Global Economics

[runawayjimbo]

So yesterday, I'm out at this festival getting saucy and, newly armed with some Einhorn knowledge, I went on a mini-rant about the Fed to this friend of mine and her coworker who I'd not met before... they both kind of looked at me like "what is this idiot blathering about?" Good times.

That's fucking awesome. And it gets to my point that word is (slowly) getting out. Even if they thought you were crazy, it's important that the message is heard and is gaining acceptance because of the obvious failures of "established" doctrine.
+k

[Hicks]

I'm fine with them raising interest rates. . .






















after I buy a house, k thnx bai.

[runawayjimbo]

I'm fine with them raising interest rates. . .


after I buy a house, k thnx bai.

Maybe no one person/group should have the awesome responsibility of dictating interest rates? Then you could always be assured that you would be getting the "right" rate.

[PIE-GUY]

I'm fine with them raising interest rates. . .






















after I buy a house, k thnx bai.

As a home-owner locked in at 4.0% for 30 years, I'll go ahead and say start raising rates any time!!

[runawayjimbo]

::insert Nelson Muntz "HA-HA" pic here::

http://www.bloomberg.com/news/2012-05-11/jpmorgan-loses-2-billion-as-mistakes-trounce-hedges.html

JPMorgan Loses $2 Billion as 'Mistakes' Trounce Hedges

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an "egregious" failure in a unit managing risks, jeopardizing Wall Street banks' efforts to loosen a federal ban on bets with their own money.

The firm's chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.

"There were many errors, sloppiness and bad judgment," Dimon said as the company's stock fell in extended trading. "These were egregious mistakes, they were self-inflicted."

The chief investment office was thrust into the debate over U.S. efforts to ban proprietary trading when Bloomberg News reported last month that the unit had taken bets so big that JPMorgan, the largest and most profitable U.S. bank, probably couldn't unwind them without losing money or roiling financial markets. Dimon, 56, had transformed the unit in recent years to make bigger and riskier speculative trades with the bank's money, five former employees said.

...

'Bunch of Pundits'

Yesterday, he said the timing of the trading blunders "plays right into the hands of a bunch of pundits out there" who are pushing for a strict version of the proprietary trading ban named for former Federal Reserve Chairman Paul Volcker.

Given Dimon's resistance to the ban and new regulations, "he's got a lot of egg on his face right now," said Craig Pirrong, a finance professor at the University of Houston. "Any chance they had of getting a relative loosening of Volcker rule, anything of that nature, that's out the window."

The chief investment office's push into risk-taking was led by Achilles Macris, 50, according to three former employees, Bloomberg News reported on April 13. He was hired in 2006 as its top executive in London and led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York-based bank, they said. Dimon closely supervised the transition from its previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

'Talented People'

"I wouldn't call it 'more aggressive,' I would call it 'better,'" Dimon told analysts yesterday. "We added different types of people, talented people and stuff like that." Until recently, they were careful and successful, he said.

"It's classic Wall Street hubris, which we've seen so many times before," said Simon Johnson, a former chief economist at the International Monetary Fund who now teaches at the Massachusetts Institute of Technology. "What's particularly ironic here is that Jamie presents himself, and is believed by others to be, the king of risk management."

Bloomberg News first reported April 5 that London-based JPMorgan trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market.

...

Sharks to Blood

"When there's blood in the water, the sharks are going to attack that animal," said Peabody, who downgraded his recommendation on the stock in March to sector perform. "It could make it very difficult for them to unwind a trade."


...

Credit Risks

Dimon declined on the call to discuss the specific transactions or people involved. Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt. JPMorgan used the instruments to hedge exposure on loans and other credit risks to corporations, banks and sovereign governments. The losses emerged after the firm tried to reduce that position and unwind the portfolio, Dimon said.

The bank said losses were partly offset by gains from the sales from its available-for-sale credit portfolio, resulting in a net loss for the firm's corporate division, which includes the CIO, of about $800 million after taxes. Dimon said losses could widen or narrow in coming weeks and months, and that he can't estimate potential costs.

...

