage through the financing
of shareholder dividends by reducing the capital stock that buffers a firm from insolvency.

Relatively easy financial conditions often are accompanied by, or lead to, a compression in risk premiums and higher asset prices. Loans with weaker covenants (covlite loans) carry less stringent borrower obligations and represent one example of mispriced credit risk. With fewer investor protections for cov-lite loans, expectations of recovery on default are lower. Consequently, a cov-lite risk premium should exist to account for lesser  creditor protection (fewer covenants) and lower expected recoveries. Based on historical recovery and default rates, these loans should command a risk premium of 30 to 35 basis points, but
are currently priced below or only on par with other comparable loans requiring stronger protections for lenders. By the same token, despite the deterioration in fundamentals, corporate borrowing costs and the spread investors are willing to pay per unit of balance sheet risk are at historically low levels, implying a lower price of credit risk and greater risk of a sharper adjustment in reaction to an adverse shock.

 

Duration and Interest Rate Risk

Investment portfolios now face growing duration risk — the risk that investors will incur outsized losses in the event of an unexpected rise in interest rates as a result of exposure to long-dated, fixed-rate bonds. Courtesy of a long period of low yields, low volatility, and investors’ search for yield, duration risk is at recent historical highs. Portfolio allocations to fixed income instruments also remain above the recent historical trend, despite the rise in yields in May 2013 and June 2013 (see Figure 12). Thus, losses from a given change in interest rates would be larger than in the past.

These positions increase the vulnerability for some market participants to outsized losses that could be difficult to absorb in the event of an unanticipated increase in long-term rates. To assess the degree of vulnerability, we simulated an adverse interest rate shock to estimate losses by bond funds from an instantaneous parallel shift in the yield curve of 100 basis points from current levels. We then compared the impact of such losses in today’s context to loss rates from a similar hypothetical scenario during the three previous periods of U.S. monetary policy tightening. Losses during each tightening cycle are calculated by averaging monthly estimated losses, where the Barclays Capital U.S. Aggregate Bond Index is used as a proxy for duration and mutual fund bond holdings are based on data from the Investment Company Institute. Figure 15 shows that losses could rise to nearly $200 billion (or 5.5 percent of GDP), underscoring that current bond portfolios are vulnerable to a sudden, unanticipated rise in long-term rates.

Interest rate risk extends beyond nonfinancial bond portfolios. On the asset side, banks have increased their holdings of longer-term assets, leaving them more exposed to interest rate risk. On the liability side, U.S. banks have seen dramatic growth in their non-interest bearing deposits relative to total banking system liabilities. The ratio now stands at a 30-year high. It is unclear how much of the growth is attributable to structural factors or cyclical factors. Challenges exist for banks and regulators in modeling the behavior of these deposits as interest rates rise. There is a nonnegligiblerisk that deposits would shift to alternative, higher-yielding investments as rates rise.

In the event of an adverse interest rate shock, policymakers would likely adopt actions aimed at tempering the rise, for instance through communication and fine-tuning policies. However, determining the underlying drivers of the rise could be challenging. For instance, the roughly 100 basis point rise in long-term rates that took place during the May–June period mostly reflected an increase in term premiums (the extra yield needed for investors to hold a long-term bond instead of a series of short-term bonds) rather than short-rate expectations (see Adrian and Fleming, 2013).

To understand this rise in the term premium, we evaluate the statistical relationship between the term premium and its drivers. Decomposing the term premium is a challenging task, in part because the term premium itself is unobservable. Following Gagnon and others (2010), we constructed a model in which the term premium (the difference between long-term and short-term bond yields) on 10-year U.S. Treasury securities is a function of macroeconomic fundamentals and uncertainty, volatility in financial markets, and supply factors.  We estimated the model over the past 22 years, and assessed drivers of increases and decreases in the term premium during the pre- and post-crisis periods.

Figure 16 summarizes our main findings. During most of the 1990s, the term premium steadily declined, driven predominantly by an improvement in macroeconomic factors, as unemployment and inflation decreased steadily. By contrast, interest rate volatility, reflecting interest rate uncertainty, was a key driver of the rise in the term premium from late 1998 to 2000. Beginning in 2008, the Federal Reserve’s asset purchase program became an important driver of the decline in the term premium, while macroeconomic factors became less important. During the most recent period, our model suggests that increased interest rate volatility has more than accounted for the rapid rise in long-term rates, reflecting increased difficulty evaluating the future direction of interest rates. Although our model is imperfect, the preliminary findings suggest that changes in the term premium will be strongly tied to investor perceptions of the future path of nontraditional monetary policy as the Federal Reserve pares back its asset purchases.

 

Impaired Trading Liquidity

Impaired trading liquidity — the inability to execute large trades without having a significant impact on market prices — could aggravate some of the threats already discussed. Market liquidity measures show a mixed picture. The current high levels of central bank liquidity may be masking some weakness in trading liquidity. Within the corporate bond market, some evidence indicates that liquidity is more bifurcated than before the crisis. Liquidity has become increasingly concentrated, with large, investment-grade bonds showing the strongest liquidity, while some smaller, high-yield issues have become less liquid. The gap has widened as broker-dealers’ securities holdings have shifted toward larger, more frequently traded corporate bonds. The growth in exchange-traded funds within the corporate bond market increases the potential to weaken market liquidity during periods of market stress (see Figure 20 and OFR, 2013).

