The Big Picture

Spiegel: The Destructive Power of the Financial Markets
Marc Faber: S&P won’t surpass 2011 high of 1,370
Tuesday Afternoon Earthquake Reads
Stephen Roach: Consumers need debt jubilee
Twitter Facts and Figures
Bank of America Credit Spread: FUGLY
Swiss Climber scales mountains with just pickaxes!
Federal Reserve Emergency Loans: Liquidity for Banks
Rosie on Recession II
10 Tuesday AM Reads

Spiegel: The Destructive Power of the Financial Markets

Posted: 24 Aug 2011 02:09 AM PDT

Nasty article in Der Spiegel, Out of Control: The Destructive Power of the Financial Markets, which helps explain what's behind the financial transactions tax that was recently introduced by Angela Merkel and Nicolas Sarkozy. The article opens,

The enemy looks friendly and unpretentious. With his scuffed shoes and thinning gray hair, John Taylor resembles an elderly sociology professor. Books line the dark, floor-to-ceiling wooden shelves in his office in Manhattan, alongside a bust of Theodore Roosevelt and an antique telescope.

Taylor is the chairman and CEO of FX Concepts, a hedge fund that specializes in currency speculation. It's the largest hedge fund of its kind worldwide, which is why Taylor is held partly responsible for the crash of the euro. Critics accuse Taylor and others like him of having exacerbated the government crisis in Greece and accelerated the collapse in Ireland.

The vitriol for hedge fund types is ubiquitous, but there is also a some truth in the article, especially on regulatory issues. Swedish Finance Minister Anders Borg refers to people like Taylor as "like a pack of wolves." New York Governor Andrew Cuomo even gets into the mix as once likening short-sellers to "looters after a hurricane."

Here are some more money quotes from the piece, which is well worth your time:

- The truth is that the financial markets are controlling the politicians.

– The markets take advantage of every weakness and every rumor to speculate against one country after the next.

- Stock markets are currently in turmoil. Even the most experienced equity traders cannot remember a time when prices fluctuated as widely from day to day — and often even within a single day — as they have in recent weeks.

- But without the destructive power of the banks, hedge funds and other investment companies, the world would not be where it is today — at the edge of an abyss.

- Many things that happen on Wall Street and in London's financial district are "socially useless," says Lord Adair Turner, chairman of Britain's Financial Services Authority (FSA).

- Flassbeck believes that the crises in the globalized economy have "a common root, namely the inability of economists to correctly interpret the world."

-Of all people, it was an academic specializing in literary studies who managed to most accurately analyze the insanity of the financial markets and the impotence of economists.

- When Deutsche Börse decided to move from Frankfurt to the nearby town of Eschborn, the town saw a rapid increase in the demand for air-conditioned basement space, where so-called high-frequency traders, as well as banks, set up their state-of-the-art supercomputers.

- The traders at Deutsche Bank are apparently more clued into who holds Greece's government bonds than the Greeks themselves.

- Speculation has always existed in economic history, but never to such an extent as today.

- German Chancellor Angela Merkel knows that there is more at stake than the stability of the economy and overcoming a temporary weakness. "This type of crisis cannot be allowed to repeat itself in the foreseeable future," Merkel said, "otherwise it will be extremely difficult to guarantee political stability, and not only in Germany."

- Following the near-collapse of the markets, then-German President Horst Köhler characterized the financial markets as a "monster."

- Jochen Sanio, head of Germany's banking regulatory agency, believes it is highly likely that the next crisis will emanate from this largely unregulated realm of hedge funds and other financial players.

- When asked whether it is possible to make future crises unlikely, Hilmar Kopper, the former CEO of Deutsche Bank and current chairman of the supervisory board of HSH Nordbank, replies with a simple "no." According to Kopper, more huge financial bubbles could happen in the future.

Let's get ready to rumble!

(click here if charts are not observable)

Marc Faber: S&P won’t surpass 2011 high of 1,370

Posted: 23 Aug 2011 03:52 PM PDT

Marc Faber, publisher of the Gloom, Boom & Doom report, appeared on Bloomberg Television's "Street Smart" with Carol Massar and Matt Miller today.

