We are off on our first family holiday in five years. I am more excited than the kids. We will be gone a month and during that time almost entirely off the grid.
Before we go I wanted to say thank you – to all of you who come to the blog to read and think and sometimes to comment and add your thoughts. I know I have written painfully little and I am doubly grateful that you have stuck with it. Thank you to those of you who recommend articles here, to other blogs. Thank you to Jesse for picking the odd article and for highlighting articles over at Jesse’s Café Américain.
I also thought I would leave you with a scattering of thoughts.
How to deal a mortal blow to American power
There was recent announcement that the BRICS have agreed to launch a new Development bank with a $100 billion currency pool to aid countries with liquidity shortfalls. The major backer of the bank is China contributing $41 billion.
The bank will I have no doubt clear and settle certainly in Yuan and perhaps in Roubles. It will have good working relationships with Hong Kong.
Of more interest to me is that it will be headquartered in Shanghai.
It seems very clear that the Chinese and their economic allies in India and Russia as well as all the countries who are fellow travellers and variously disgruntled with Washington’s high handedness are aiming at increasingly by-passing the dollar. The raft of bilateral agreements to settle in Yuan or Roubles that have been signed between China, Russia, Australia, Iran, various South American countries and the EU all serve notice that the days of the dollar’s pre-eminence are now numbered.
Of course the reserve status of the dollar is important for how much debt the US can carry. But even if the Yuan and the euro begin to account for a far larger proportion of international settlement this does not eradicate the dollar’s importance nor its status. obviously the euro is aiming at being used to settle gas contracts and possibly some oil contracts. If America continues to piss off Iraq’s new dictators then they could well decide to settle their contracts in euros or roubles or Yuan.
But I think there are two further important step to watch for. One is to do with banks, the other with courts.
The other half of the power the dollar gives America is that settlement of contracts in dollars means every nation has large dollar accounts which it uses to settle accounts and pay debts. These accounts are held in the small number of global Custodial banks. I think, from memory there are about 4 majors and they are all American: Citi, JPMorgan Chase, Bank of NY Mellon, State Street. These banks house trillions and are one of the choke points used by international lawyers.
When Washington wants to enforce its will on a nation or when American vulture funds want to sue a crippled debtor the Custodial banks are the choke point they use. When Elliott Associates wanted to sue Argentina they did so by taking the Custodial banks that held Argentina’s money, to court and got those banks to freeze Argentina’s accounts. So the first thing I am waiting for is for the emergence of a non-American, Asian or at least Asian based bank to become a major Custodial bank.
The second thing I am looking out for is for that bank to be based NOT in NY. The bank cannot be based in NY because if it was then it would be subject to American law and specifically it would come under the jurisdiction of Wall Street’s ( and therefore Washington’s) court, which is the Southern District Court of Manhattan. Where you will find the lovely and completely independent Judge Griesa.
Griesa is Wall Street’s hanging judge. And his last judgement against Argentina and in favour of the Vultures was upheld by the US supreme court. That decision meant that Argentina will now be crippled with copy-cat appeals for payment from bond holders who had previously agreed to accept a lower settlement. More than that the judgement deals a huge blow to sovereignty in general setting a powerful precedent against any idea of sovereigns having the ability to protect themselves in bankruptcy. A protection that the private companies, including vulture funds themselves DO ENJOY. The ruling rules in favour of one strand of international law – the strand which greatly favours private capital and ignores the other older strand such as the Calvo doctrine) which gives pre-eminence to sovereign not private rights.
America is the home of vulture funds and houses the court that rules in their favour. Those courts ruling over those banks is a major part of the projection of American power abroad. Set up a non-american bank to house those funds, and put it in a non American jurisdiction where American courts and Washington’s political power is not served and America will have been dealt an entirely peaceful but crippling blow.
So the choice of Shanghai for eth new bank is interesting. There is little attraction in avoiding American political power if you saddle yourself with another equally aggressive power such as China. So what is needed is a place beyond Washington’s reach but also not tied to closely to either China or Russia. Who would want a custodial bank subject to courts in Moscow or Beijing? Shanghai is a good place. It is less tied to Chinese banking interests than Hong Kong but still protected from America the way that Singapore, for example, might not be.
If you want to cripple American ability to enforce its will on other nations setting up a major Custodial bank outside of Manhattan would be a very good step. The steps taken so far – increasingly by-passing the dollar when settling international accounts in favour of euros or Yuan followed by setting up a lending facility for nations in trouble that is not in dollars, avoids dollar accounts in American banks and is not controlled by the IMF are all the necessary steps which lead up to breaking the stranglehold of American custodial banks and the court which rules them.
I shall be watching.
Next a small question I have been thinking about -
What do the stock or bond markets measure?
Once upon a time, in the fabled era of ”buy and hold” when blue chip companies made stuff which people bought, stocks were thought to be a measure of the likely future profitability of the company that issued them. While bonds were the sedate grazing ground of what were then still just the gentle benthic giants of the financial world, the pension companies and banks.
Then something changed. In fact almost everything changed.
As Zerohedge reported, the deputy chair of the Monetary Authority of Singapore (Lim Hng Kiang) said last night at a dinner that “an uneasy calm seems to have settled in markets” and that “we remain in uncharted waters.”