The sources of diminished trading liquidity are not fully understood. A commonly cited source is reduced broker-dealer capacity and a higher premium for the risk of holding inventory. Broker-dealer inventories of fixed-income instruments have declined since 2007, particularly for corporate bonds. The shift in inventories has occurred against the backdrop of an expanding corporate bond market, reducing the ability of broker-dealers to act as shock absorbers during market stress (see Figure 19). Other changes since the crisis may have also affected structural market liquidity, including shifts in the investor base, risk appetite, and trading behavior.

Foreign Risks: Spillovers to and from Emerging Markets

Accommodative monetary policies in advanced economies, strong domestic fundamentals in select emerging markets, and a structural increase in investor allocations have led to strong cross-border portfolio flows to emerging markets over the last few years. Foreign  flows have predominantly targeted emerging market bonds, with cross-over and nondedicated emerging market investors increasing their footprint. In some emerging markets, domestic policies have encouraged local companies to expand debt to high levels and boost leverage (see IMF, 2013e).

Increased sensitivity between the U.S. risk-free rate and emerging market capital inflows has increased the vulnerability of capital flows to a sudden increase in U.S. rates. A reversal in capital flows could highlight vulnerabilities that have built up, particularly where sovereigns and corporates have become dependent on capital inflows to meet near-term borrowing and refinancing needs. An abrupt reversal in inflows would be damaging for countries with external imbalances or near-term refinancing needs.

Yield-seeking capital flows across borders, driven by both external and domestic factors, have driven a decline in local bond yields.  Markets for emerging-market bonds have grown increasingly more sensitive to changes in U.S. interest rates (Figure 21). Rises in yields for 10-year Treasury bonds have been accompanied by a depreciation in emerging-market currencies, higher bond yields, and weakness in equity valuations.

The sell-off in emerging markets that began in late May illustrates what could happen once U.S. monetary conditions tighten. Higher U.S. interest rates coincidedwith a pullback in capital flows to emerging markets and increased instability in emerging market assets. The first phase of the sell-off was concentrated in highly liquid proxy trades (trades that use one asset class to take positions in  another asset class — for example, positions in commodity producers’ assets to proxy for China). The second phase saw a more pronounced sell-off in assets that had been the primary beneficiaries from excess liquidity since the start of the Federal Reserve’s quantitative easing program (see Figure 22). The third phase reflected further differentiation, with heightened volatility in emerging market assets with the weakest domestic fundamentals (for example, weaker relative growth prospects, low or eroding foreign exchange reserves, large external financing needs, high levels of leverage, or limited policy buffers). On these measures, markets in several countries look vulnerable, including Turkey, South Africa, India, Indonesia, and Brazil (see Figure 23).

Sustained volatility can feed on itself, spilling over toother risk assets as losses trigger fund redemptions and asset sales. Emerging markets are generally more resilient as an asset class than in the past, thanks to liberalized exchange rates, more prudent macroeconomic policies, and issuance of debt in local currencies rather than in dollars. But vulnerabilities remain, including the buildup of corporate debt and leverage (see IMF, 2013e), rapid nonbank credit growth (see insert on Financial Intermediation in China), and diminished policy buffers. Emerging markets are now larger and more connected to developed markets, which means stress can be more readily transmitted directly or indirectly to the U.S. through various conduits, including funding, foreign exchange, credit, and growth channels.

An increase in U.S. policy rates could create challenges for overseas central banks seeking to maintain a looser monetary policy stance. An already challenging policy environment for certain emerging markets with less capacity to absorb external shocks increases the risk of a policy error. Figure 24 shows significant differentiation in monetary, external, and fiscal buffers. Since our last annual report, buffers have eroded in Indonesia, Malaysia, Peru, India, and South Africa. The thinner cushion means less room for stimulus, more difficulty in managing external shocks, and a greater risk of a policy error.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_bR7msDSdko/story01.htm Tyler Durden

Submitted by Gonzalo Lira via Gonzalo Lira’s blog,

Neoliberal economics has been a wonderful driving force for progress and material prosperity—but it cannot be the single ruling principle of our lives, of our government, or of our society.

If we allow the profit motive to be the only motive, then we and our society are doomed.

We are already seeing the shape of that doom, in our health care, our government, and our industry.

So this morning, I woke up to a piece by Michael “Mish” Shedlock—a piece that, being a fellow middle-aged man, scared the ever-living shit out of me.

Mish opens his piece describing how last October 2012, he took a standard prostate cancer test and came up positive. What follows is his no-nonsense journey of beating his cancer. The whole piece is a must-read; here is the link.

(Refreshingly, Mish doesn’t inflict the needless emotional bullshit on us. I’m sure he felt scared out of his wits, and I’m sure he had quite a few dark-nights-of-the-soul, especially as he had only recently lost his wife. I have nothing but compassion for him as a human being—but as a reader, I’m so glad he didn’t roll around in the emotional muck, which is such the fashion today.)

The thing that struck me about Mish’s piece was how one of his doctors, the surgeon who performed the initial biopsy, wanted to do surgery right away. Mish adopted a wait-and-see approach, coupled with a cocktail of drugs, to see if this counteracted the cancer. And rather than another biopsy, Mish wanted more and more-frequent blood tests. The surgeon, “Dr. G.”, insisted on biopsies instead of blood tests—he wanted to perform surgery so badly that he effectively gave Mish an ultimatum: My way (biopsies/surgery) or the highway.

Mish walked on Dr. G., concluding that Dr. G. was interested in the fat fees he would receive for performing biopsies and eventual surgery.