Speaking from Sao Paolo, Brazil, Faber said that the S&P won’t surpass the 2011 high of 1,370 and that investors are “better off in equities than bonds.” Faber also said that keeping money in cash in 10-Years is a “disaster.”

~~~

Faber on whether this is the market rally he's been expecting:

“We had rally from the low on the ninth of August at 1,101 on the S&P to almost 1,200. Then we came right down again. Basically we did not make new lows. And now I think we can rally again for a while.”

Faber on how long his view of the market is:

"I think a lot of people will say the markets formed a double low and we have some technical indicators that are going to turn positive, so we could rally around 1,250, but as I said before, for me, we reached a high on May 2, 2011. 1,370 on the S&P–that we will not go through. My view is you have a lot of people with strategies that are very bullish. They have a yearend target of around 1,400-1,450 on the S&P. Then you have the super bear. I think both camps will be disappointed.”

On why the markets won't come back down again to the lows that were hit in 2009:

“On fundamentals one could make the case that we could go lower to around March 2009 lows at 666 on the S&P. But I think we have to be realistic that if the market dropped here another 10% or 15%, there would be for sure another quantitative easing move and other measures taken to support asset prices.”

On what we'll hear from Bernanke on Friday and whether there will be a selloff of Treasures after that:

“I think what [Bernanke] will say is that they are monitoring the situation, and they will take 'appropriate measures' when they are required. To some extent we are in midst of QE3 already, because by announcing the Fed will keep zero interest rates until the middle of 2013, they basically encourage financial institutions to borrow short-term and to buy 10-year Treasuries.”

On how uncertainty on a global level is affecting the markets:

“What I see extremely well is the stock market has traced out a major high between November of last year and June of this year and then fell sharply with very strong momentum and conviction very rapidly by close to 20%. I think that is a very important signal that we should not overlook. I think new highs are practically out of the question for the next six months to one year. We will likely move lower, but as I said, I do not think we will have a complete collapse.”

On why he's not more bearish:

“I agree with you. I am the greatest bear on earth, but if you compare Treasury bond yields and equities, equities look reasonably attractive. I think we will have zero and below zero interest rates for the next 10 years. In other words, inflation adjusted to keep money in cash. Finally, the mood is so negative right now as a contrarian, you do not take a huge short position when people are as bearish as they are right now and when insider buying has picked up as much. I am as bearish as the greatest bear is. It is just that I do not believe stocks will implode.”

On insider buying:

“The insider buying has picked up, but there is still a lot of insider selling. Compared to all the selling in the last six months the buying is relatively muted. The insiders in general are a group of people against whom I would not bet against necessarily. All I am saying is I am very bearish. I think we will have inflation. I think the Treasury market is a disaster waiting to happen. I think the economy will slow down. They're going to print money and we will go to war at some stage somewhere. So, you are probably better off in equities than in bonds. My favorite investment remains gold. As it happens the gold price is coming down, and I hope it will drop $100 or $200. Not necessarily a prediction. I think we will go down in a correction because there has been too much enthusiasm recently.”

Faber commenting on Gary Schilling’s bet against copper:

“I have known Gary Schilling since 1970 when we worked together. He has been a frequent bear about commodities and about copper. I happen to think copper is likely to come down, but I would not bet too heavily on it, because it takes a long time to bring on additional copper mines. Unless the Chinese economy collapses, the demand for copper will stay relatively high. If the Chinese economy collapses and Jim Chanos is right, then you want to be short not only copper, but short everything.”

Faber where the 10-Year will go:

“I would like to remind you that the 10-year has made a new low. [Gluskin Sheff economist] David Rosenberg was right and I was wrong. The 30-Year has not made a new low. The low in December 2008 was 2.53%. Now we’re around 3.4%. Basically we have an artificial market. The Fed has said we guarantee next to zero interest rates for the next two years. Banks and financial institutions are pouring into the 10-year because of the low rates at the present time. ”