"It's a major event that confirms a lot of investors' worst fears about bank risk," said Frank Partnoy, a former derivatives trader who's now a law and finance professor at the University of San Diego. Concern is "that at a large, supposedly sophisticated institution, even something called a 'hedge' can contain all kinds of hidden risks that the senior people don't understand."

...

Satyajit Das, the author of "Extreme Money: Masters of the Universe and the Cult of Risk," compared the publicity around JPMorgan's situation to losses that spiraled at hedge funds like Long-Term Capital Management in 1998 and Amaranth Advisors LLC in 2006.

"A $2 billion loss suggests a position of considerable size," Das said. "I think you remember LTCM and a few other people like Amaranth that have had the exact same problem and have learned it's a bit like hell -- easy to get into, not so easy to get out of."

[Guyute]

$2 billion and what really amounted to $800 million isn't as big as it sounds.    When you think about them having $1.8 trillion in assets and a net income of around $12billion, they won't even take a loss for the year on this.    Even the private bank has $250 billion under management.    This is just a blip that shouldn't be hard to recover.   Just the size of the $ amount sounds large to most people.

[runawayjimbo]

$2 billion and what really amounted to $800 million isn't as big as it sounds.    When you think about them having $1.8 trillion in assets and a net income of around $12billion, they won't even take a loss for the year on this.    Even the private bank has $250 billion under management.    This is just a blip that shouldn't be hard to recover.   Just the size of the $ amount sounds large to most people.

But it's not the ultimate size of the loss that matters (which will likely be closer to $4B; they still haven't closed out the position as far as I know). It's the insanity that an institution with the expressed full faith and credit of the US gov't can put almost their entire tangible book value in the hands of their prop trading desk. Now it's coming out that the CIO and the investment bank were marking trades using different prices. And St. Jaime either (a) intentionally mischaracterized the CIO as a risk management function so he could get around proposed rules that he was simultaneously lobbying to ease or (b) actually believes the position was "hedging," in which he case he hasn't the slightest idea of what a hedge is supposed to do (I'm not sure which is scarier). Meanwhile, the bank has grown larger since the financial crisis and has up to $70 TRILLION, i.e., the entire world GDP, in notional derivative exposure (but don't worry, it all nets to almost nothing with other banks that also have trillions of dollars in notional).

This is the true cost of moral hazard that was instilled with the bailouts and codified in Dodd-Frank. The incentives are now for a bank to prove it is so big it qualifies for the money printing tree know as the federal gov't. They have no reason to de-risk their portfolios and there is so much malinvestment from years of direct manipulation and intervention from the Fed that arbitrage opportunities abound. So they will try to maximize profits in the short term and if they're wrong they'll maybe have to accept a bailout. But they know the worst thing that will happen to them is that they'll be thrown out with an enormous parting gift. They won't be prosecuted for falsifying financial statements or defrauding investors. There is zero consequence for their behavior so I see no reason to expect different results. And that's the bullshit in all this, not how much JPM's bonus pool is affected.

[Guyute]

My point was more that this was a blip rather than some large loss of capital.

I don't agree with your point that this is feeding a moral hazard and there is no consequence and they are relying on the bailout.   That assumes you know the decisions they are making and the reason behind them.  It also lumps a lot of people together rather than dealing with each as an individual.  I am not saying that is not what JPM is doing, I just don't like generalities which lump entities together.  There is obviously something fishy or just plain poor management which should not happen given what we have just gone through.

It is interesting to be on the other side of this issue, don't worry I'm not with JPM, an to see what really goes on behind the scenes and just how much of a gamble all of this truly is.  Just 1 big game of porker with everyone trying to calculate how to get the biggest pot.

[runawayjimbo]

I don't need to know their decisions or the reasons they make them to draw a conclusion about their strategy; their actions make it perfectly clear to me that they continue to operate with a complete disregard for anything other than maximizing short term profits.

Now, I don't think that an investment bank needs to have some altruistic purpose for being like promoting the greater good. In fact, I have argued quite often that allowing firms to innovate and take risks and make profit (even for profit's sake) can benefit society and not just the "greedy" bankers. What bothers me is that we are 4 yrs out from the worst financial crisis since the Depression - a crisis brought about by (among many other things) excessive risk taking, countless misrepresentations (of financial statements and product design), and a culture of zero accountability - and these assholes haven't learned a goddamned thing. And this is Jamie fucking Dimon we're talking about, the patron saint of financial risk management. If JPM could have such an absolute failure in controls, what are the chances that other, less "well managed" banks could suffer from a similar break down? I don't know the decisions that other banks are making either, but that doesn't stop me from believing that the chances are pretty friggin good.