Mish was right—but then again, Dr. G. was being exceptionally rational, according to our current Neoliberal paradigm: It paid him (and rather well at that) to perform surgery, regardless of whether there were other options for his patients. And it was a drain on his resources to have a patient such as Mish on his client list: Mish was wary of losing his prostate, which well might mean losing his ability to perform sexually, as well as possible urinary incontinence. Hence Mish’s reluctance to dive right into surgery without exploring all the other options. Such a patient, for Dr. G., was a waste of time, and time is his main resource.

So his ultimatum to Mish was ruthlessly “efficient” in the paradigm of Neoliberal economics: If Mish stayed with Dr. G., then Dr. G. would make money through the surgery. If Mish walked, Dr. G. would be unburdened from having to spend time on a non-performing patient; “non-performing” in the sense of not being a billable client.

Of course, this flies in the face of what a doctor ought to be: A healer. A professional whose interest is to cure his patients of their disease, howsoever that cure may come about, be it surgery, drug cocktails, or whatever other treatment is available and scientifically reasonable.

Yet Dr. G., far from being a weird outlier of a greedy surgeon hungry for fees, was being the ultimate Neoliberal Man: Rationally prioritizing profits over care. He is in fact a common exemplar of the medical-insurance business. He’s the norm, not the exception.

Now for something completely different:

Newsweek magazine ran a piece a few days ago, where it reported a study carried out by Paul C. Light and others, which concluded that the Federal government overspends $300 billion a year on private contractors. The money-quote:

    In theory, these contractors are supposed to save taxpayer money, as efficient, bottom-line-oriented corporate behemoths. In reality, they end up costing twice as much as civil servants[.]

According to the Neoliberal paradigm, the private sector is supposed to be ruthlessly efficient—yet this “ruthless efficiency” was bilking the government—ultimately bilking us, the taxpayers—of $300 billion a year: Roughly $1,000 a year for every man, woman, and child in America.

Could you have used an extra $1,000 last year? Me, I wouldn’t have minded getting an extra grand. But I didn’t get this extra money. It went instead to an “efficient” private contractor that bilked the government.

The Neoliberal paradigm might sell the illusion that it’s all about “ruthless efficiency”—but it’s not. Neoliberal economics is in fact all about the pursuit of Return On Investment (ROI): Profits as a ratio of income to capital. That’s it. That’s all Neoliberal economics really is, at its core: Maximizing ROI, and creating the social conditions where that maximization might occur with the least amount of societal or governmental interference.

There are essentially three ways to improve ROI:

    Sell more units than previously.
    Sell each unit at a higher price (or lower cost) than previously.
    Reduce your capital while maintaining your sales.

Neoliberal economics—and its cheerleaders—claim as a matter of faith that it is “ruthlessly efficient”. But it’s not. Its efficiency comes as a very welcome byproduct of its pursuit of profits—but Neoliberalism is not inherently more efficient.

There’s nothing wrong with pursuing profits. Quite the contrary, our very modern existence is a byproduct of this relentless pursuit of ROI. Think of the computer you are using to read this very essay—infinitesimally cheap and light-years better than the computer made a mere twenty years ago, or even ten years ago. The second way of improving ROI—lowering the cost of each unit sold—is in fact the great efficiency engine of Neoliberalism from which we have all benefitted. Efficiency and progress is a byproduct of Neoliberalism’s pursuit of ROI—and a very welcome one at that.

But to apply the Neoliberalist Paradigm to all facets of our lives and our society is creating the mess we have today.

Look at how our government is being bilked—because the Neoliberalist Paradigm is not “efficient”: It’s just looking to maximize ROI, that’s all. Contractors, when selling to the government, will maximize their ROI not by being “efficient”, but by selling more to the government. And if they can’t sell more to the government, then they will sell more expensively: $250 hammers, trillion-dollar planes—whatever it takes to maximize ROI. Thus why private contractors are being rational per the Neoliberalist Paradigm—and thus why private contractors are a complete disaster when working for the government, ultimately forcing us taxpayers to foot the bill for these “efficiencies”.

Likewise with other industries, and other sectors of our society: The Neoliberal Paradigm is being implemented where it has no business being implemented. And far from improving our lives, it is making our society more inefficient.

Consider health care, and the example of Mish Shedlock: ROI is being relentlessly pursued by all the participants in the disastrous American health care system. Insurers, Big Pharma, doctors, the big health care providers: If you analyze each and every one of the participants in the health care nightmare, as I analyzed Dr. G. above, you will find that each and every one of them is rationally chasing ROI—and the result is a complete mess. For obvious political reasons—if only to prove that they are tryin
g to help people—the government is (inefficiently, ineffectively) sticking its nose in this tussle, creating even more inefficiencies, ultimately hurting the people even more.

I wrote about the results of the health care inefficiencies brought about by the Neoliberal Economic Paradigm here. It pissed off a lot of people, but no one refuted the data. The data can’t be refuted because it’s true. The data shows how the health care nightmare actively hurts the American people.

Apart from government and health care, the Neoliberal Economic Paradigm is being aplied to all sectors of our society—and its effects have been the same: High ROI which benefits the few, while destroying industries which benefit us all.

After all, it was the Neoliberal Economic Paradigm which destroyed American industry, in the guise of “globalization”.

It sounded so wonderful—“globalization” this and “globalization” that—but what it ultimately was was closing American factories and exporting manufacturing jobs for the sake of improving ROI, and leaving the American economy a hollow shell.

The whole point of “globalization” was the improvement of ROI by way of reducing capital, and/or reducing production costs. How was capital reduced and production costs lowered? By closing factories in America, and exporting whole industries to Third World and developing countries so as to exploit the cheap labor there.

