SECTION THREE, PART FOUR

Sliding doors, How Broad Is It?: The thread behind the "sliding doors" series is the possibility of an alternate reality, where the real obligations behind the social contract are fulfilled, versus the arbitrary dishonesty that currently exists. I have commented before about financial market manipulation across a range of areas, but this week's announcement that there might be some form of investigation into the pricing dis-continuities that seem to occur around the London 4pm pricing "fix" within foreign exchange markets has caught my eye. I will explain how it works shortly, but the announcement of the news item on Bloomberg news a few days ago got the usual commentariat huffing and puffing about putting all the usual suspects behind bars, and I do not mean the ones that serve refreshments. When the idea of market manipulation within benchmark rates for foreign exchange, is combined with market manipulation for interest rates ( the LIBOR rate setting scandal ) , and market manipulation of securities in products ( the Goldmans/Paulson CDO scandal ) , and the general scandal for both commodities pricing ( again, Goldmans and its aluminium warehousing scandal) and electricity pricing ( JPMorgan ), it seems that there are very few areas which are not tainted by robber barons. The foreign exchange markets have now virtually universally used the rates determined at 4pm London time, as the benchmark forex rate for that trading day. In general, benchmark rates are no more than that, a guide...and not necessarily important. But they do have some financial importance. As a settlement rate, monies will change hands based upon this being the rate for determining valuations/ margin adjustments, and so there is a possible real financial gain to be made or lost, if rates were able to be manipulated. AND of course, they are able to be manipulated, by falsely driving the price one way or other, to suit the book. The usual culprits for the manipulation are typically the banks involved in intermediating foreign exchange rates, but not exclusively. Anyone with big enough clout can temporarily drive markets rates, if their orders are either big enough, or catch market makers by surprise. But being caught by surprise might happen six times a year, versus the other two hundred and fifty days where a traditional banking gouge can take place. The foreign exchange markets have always been bread and butter gouges for intermediary banks. Anyone who has physically exchanged one currency for another, knows that you pay some transaction fees for the privilege of exchange, and banks have always been the delivery tools for this cash exchange.....the European banks must have had apoplexy when their bread and butter exchange rate transaction gouge was single handedly devastated by the introduction of the Euro. And so, continuing the piracy tradition, banks must feel they are entitled to whatever gaming profits they can garner from manipulation of the "fix" rates. BUT the right to extraction profits, does not make it any less illegal. Any manipulation is dishonest, and since we expect that others will by nature deal honestly in the majority of dealings, the condoning of continual dishonest practices by banks, renders them as less than useful as bastions of society. That market manipulation occurs, is not surprising. Most markets are opaque, and the general public does not either have the know-how or the tools, or the access to identify and expose the market manipulation. So it goes unnoticed....except by those who profit from it, and they are hardly going to expose their own tawdry practices. BUT, once exposed, the dishonest practices need to be stopped, otherwise general society will believe that if we are going to continue to accept dishonest practices, then there is no point in being honest in the first place. We cannot have two rules, where physical infractions are punished by the legal system, but that white collar infractions are not. Otherwise, we have no benchmark, or "fix" on what constitutes honesty. Truth, and honesty, are fundamental constructs for the social contract....otherwise I may as well steal your property, or bust your head when you are not looking, because our current system refuses to punish transgression. The law of the jungle is not far away, when we are constantly allowing dishonesty/crimes to go unpunished. IT IS NOT CAPITALIST TO ALLOW DISHONESTY, and stealing money is not the preferred way to run a society. If I am left with no way to believe that society will encourage honesty as a fundamental principle, then there is little hope.

SECTION THREE, PART THREE

Sliding Doors: The More it Changes, .....: After a funeral and a wedding this week, it is possible to review both the beginning and the ending of things. Almost a metaphor for the Fed minutes indicating that they are giving serious consideration to "tapering". Again, using social media comments as a guide, and specifically, the Bloomberg news comments, as the litmus test, there seems to be a particularly vociferous view about what the population has been saddled with as a result of Quantitative Easing programmes, and the impact of its unwinding. Equally, the perception that the banks have been unduly supported, and not seen as giving sufficient community regard for being saved by taxpayers, and not playing their social dues for that, seem to scar the debate. The reward patterns certainly appeared skewed against the general public, both in terms of the speed of the transmission mechanisms by which the liquidity events have been noticed by the general worker, and the retiree with interest bearing securities as their main form of financial support, have been particularly damaged by the Fed's insistence that it is equity holders, and mortgage borrowers, who deserve special support. In terms of dictating which groups deserve preference, the Fed has unwittingly elevated arbitrary monetary impacts into the main role for monetary policy tools, and allowing those to operate for an extended period of time. To translate "arbitrary" into a real economy diagnostic, which says that unwinding preferencing policies only after the macro-economic measure of unemployment gets to certain levels must assume that the Fed. has accurately modelled the real economy effects of its created behaviours. Given that QE has always been defined as unconventional policy, means that the modelling could not have taken place. Again, one reason why the Fed should attract opprobrium from the general public. That the bond markets are beginning to more fulsomely gyrate to the uncertainty of the unwinding is about time. But what is left? A bitterly engaged population who perceive a world of winners and losers, and their particularly prism coloured by where they sit on that spectrum...no longer quiescent to the belief that central authorities, and regulators are honest negotiants in the management of an economic system. Five years has been too long to be seen as unequally supporting high finance. JPMorgans energy trading fiasco, and this weeks Goldmans options mispricing event only go to stoke the flames of discord, by re-informing that lawfulness has its own form of being arbitrarily defined. THIS IS NOT GOOD ENOUGH. It is time for the population to become engaged more directly by ensuring that their elected representatives recognise that there has not been enough punishment meted yet to the transgressors for 2007-2009 bad behaviours, and the savings buoys which were doled out so generously. Either justice appropriately, or out of a gun barrel, has been a historical precedent on too many occasions. Civilisation recognises either as valid, if the authorities become part of the problem, not part of the solution.