I agree with you that in the scheme of JPM's B/S, a $2-4B loss is pretty immaterial and that they will likely still make billions in profit this qtr. The problem is when JPM's blip and BoA's blip and Citi's blip and MS and GS blips all start popping at the same time.

And I hear you on the impropriety of making broad generalizations. I fully understand that not all bankers are bad and not everyone who works at JPM is scheming to defraud investors and taxpayers. Shit, Jamie Dimon might not actually be a bad dude (he is a Democrat, Hicks). But I do think there is still a culture at most large financial firms to act first and ask questions later and I believe that mentality has only been made worse by the unlimited supply of funds these institutions have been given access to. Until there is any attempt to hold people accountable (the SEC just announced they would not recommend either criminal or civil charges against Lehman) and until the banks have an incentive to protect their capital instead of allowing a single trader to risk their entire tangible book, I can only assume that the banking industry is (generally) either (a) actively operating on TBTF or (b) are stupid. I don't believe they are stupid.

[runawayjimbo]

Couple more months like this and "President Romney" won't sound like such a far fetched concept.

http://www.bloomberg.com/news/2012-06-01/employment-in-u-s-increased-69-000-in-may.html

U.S. Employers Add 69,000 Jobs, Fewer Than Forecast

The American jobs engine sputtered in May as employers added the fewest workers in a year and the unemployment rate rose, dealing a blow to President Barack Obama's re-election prospects and raising the odds the Federal Reserve will step in to boost growth.

Payrolls climbed by 69,000 last month, less than the most- pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median projection called for a 150,000 May advance. The jobless rate rose to 8.2 percent from 8.1 percent.

"The picture is getting more worrisome," Bruce Kasman, chief economist for JPMorgan Chase & Co. in New York, said on a conference call with clients. "The U.S. economy is going to be somewhat softer over the next couple of quarters."

Stocks tumbled, erasing the 2012 advance in the Dow Jones Industrial Average, and Treasury yields fell as the data reinforced concern that global growth is heading for a third mid-year lull. Other reports today showed manufacturing output shrank in Europe and slowed in China, the world's second-largest economy.

...

[VDB]

Though I think Obama was prescient and cunning in preemptively taking the jobs fight to congress those months back; this way he can deflect some criticism for poor jobs numbers by claiming that congress refuses to enact the solutions he offers.

[runawayjimbo]

Though I think Obama was prescient and cunning in preemptively taking the jobs fight to congress those months back; this way he can deflect some criticism for poor jobs numbers by claiming that congress refuses to enact the solutions he offers.

Of course, they can counter with "Your stimulus didn't work the first time (remember when you said unemployment would stay under 8% if we passed it? Lulz); why would we want to do that again?"

[runawayjimbo]

A really interesting take by Peter Schiff on why money as we know it is worthless.

http://lewrockwell.com/schiff/schiff166.html

What Is Money?

Today, we're accustomed to thinking of small greenish paper rectangles as the definition of money, and we think of the US government as the only source of money. To honestly discuss sound money, we need to realize where our current money customs came from.

At first, it was every man for himself. You ate or wore what you could pick or catch.

Barter was the first advance. If you had some extra meat, and your neighbor had an extra fur, you might make a direct exchange. If food, water, clothing, and simple tools are the only goods on the market, barter is fine – you can always find someone who has what you want and wants what you have.

But as soon as there's basic manufacturing and prosperity begins increasing, barter becomes inadequate. Say you're a hunter and you want a bed, but the only bedmaker in town is a vegetarian. What do you do then? You would have to figure out what the bedmaker wanted (maybe tofu), and then find someone who had tofu and wanted meat. If you couldn't find that person, you would have to find a fourth person (someone who wanted meat, and had the hats that the tofu maker wanted), or try to convince the vegetarian bedmaker to take the meat and trade it for something else.