Today, there is no healthy civilian manufacturing in America. The only heavy industries that are thriving are the defense industries—which by law have to be in America. All other manufacturing jobs? Gone—globalization took ‘em all. The third driver of ROI maximization took ‘em away. The only jobs left for the American working classes are low-paying, low-skill service-related occupations—especially health care.

This shit’s still going on, by the way: It’s no accident that the last five years have experienced anemic—not to say non-existent—growth. Profits? Oh they’re up—just ask the banksters or the health care industry. They’re ROI has been outstanding, as they cut and cut and cut costs—jobs. Outstanding last five years.

But real, honest-to-goodness, meat-and-potatoes growth?

Crickets.

There won’t be any real growth in America—not if we continue indiscriminately applying the Neoliberal Economic Paradigm. We have to realize that Neoliberalism is a tool—just like a lever, a gun, or a power drill: A great tool, but highly specialized, useful for only certain tasks, and very dangerous if misapplied to all tasks.

Just in case it needs mentioning, economically, I’m a die-hard, hard-core conservative. Anti-bailouts, anti-progressive tax, anti-government subsidies, anti-targeted tax breaks, anti-free trade agreements—and as to the banks, fuck ‘em if they go broke: Arrest every last motherfucking one of the banksters’ sorry asses if they lose so much as a penny of depositors’ money. (As to social conservative issues, I’m cheerfully to the right of Attila the Hun: Anti-abortion, anti-gay rights, anti-affimative action. The only big social issue with which I differ from my conservative brethren is the death penalty, of which I have written about here; and I’m not opposed to the death penalty on principle, but rather in practice.)

Yet I recognize that the profit motive cannot be the only motive for a thriving, healthy society. In fact, the profit motive should be a subordinate goal, both for individuals and for society as a whole.

For individuals, satisfaction and happiness in life ought to be achieved through personal relationships, leisure, and work—not merely money. Money ought to be the byproduct of work, not the end in itself.

For a society, industries should be harnessed for the common good, not let loose like wild horses, fingers crossed and hoping for the best. Wild horses cannot pull a stagecoach—they might have the energy, but they certainly do not have the organization. This isn’t to say we should have managed industries—but we most definitely should have a coherent industrial policy, whose aim is to provide us with goals that we as a society can all agree upon.

As a conservative—as someone looking to live in a stable society with a reduced government, where extreme poverty is anathema, and yet where anyone can achieve their maximum potential irrespective of their birth or station—we should be reëvaluating our common good. Reëvaluating those things which Americans all agree are important, and worth protecting: Freedom of speech, freedom of worship, freedom from fear, freedom from want.

Unrestricted Neoliberalism is hollowing out the United States. We have a chance to turn it around—but we as a nation have to wake up to what Neoliberalism is, and is not: It’s a great tool—but it is not and cannot be an end in itself, and it cannot be applied to every situation.

If we do not put the reins on Neoliberalism—and put those reins on soon—then we as a society are doomed. And it will be reflected first in our economy—as we are seeing now.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wXdeiM4TVLQ/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

“Step right up and try your luck…spin the wheel and watch where she lands…everybody’s a winner” – sometimes if you listen hard enough you can almost hear the Carney coaxing unwary investors to step up and try their luck in a game that has been rigged against them.  During the last two decades, I have been amazed to watch as individuals strolled through the doors of the Wall Street casino to try their luck by betting “against the house” for a dream of riches.   Just as with anyone who has ever gone to Vegas – you will win sometimes but the “house” wins most of the time.

However, there are always the “professional gamblers” that can do better than the average most of the time.  Why?  Because they understand “risk” in its various forms.   Most amateurs tend to bet on most hands.  They take speculative positions where the odds of success are stacked against them, or try to bluff their way through a losing hand.  Professionals play cold, calculated and unemotional.  The professional gambler understands the odds of success of every play and measures his “bets” accordingly.   He knows when to be “all in” and when to fold and walk away.   Do they succeed all the time? Of course not.  However, by understanding how to limit losses they survive long enough to come out a winner over time.

There are 10 lessons that can be learned from being a good poker player.

1) You need an edge

As Peter Lynch offers:

“Investing without research is like playing stud poker and never looking at the cards.”

He’s absolutely right; it is a clear parallel to how successful poker players operate as people who play cards for a living sit only at tables where the other participants are less sober, more emotional, or less expert. The financial markets are a very large table, and it is your job to take advantage of those that are far too emotional to make “sober” decisions, or perhaps just not informed enough to be comfortable accepting them.

2) Develop expertise in more than one area

In the financial markets the difference between winning occasionally or consistently is the ability to adapt to the changing market environments.  There is no one investment style that is in favor every single year – which is why those that chase last years performing mutual funds are generally the least successful investors over a 10 and 20 year period.  Flexibility is the cornerstone of long term investing success and investors that are unwilling to adapt and change are doomed to extinction – much like the dinosaur.  Having a methodology that acts as an operating system where all types of applications can be used will separate you from the weak players and allow you to capitalize on their mistakes.

3) Figure out why people are betting against you.

In essence, if there is one thing that we must always remember, and keep with us daily, is that basically “we know nothing”. Sure, there are some things we can determine like what a particular company’s business is today, what they most likely will do in the coming months, and whether the price of its stock is trending higher or lower. However, in the grand scheme of things, we don’t know much as we are closer to knowing nothing than to knowing everything, so let’s just round down and be done with it.  