# # #

Tuesday Afternoon Earthquake Reads

Posted: 23 Aug 2011 01:15 PM PDT

My afternoon reading material:

• A 'no-growth' boom will follow 2012 global crash (Market Watch)
• El-Erian Joins With Feldstein-Fels on Prospect of New Core Euro (Bloomberg) see also Spend Now, Save Later, Bond Fund Leaders Say (NYT)
• NY Fed Director Kathryn Wylde Provokes Accusations Of Conflict Of Interest (HuffPo)
• Investors Call for 4-Way Breakup of McGraw-Hill (Deal Book) see also S&P President to Step Down (Deal Book)
• Against "Japan-ification" (FT.com) see also Mistaken policy lessons from Japan? (Vox)
• The Rich Can Afford to Pay More Taxes (Economix)
• The Corruption of Darryl Issa: Regulator, Lawmaker and a Quandary (NYT)
• Tabloid’s Pursuit of Missing Girl Led to Its Own Demise (WSJ)
• Slip-Up in Chinese Military TV Show Reveals More Than Intended (The Epoch Times)
• Rick Perry's Scientific Campaign Method (NYT)

What are you reading?

Devastation from East Coast 5.9 Earthquake

Source: jmckinley’s posterous

Stephen Roach: Consumers need debt jubilee

Posted: 23 Aug 2011 12:00 PM PDT

Twitter Facts and Figures

Posted: 23 Aug 2011 11:30 AM PDT

Click To Enlarge Graphic:

Source:
Twitter Infographic,
Touch Agency

Bank of America Credit Spread: FUGLY

Posted: 23 Aug 2011 09:30 AM PDT

This is pretty damned FUGLY: Click for larger graphic

>
click for larger chart

Mark Gongloff explains the pain:

“In the credit-default swap market, spreads are wider across the board, meaning people are paying up for protection. The Markit investment-grade corporate debt index is 3 basis points wider. The index of European sovereign debt is 10 basis points wider. The index of European financials is also 10 basis points wider.”

Source:
Bank of America CDS Spread Nears Record As Credit Market Misses Rally Memo
Mark Gongloff
Marktbeat, August 23, 2011, 9:05 AM
http://blogs.wsj.com/marketbeat/2011/08/23/credit-misses-rally-memo-bank-of-america-cds-approaches-record/

Swiss Climber scales mountains with just pickaxes!

Posted: 23 Aug 2011 08:56 AM PDT

Federal Reserve Emergency Loans: Liquidity for Banks

Posted: 23 Aug 2011 08:43 AM PDT

Nice interactive graphic from Bloomberg regarding the Emergency loans made by the Fed (see yesterday’s discussion here).

Click for interactive graphic:

Source: The Fed's Secret Liquidity Lifelines,
Bloomberg

Rosie on Recession II

Posted: 23 Aug 2011 06:45 AM PDT

Overview on Rosenberg’s points from Reformed Broker:

* We are already in recession, and while this one may last awhile, there is no evidence to support claims that this recession will be as catastrophic as the one that began in 2007 (I’ve been saying this for a month now).

* Both gold and Treasurys have more room to run, but tactically-speaking, buyers should hold off at today’s prices as both are overdue for a short-term pullback.

* There’s no reason to be completely out of equities, but one should be underweight the amount of equities they’d own in a cyclical bull market, which this assuredly is not (this mirrors exactly what we’ve done with the stock weightings in the portfolios we’re managing).

* The equities you do own ought to be defensive in nature and not cyclical, they should have good earnings visibility and solid dividends (again, he may as well have been talking my book precisely).

* The best type of stimulus the government could do would be something tied to energy. Natural gas infrastructure build-out for example would put legions of Americans to work and could eventually lead to much lower energy prices for consumers leading to a higher amount of disposable income (long time readers are aware of my nat gas vehicle obsession).

10 Tuesday AM Reads

Posted: 23 Aug 2011 06:35 AM PDT

This is what I am reading this morning:

• Baby Boomers Selling Shares May Depress Stocks for Decades, Fed Paper Says (Bloomberg) see also Demographics and destiny, labour force and consumer spending edition (FT.com)
• FAQ’s about the “Great Depression” and the “Great Recession” (Northern Trust)
• Is the SEC Covering Up Wall Street Crimes? (Rolling Stone) see also The S.E.C.'s Document Destruction Problem (Deal Book)
• Analyst Estimates 10 Times Higher Than GDP in S&P 500 Rout (Bloomberg)
• A Sales Tax on Wall Street Transactions (Economix)
• Time for Bank of America to Get Out of the Dow? (WSJ) see also Bank Of America’s No-Good, Very Bad Enablers (Forbes)
• Size of Gold ‘Bubble’ Now an ‘Absurdity’: Analyst (CNBC)
• Checking in on market valuations (Abnormal Returns) see also Dow Transports Collapse = Recession Priced In (WSJ)
• What’s the better austerity: more cuts or more taxes? (Christian Science Monitor)
• Goldman CEO hires prominent defense lawyer (Reuters) see also Goldman's Shares Tumble as Blankfein Hires Top Lawyer (Deal Book)
• Do You Suffer From Decision Fatigue? (NY Mag)