The way stocks and bonds continue to levitate no matter what the news has been a strange factor of our ‘recovery’. There are so many indicators which all point down that the upward march of the stock valuations is odd. GDP has not rebounded anywhere, to any degree sufficient to warrant the Dow at 17000. Even the market cheerleaders admit the recovery has not brought with it employment other than a huge increase in part-time and low paid jobs. So what are the stock movements tracking or reflecting? It seems to me they no longer reflect any economic fundamentals but instead political ones. Of course the political was always a part of what the markets noticed. But in the past the political was a smaller part and the economic profitability of the company in question or eth market in general was the larger part. Today the health and viability of the entire market and the companies who float in it are entirely dependent on political fiat and power. Today the stock markets are a measure, I think, of the perceived grip of the global over-class on the levers of political control. Bad economic news hits, but what counts is not that news, but the market’s estimation of what that news might do to the ability of those in power to maintain their grip on power.
The dynamic is news hits, and the market looks to see how destabilizing that news might be to the political status quo. The questions are all political. Will loose money continue? Will lobbying for further loosening of not-yet-even-in-place regulations continue? Is the will to replace national regulation ( which is far too close to democratic review) with international agreements like the TPP and TTIP and best of all TISA still ascendant? If the news does nothing to derail the political underpinnings of the present golden era then no news is bad news. If you allow any of the above then the stock and bond markets are a measure of political control. The market measures the global overclass’s belief in their own grip on power.
To me it makes complete sense to see unemployment remain high, austerity cutbacks eviscerate public services and the gap between the have-it-alls and the have-nothings to grin wider and wider and yet have the stock markets rise and rise as everything were fixed. Because what the market indices are measuring is the fix.
The Dow is a measure of political control not economic health.
What will sustain it?
It’s all very well watching the global overclass congratulate themselves on their own omnipotence but what will sustain their powdered and gilded society next? Like everything else in their world even their time is borrowed.
They gorged on bail outs and then when that caused too much political grief they moved on to cheap central bank money (superlow interest rates and hundreds of billions in bond buying) as a substitute. Same money, same junkie fix, just a different means of delivery. But now what?
All that money has allowed three things, M&A’s and junk bonds and buy-backs. M&A are always talked about in terms of ‘synergies’ and creating behemoths and market leaders etc. But what are they really? I suggest M&A’s are better seen as cannibalism. A room-full of spiders with nothing to eat but each other. Eventually they must consume each. For a while the victors in the grisly struggle are plump and flush. But as time goes by they each need larger and larger prey just to survive and there are fewer and fewer of them. At some point even the survivors will starve. M&A is a familiar phase in a market end game.
Buy Backs are when a company uses cash to buy back its own debt when that debt is cheap. The company spends its money on reducing its debt so it can say look at me I have low debt and must therefore be healthy and not at risk of not being able to service my debt. Of course the down side is the company is spending all its money on the sterile exercise of reducing its debt burden rather than on R&D or on capital investment in production. It is akin to drinking your own piss instead of looking for water.
And junk bonds. High risk, high yield bonds. The same regime of easy monetary policy/low interest rates which is keeping the financial sector alive ( high rates would kill them and they know it) but those low rates mean it is also impossible to get a rerun on an investment. So how do you get those bonus getting returns? the answer is to look for risky assets, risky loans which do give a good return.
Easy money makes junk bonds desirable and also makes them work – for a while. The Banks want junk. The growth in junk bond issuance has been spectacular because the banks and pension funds ( devious routes)n and ETF funds (who are the banks in another guise) want the return they promise. But easy money also means the banks who buy the bonds with one hand, can lend to those junk companies and ensure their junk bonds don’t default. Neat trick. Till the market turns then the hand that lends closes and the companies can’t roll their debt from one loan to a new one which means they default on their junk bonds. Which makes those bonds crash. So many of those bonds are now sitting in the ETF market that that market will transmit the shock wave. And as I have argued in the articles I wrote about ETF I don’t think the ETF market is resilient at all despite its claims. I think the ETF market will collapse like Sub-prime did before it.But what do I know?
So what is next? What will keep the show going if loose money and the search for high yield have both been tapped out? I think the next phase is a push for deregulation. Higher leverage must be allowed again. Lower regulatory capital requirements is also a must. Both will be argued for. Lower Regulatory Capital can be achieved by allowing derivatives to be counted as regulatory capital. A major push for that particularly in America. And allowed much more freely as collateral at the FED and ECB.
What is government for?
The State is not the to serve the people. Those who currently control the state have come to believe the role of the state is to ‘help’ the ‘wealth creators’. The wealth creators are the 1%, the global overclass who have declared that they are th ones, the only ones who can create wealth. WIthout them we would all starve because we do not know how to create wealth. We, according to them, only know how to reach for hand-outs. And unless we are controlled by the state that is all we would do.
So the new job of the State according to the Wealth Creators, who just happen to be the 5% who own most of the financial assets of the world – the very same assets that were nearly wiped out in the crash but which were saved when we bailed them out resulting in their wealth increasing hugely while we were told we had to tighten our belts - is to manage the expectations of the public should they get restive about bailing out the banks or start to question why banks who launder money avoid taxes are too big to fail and too big to prosecute – and if that fails then manage their actions (with water cannon if necessary).
Finance is politics. Economics is war. Peace is imposed. Thought is monitored. And freedom ? Well freedom has gone underground.
See you when I get back. Hope you will forgive this run of loose thought.