All we really know is what “IS” and all we can really do is create and implement a plan that will deal with what “IS” and protect us from what “Might Be”. Most investors can not accept, or comprehend, the concept where a companies earnings are rising but the price of the stock is falling.  It is at this point the realization of what is “unknown” is critically important. 

We must always remember that there is someone on the other side of every trade, for every seller there must be a buyer. If there is not, the price will fall until one is found, that’s simple supply and demand, but don’t assume the person on the other side of the transaction is any more or less informed than you. You have your reasons to buy, they have their reasons to sell, technical analysis is simply a way of recording the overall battle of those willing to sell versus those willing to buy. In poker, you may see a few aces in your hand and think that now is the time to bet it all, but there is often a calculated reason for the guy across the table to match your bets. In poker it is called “checking,” in investing it is called “hedging,” but both are simply forms of risk management.

Don’t assume you are the smartest person at the table, when stocks meet your objectives, be willing to trim, when they begin to break down, begin to become defensive, when your reasons for buying have changed and no longer exist, be willing call it a day and remove your risk.

4) When you have the best of it – make the most of it.

In a game of “Texas Hold’um” when the right hand comes along you can be “all in” and bet it all.   The risk with this, of course, is that if another player “calls” you and you lose – your busted.   In investing when you have the right set of environmental ingredients in your favor such as an extreme oversold market condition, panic and fear from investors, deep discounts in valuations, etc. those are times to invest more heavily into equities as the “risk” of loss is outweighed by the potential for reward because the “hand” you are holding is a strong one. 

The single biggest mistake that investors make today is they continue to be “all in” on every hand regardless of market conditions.  “Risk” is only a function of how much money you will lose “when”, not “if”, you are wrong.

5) It often pays to pass; and 6) Know when to quit and cash in your chips

Kenny Rogers summed this up best: 

“If you’re gonna play the game, boy…You gotta learn to play it right – You’ve got to know when to hold ’em. Know when to fold ’em. Know when to walk away.  Know when to run. You never count your money when you’re sittin’ at the table.  There’ll be time enough for countin’ when the dealin’s done.

Now every gambler knows the secret to survivin’ – Is knowin’ what to throw away and knowin’ what to keep.  ‘Cause every hand’s a winner and every hand’s a loser and the best you can hope for is to die in the sleep”.

This is the hardest thing for individuals to do.   Your portfolio is your “hand”.   There are times that you have to get rid of bad cards (losing positions) and replace them with hopefully better ones.   However, even that may not be enough as there are times that things are just working against you in general and it is time to walk away from the table.   This is why using some measure of risk management in your portfolio is critical to long term success.   Most people do the opposite of what they should due to emotional biases – the sell when they should buy, the hold onto losing positions hoping they will come back, they double down on losing positions, they sell winning positions too soon and many more mistakes that are almost all entirely driven by emotion rather than logic.  Emotional players ALWAYS lose in gambling and investing.  

The error that most investors make is that they are playing poker without a hand of cards. Since most investors buy investments, because of what they read in a newspaper, saw on television or heard about on the radio, they have effectively “anted” up for the game. They then basically walk away from the table and begin to hope that the hand they were dealt is the winning hand – this is the basis of the “buy & hold” strategy.

A good investor must develop a risk management philosophy (a sell discipline) and combine that with a set of tools to implement a successful investment strategy.  The odds of success can be substantially increased by removing the emotional biases that drive most investment decisions.  Being well disciplined within an investment strategy, just as a professional poker player is disciplined in his game, allows you to act and react successful to a fluid and changing investment landscape.   Sell signals, trend changes, pre-determined exit strategies, etc. will give you the chance to fold before losses mount.

7) Know your strengths AND your weaknesses & 8) When you can’t focus 100% on the task at hand – take a break.

Two-time World Series of Poker winner Doyle Brunson joked a bit about his book “Super/System,” of which he had thrown around two alternative ideas for titles before going with “Super/System“. The first of which was “How I made over $1,000,000 Playing Poker,” and the second equally accurate idea was, “How I lost over $1,000,000 playing Golf.“

The larger point here is that invariably there will be things in life that you are good at, and there will be things out there that you are much better paying someone else to do. Many investors believe that they can manage their money effectively on their own – and they are most likely right – as long as we are in a cyclical or secular bull market. Of course, this idea is equivalent to being the only person seated at a blackjack table and the dealers cards are all face up. You might still lose a hand now and then – but most likely you are going to win.

Me, I would love to be a graphic artist, but until pie charts and analytical tables come into vogue as contemporary art it is unlikely I will be able to fund my retirement by doing it. However, just because my emotions tell me I want to be an artist doesn’t mean that I will be good at it. So, for the time being, I will leave it to others that have a penchant for paint. (But if you are interested in a pie chart for your living room let me know…)

Emotion causes us to attach significance to things that have little influence on whether a trade works out or not. Short-term traders often rely on a narrow statistical advantage in their methodology that allows them to be profitable over time. Emotions will deter this and over time have caused countless trading debacles, some of which ended in large hedge funds causing near-currency collapses. And that’s only looking at the Nobel Laureates.

Tom Dorsey wrote;

“Consider this, if someone offered to flip a coin for you and offers you a better payout on heads than tails, the only logical bet would be on heads. So there is only one decision, logically, but emotion may cause you to remember that the last time you took heads was in the 1958 NFL Championship game at Yankee stadium. You were with the Giants and called for heads in the overtime session, losing not only the coin toss, but also the game, eventually, to Johnny Unitas and the Colts.