Meat, however, spoils, and so the bedmaker would have to unload it pretty quickly. So, unable to get your hands on anything the bedmaker wants to consume, you trade your meat for some salt and approach the bedmaker.

"Look, I know you don't want salt, but think of all the people who do. They use it to preserve their meat and flavor their soup. And this stuff is nonperishable, so you can hold it as long as you want. And if, when the tofu dealer comes through town, he doesn't want salt, you can explain to him what I've explained to you – he can use it to buy something he wants."

If you and the bedmaker agree, you've just created money. Organically, more people in your community begin taking salt for payment, even if they have no intention to use it, because they know others will accept it.

But – and this is important – the value of salt money is not entirely dependent on other people accepting it as payment. If, for some reason, folks stopped taking salt as payment, you could use it as, well, salt.

Salt was a pretty good currency, especially before refrigeration, because it was widely demanded, divisible down to the grain, very portable, easy to weigh, and could easily be tested for counterfeit by tasting it. Romans used salt for money.

But just because salt served as money didn't mean there would be no other form of money in circulation. Tobacco leaves might be widely accepted as payment. So might gold or silver.

The Greatest Invention Ever?

The point is that money arises naturally in society, as a way of aiding in voluntary economic transactions. It was one of the greatest inventions ever. Money not only made it easier for people to buy what they wanted, it also made saving much more possible – you could accumulate excess money to spend at a later point.

While saving is frowned upon by the elites today, it's an essential element in economic progress. By making it easier for people to save, money did two crucial things. First, it inspired more industriousness: there was now incentive to work harder to earn more in a day than you could spend in a day. Second, savings enabled ambitious entrepreneurs to make big capital investments: labor-saving machines, warehouses, transportation.

If the saver didn't have any big plans in mind for his money, he could still make it productive by lending it out. Finance was nearly impossible without money. Sure, you could give your neighbor a pig this year in exchange for a pig and a chicken next year, but there would be a lot more opportunity for squabbling ("this pig isn't as healthy as the pig I gave you last year").

With a commodity money, where there is little or no deviation in quality, and using universal, objective measures, like weight, you can lend with the confidence that what you get back will be of the same quality as what you loaned out.

Money also made specialization more practical. If you were really good at one thing – manufacturing nails (to borrow Adam Smith's famous example) – you could make a living just by making nails. Without money, someone who spent his whole day making nails would have to find (a) someone with excess food who wanted nails, (b) someone with excess shelter who wanted nails, (c) someone with clothes to spare who also wanted nails at that moment, and so on.

Once money is introduced, the nail seller only needs to find (a) people with money who want nails, and (b) different people with everything the nail seller needs who want money. Facilitating specialization creates efficiencies, as folks get to divide up labor according to skill and interest. In countless ways, money improves society.

Competing Currencies

In the past, different types of commodity money competed. Salt had its advantages, but also disadvantages – you had to keep it dry, it was easy to spill. In Rome, rising sea levels made it much harder to get salt over the years.

Meanwhile, gold had a lot going for it. It's fairly easy to store. Like salt, it's easy to divide, but also easy to combine: you can make blocks, or coins of different weights or denominations, which can be standardized. It doesn't rust. It doesn't tarnish or undergo other unpleasant reactions with chemicals.

Like any money, gold has underlying value. Mostly, we think of its decorative value – across nearly every culture, gold is considered beautiful. Women love it, and pleasing women's fancies is universally considered a good thing. It has industrial uses due to its resistance to corrosion and how thin it can be hammered.

Gold is also rare enough to be valuable, but plentiful enough that it can be widely circulated. Its supply grows, but never very quickly.

No authority had to declare gold to be money. It arose as a good medium of exchange, and in many cases it won out in competition against other moneys. It didn't always win out to the exclusion of other types of money, but it was probably the most successful money ever, thanks not to some order from above, but thanks to gold's own attributes.

This is very important: money doesn't come from government; it comes from civil society.

Peter Schiff CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. He is author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse. His latest book is The Real Crash: America's Coming Bankruptcy, How to Save Yourself and Your Country.

[VDB]

So I'm guessing this guy would like us to buy gold?

[rowjimmy]

So I'm guessing this guy would like us to buy gold?

Of course.
It would be good for his business.