That decision may be one you will remember for the rest of your life, but it isn’t one that will have any impact on the bet at hand. Nonetheless, we are all human and all susceptible to these types of thoughts, just some more than others.”

That is why there are so few successful poker players in the world but so many people willing to fund the Las Vegas strip. Most people are more than willing to take a risk with their money in the hopes of hitting the jackpot, the dream of being rich has been embedded in us since birth, how
ever, very few investors have any idea of the “possibilities” of success versus the overwhelming “probabilities” of failure. Therefore, as in my case, I can’t paint, therefore, I understand that there is a huge probability that I will not be successful as an artist versus the slim hope (possibility) that people will flock to my door wanting 8 ½ X 11 framed pie charts. (Readily available at our website)

If you are not successful at managing your money over the long term, you will wind up losing money as roughly 80% of all investors do. It is better to be honest with yourself and begin an approach to increase your probabilities of success.   There are literally thousands of articles, research reports, contradicting opinions, radio programs, television shows, etc. – how are you supposed to determine what’s important and what’s not – that is the difference between a professional poker player and everyone else. In a blink of an eye, the professional can read the table and make a determination as to whether it’s time to “hold’em” or “fold’em”.

9) Be patient

Patience is hard.  Most investors want immediate gratification when they make an investment.   However, real investments can take years to produce their real results, sometimes, even decades.  More importantly, just like in playing poker, you are not going to win every hand and there are going to be times that nothing seems to be “going your way”. 

No investment discipline works ALL of the time.   However, it is sticking with your discipline and remaining patient, provided it is a sound discipline to start with, that will ultimately lead to long term success.   I remember in the late 1990’s the media equated investing with Warren Buffet to driving “Dad’s old Pontiac” as Warren didn’t embrace new technology.   He didn’t embrace new technology because he didn’t understand and valuations on those companies made no sense to him.   He stuck with his discipline even though he was grossly under performing the market.   Eventually, his discipline paid off because it was a sound investment discipline to begin with and he was patient to allow it to work for him over time.

10) Examine your motivation for playing.

Why are you trying to manage your own money? Is it that you love doing it? Is it the “thrill of the chase and the agony of defeat” syndrome? Or, did you just think that is what you are supposed to do?   It’s a fair question, you’ve probably been asked it before, you’ve probably even got a well thought out answer. However, the real question that you need to ask yourself is “Am I successful at managing the future of my family and my retirement?”

“To a real player, gambling is only a certain part of what happens at casinos or at the track. Gamblers (or average investors) are people who either don’t know what they are doing, or like to bet against the odds. Good poker players (and good investment advisors), like good horse players, search for value. They leverage advantage. They look for small truths and they hope other people (competitors) don’t notice. They manage risk, and expect rewards for playing well. They like the sport. They like knowing. Call these people craftsmen. Don’t call them gamblers.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6a3g6JXvV9w/story01.htm Tyler Durden

Although the probability of any one of the predictions coming true is low, they are deduced strategically by Saxo Bank analysts based on a feasible – if unlikely – series of market and political events. As Saxo’s chief economist notes, “This isn’t meant to be a pessimistic outlook. This is about critical events that could lead to change – hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented.”

 

These Outrageous Predictions are not Saxo Bank’s official calls for 2014, but rather an exercise in feeling out the major risks to capital preservation, and intended to encourage investors to prepare for the worst case scenario before trading or investing…

Saxo Bank’s Outrageous Predictions 2014

1. EU wealth tax heralds return of Soviet-style economy

Panicking at deflation and lack of growth, the EU Commission will impose wealth taxes for anyone with savings in excess of USD or EUR 100,000 in the name of removing inequality and to secure sufficient funds to create a “crisis buffer”. It will be the final move towards a totalitarian European state and the low point for individual and property rights. The obvious trade is to buy hard assets and sell inflated intangible assets.

2. Anti-EU alliance will become the largest group in parliament

Following the European Parliamentary elections in May, a pan-European, anti-EU transnational alliance will become the largest group in parliament. The new European Parliament chooses an anti-EU chairman and the European heads of state and government fail to pick a president of the European Commission, sending Europe back into political and economic turmoil.

3. Tech’s ‘Fat Five’ wake up to a nasty hangover in 2014

While the US information technology sector is trading about 15 percent below the current S&P 500 valuation, a small group of technology stocks are trading at a huge premium of about 700 percent above market valuation. These ‘fat five’ – Amazon, Netflix, Twitter, Pandora Media and Yelp – present a new bubble within an old bubble thanks to investors oversubscribing to rare growth scenarios in the aftermath of the financial crisis.

4. Desperate BoJ to delete government debt after USDJPY goes below 80

In 2014, the global recovery runs out of gas, sending risk assets down and forcing investors back into the yen with USDJPY dropping below 80. In desperation, the Bank of Japan simply deletes all of its government debt securities, a simple but untested accounting trick and the outcome of which will see a nerve-wracking journey into complete uncertainty and potentially a disaster with unknown side effects.

5. US deflation: coming to a town near you

Although indicators may suggest that the US economy is stronger, the housing market remains fragile and wage growth remains non-existent. With Congress scheduled to perform Act II of its “how to disrupt the US economy” charade in January, investment, employment and consumer confidence will once again suffer. This will push inflation down, not up, next year, and deflation will again top the FOMC agenda.

6. Quantitative easing goes all-in on mortgages

Quantitative easing in the US has pushed interest expenses down and sent risky assets to the moon, creating an artificial sense of improvement in the economy. Grave challenges remain, particularly for the housing market which is effectively on life support. The FOMC will therefore go all-in on mortgages in 2014, transforming QE3 to a 100 percent mortgage bond purchase programme and – far from tapering – will increase the scope of the programme to more than USD 100bn per month.

7. Brent crude drops to USD 80/barrel as producers fail to respond

The global market will become awash with oil thanks to rising production from non-conventional methods and increased Saudi Arabian ouput. For the first time in years hedge funds will build a major short position, helping to drive Brent crude oil down to USD 80/barrel. Once producers finally get around to reducing production, oil will respond with a strong bounce and the industry will conclude that high prices are not a foregone conclusion.

8. Germany in recession

Germany’s sustained outperformance will end in 2014, disappointing consensus. Years of excess thrift in Germany has seen even the US turn on the euro area’s largest economy and a coordinated plan by other key economies to reduce the excessive trade surplus cannot be ruled out. Add to this falling energy prices in the US, which induce German companies to move production to the West; lower competitiveness due to rising real wages; potential demands from the SPD, the new coalition partner, to improve the well-being of the lower and middle classes in Germany; and an emerging China that will focus more on domestic consumption following its recent Third Plenum.

9. CAC 40 drops 40% on French malaise

Equities will hit a wall and tumble sharply on the realisation that the only driver for the market is the greater fool theory. Meanwhile, the malaise in France only deepens under the mismanagement of the Hollande government. Housing prices, which never really corrected after the crisis, execute a swan dive, pummeling consumption and confidence. The CAC 40 Index falls by more than 40 percent from its 2013 highs by the end of the year as investors head for the exit.

10. ‘Fragile Five’ to fall 25% against the USD

The expected tapering of quantitative easing in the US will lead to higher marginal costs of capital from rising interest rates. This will leave countries with expanding current account deficits exposed to a deteriorating risk appetite on the part of global investors, which could ultimately force a move lower in their currencies, especially against the US dollar. We have put five countries into this category – Brazil, India, South Africa, Indonesia and Turkey.

Full article – with details here…

TF OutrageousPredictions 2014

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

Although the probability of any one of the predictions coming true is low, they are deduced strategically by Saxo Bank analysts based on a feasible – if unlikely – series of market and political events. As Saxo’s chief economist notes, “This isn’t meant to be a pessimistic outlook. This is about critical events that could lead to change – hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented.”

 

These Outrageous Predictions are not Saxo Bank’s official calls for 2014, but rather an exercise in feeling out the major risks to capital preservation, and intended to encourage investors to prepare for the worst case scenario before trading or investing…

Saxo Bank’s Outrageous Predictions 2014

1. EU wealth tax heralds return of Soviet-style economy

Panicking at deflation and lack of growth, the EU Commission will impose wealth taxes for anyone with savings in excess of USD or EUR 100,000 in the name of removing inequality and to secure sufficient funds to create a “crisis buffer”. It will be the final move towards a totalitarian European state and the low point for individual and property rights. The obvious trade is to buy hard assets and sell inflated intangible assets.

2. Anti-EU alliance will become the largest group in parliament

Following the European Parliamentary elections in May, a pan-European, anti-EU transnational alliance will become the largest group in parliament. The new European Parliament chooses an anti-EU chairman and the European heads of state and government fail to pick a president of the European Commission, sending Europe back into political and economic turmoil.

3. Tech’s ‘Fat Five’ wake up to a nasty hangover in 2014

While the US information technology sector is trading about 15 percent below the current S&P 500 valuation, a small group of technology stocks are trading at a huge premium of about 700 percent above market valuation. These ‘fat five’ – Amazon, Netflix, Twitter, Pandora Media and Yelp – present a new bubble within an old bubble thanks to investors oversubscribing to rare growth scenarios in the aftermath of the financial crisis.

4. Desperate BoJ to delete government debt after USDJPY goes below 80

In 2014, the global recovery runs out of gas, sending risk assets down and forcing investors back into the yen with USDJPY dropping below 80. In desperation, the Bank of Japan simply deletes all of its government debt securities, a simple but untested accounting trick and the outcome of which will see a nerve-wracking journey into complete uncertainty and potentially a disaster with unknown side effects.

5. US deflation: coming to a town near you

Although indicators may suggest that the US economy is stronger, the housing market remains fragile and wage growth remains non-existent. With Congress scheduled to perform Act II of its “how to disrupt the US economy” charade in January, investment, employment and consumer confidence will once again suffer. This will push inflation down, not up, next year, and deflation will again top the FOMC agenda.

6. Quantitative easing goes all-in on mortgages

Quantitative easing in the US has pushed interest expenses down and sent risky assets to the moon, creating an artificial sense of improvement in the economy. Grave challenges remain, particularly for the housing market which is effectively on life support. The FOMC will therefore go all-in on mortgages in 2014, transforming QE3 to a 100 percent mortgage bond purchase programme and – far from tapering – will increase the scope of the programme to more than USD 100bn per month.

7. Brent crude drops to USD 80/barrel as producers fail to respond

The global market will become awash with oil thanks to rising production from non-conventional methods and increased Saudi Arabian ouput. For the first time in years hedge funds will build a major short position, helping to drive Brent crude oil down to USD 80/barrel. Once producers finally get around to reducing production, oil will respond with a strong bounce and the industry will conclude that high prices are not a foregone conclusion.

8. Germany in recession

Germany’s sustained outperformance will end in 2014, disappointing consensus. Years of excess thrift in Germany has seen even the US turn on the euro area’s largest economy and a coordinated plan by other key economies to reduce the excessive trade surplus cannot be ruled out. Add to this falling energy prices in the US, which induce German companies to move production to the West; lower competitiveness due to rising real wages; potential demands from the SPD, the new coalition partner, to improve the well-being of the lower and middle classes in Germany; and an emerging China that will focus more on domestic consumption following its recent Third Plenum.

9. CAC 40 drops 40% on French malaise

Equities will hit a wall and tumble sharply on the realisation that the only driver for the market is the greater fool theory. Meanwhile, the malaise in France only deepens under the mismanagement of the Hollande government. Housing prices, which never really corrected after the crisis, execute a swan dive, pummeling consumption and confidence. The CAC 40 Index falls by more than 40 percent from its 2013 highs by the end of the year as investors head for the exit.

10. ‘Fragile Five’ to fall 25% against the USD

The expected tapering of quantitative easing in the US will lead to higher marginal costs of capital from rising interest rates. This will leave countries with expanding current account deficits exposed to a deteriorating risk appetite on the part of global investors, which could ultimately force a move lower in their currencies, especially against the US dollar. We have put five countries into this category – Brazil, India, South Africa, Indonesia and Turkey.

Full article – with details here…

TF OutrageousPredictions 2014

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

Submitted by Charles Hugh Smith from Of Two Minds

Do We Even Need a Banking Sector? Not Any More
 

An automated banking utility has no need for parasitic bankers or politicos or indeed, a central bank.

Do we need a banking sector dominated by politically untouchable “Too Big to Fail” (TBTF) banks? Thanks to fast-advancing technology, the answer is a resounding no. Not only do we not need a banking sector, we would be immensely better off were the banking sector to wither and vanish from the face of the Earth, along with its parasitic class of political enablers, toadies and Federal Reserve apparatchiks.

The key to understanding why big banks have outlived their purpose is to grasp the implications of computing power, self-organizing networks and crowdsourcing. Banks came into existence to manage the accumulation of capital (savings) and distribute the capital to borrowers in a prudent manner that minimized risk and still yielded a return for savers and the bank’s investors/owners.

Back in the pre-computer era, the record-keeping and risk management processes of these two core functions required a complex bureaucracy and a concentration of accounting skills and lending experience. The costs of operating this record-keeping and risk management bureaucracy was high, and these costs justified the bank’s fees and interest rate spread. In an idealized scenario, a bank might pay depositors 3% annual yield on their savings and charge borrowers 5%. The 2% spread was the bank’s to keep for performing the accounting, collection and risk management functions.

Today, computers running scripts/programs can perform these functions with minimal human oversight and at very low cost. The tracking and recording of millions of transactions and accounts no longer requires thousands of clerks and a large institutional bureaucracy; a relative handful of software engineers are all that’s needed to maintain these services, which are in effect a low-cost utility.

Risk management and lending are also computerized; the human interface of a banker is a bow to tradition, not necessity. Crowdsourced funding is entirely computerized: those with money/capital choose to join a pool of lenders who accept the risk of lending to an individual, household, project or enterprise for a specified return.

This process of aligning excess capital (savings) with borrowers is already automated. Is there a role for regulation? Absolutely: such a system requires transparency that can be trusted. Those who violate this trust with cooked-books, lies, misinformation, etc. must suffer negative, long-lasting consequences, starting with being banned from the system.

It is an abiding irony that the present banking system’s secret portfolios and processes (shadow banking, derivatives designed to fail and trigger profitable defaults, etc.) are considered core competitive advantages: in other words, eliminating transparency generates the highest-return bank profits.

And let’s not overlook the political consequences of these immense profits: a political and regulatory order that is easily captured to serve the interests of big banks. The number one agenda item is of course to arrange Central State protection of the most profitable (i.e. the least transparent) parts of the banking sector’s operations.

This lack of transparency distorts the financial market, rendering it systemically vulnerable to malinvestments and risky speculations and the financial crashes that result from these systemic distortions.

The other top agenda item for bank lobbyists is to arrange Central State/Federal Reserve subsidies of bank profits. These subsidies are also known as financial repression, as the Central State/Bank rigs interest rates and regulations to favor bank profits at the expense of both savers and borrowers.

Thanks to the Federal Reserve’s Zero Interest Rate Policy (ZIRP), savers have been robbed of hundreds of billions of dollars in income–money that has been effectively transferred to the banks by the State. This is why I call our system State-Cartel capitalism, as the State and cartels rule in a mutually beneficial marriage at the expense of the real economy, the citizenry and especially what’s left of the dwindling middle class.

Since the core functions of banks can now be performed by cheap processors and software, we can get rid of the entire parasitic banking sector, once and for all. But what about investment banking? That too can be automated. What about wealth management? In a world where index funds beat 96% of money managers over a long time-frame, that too can be automated.

But what about the tens of millions of dollars in campaign contributions politicos skim from the bankers? Now we finally reach the real reason why the parasitic banking sector is allowed to exist, even though it has outlived its purpose and value: the political class of parasites benefits immensely from the banking sector’s giant state-rigged skimming machine.

An automated banking utility has no need for parasitic bankers or politicos or indeed, a central bank. The only legitimate regulatory function of the state is to enforce transparency; beyond that, its actions are all subsidies of one sort or another of politically powerful constituencies at the expense of the real economy’s productive people, communities and enterprises.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ge5lWNT5Grg/story01.htm Tyler Durden