SECTION THREE, PART TWO

Sliding Doors, Which Reality?: One interesting development over the last week or so is the probability of a class action against Allco, one particularly notorious example in Australia in 2007 and 2008 of a number of objectionable behaviours. Just to remind ourselves what happened here; the class action, if successful, will be primarily based around the argument of material mis-statements to the majority so shareholders about the level of short term liabilities disclosed in Allco accounts. These mis-statements will stem from "review" clauses in lending conditions from some banks about the total market capitalisation that Allco had to maintain in order for the debt not to be called in for quick repayment ( or more typically a much more onerous interest rate applying to the re-set ). These types of clauses were not untypical as causing a number of debt reviews during the GFC, in particular in relation to listed property trusts ( or real estate investment trusts, REITS in some jurisdictions), but also applied to a whole range of non-property basd entities as well. Allco, I believe at the centre of this action, had a $2 billion bottom line, but the nature of falling below two billion, and having some debts recalled/reviewed had not been declared to shareholders. Fair enough, equity markets were very volatile during the downturn, and breaching market capitalisation levels on regular bases were almost de-rigeur for most companies during some of the periods of market free-fall. But what was galling about Allco was that an accelerant to the market decline was the forced margin sales of the main management and Directors as their margin loans got called in. The extent of the "margined" shares on issue, and held by the inner workings, were also not typically, or widely known, nor was the trigger points under which those margined holdings were going to forcibly appear on market. So a quick recap...shareholders were generally not aware that low market cap levels were going to breach debt agreements, and that the low market cap could be caused by senior company officials having their margined holdings sold out for under them. I would agree with the proponents of the class action that these material non-disclosures would have made a number of shareholders consider their continued investment in the company at the time if they were more widely known...and as a shareholder, these were disclosures that should have been made. Two things flow from this, however. One of the proponents of Allco has since died, and we were told at the time of his death that he was a good bloke, who did a lot of good things and helped people. He also went down with the ship in losing a lot of money in Allco. Quite apart from a couple of extremely dubious decisions that Allco made as it was slowly slipping to its death, I ( may appear uncharitable here ) did not think that individual who passed away should have been lionised at the time of his death. Forget the good, why don't we balance that with the bad....a number of shareholders....regular Joes and Joans... had their savings affected by the sleights of hand practised at Allco, and similar companies, who didn't seem at the time to feel morally affected by their non-disclosures. And as for losing a lot of wealth, since a lot of that wealth was the invented wealth of a falsely high share price, and margined up for good measure, then if the people had a rich life at all, it was garnered immorally on the backs of more restrained ownership types. The Allco fiasco is typically of a type where fundamental dishonesty ruled supreme for a while...and I ask the rhetorical question. If these people demonstrate that they will be dishonest when they are exposed to stress, who is going to ring the bell when the next period of stress begins to emerge. These people should not have been in a position of trust before, because they have demonstrated that they did not deserve to be in a position of trust in the first place. That should mark the card for a wole range of people during that period, but alas, there still seem too many survivors floating around...maybe further time needs to pass. I can only hope. But the sliding doors moments is when you think about the amount of government "printing" that has, and continues to inflate asset prices, the unknown event will be the equivalent as some trigger which will lead to a global call up of a range of "market cap" style debt agreements. Greece will not be the only example, nor will Cyprus be the only extreme case of unacceptable imposts upon populations. With the corpus of debt held by all major economies, it will not be like a Japan of the nineties. Japan could stand, because it was a one-off..the only country going through aan asset deflation of hat size at the time. This time around, ALL countries will be going through their own version of the deflation, and the issue of "in isolation" will not apply. Too many will be seeking the lifeboat, and again they will all be seeking their best bail-out structure. Again, no lionising this time....but the big question is about what we are not getting told. Allco is a metaphor for national economies this time around, and it is government revenue departments, and central bankers, who are playing the roles of the insiders. Not really too scary, is it? I want to be the leader of the class action on this one though...10% success fee should be sufficient!

SECTION THREE, PART ONE

SLIDING DOORS: Which Reality?. Globally, the current resuscitation event for domestic economic expansion has been left to monetary policy instruments by a very large number of countries, and by almost entirely the G20 countries. Theory tells us that monetary policy is, at best, a blunt tool by which to engineer tailored economic solutions, and the burden of bearing a disproportionate element of the adjustment is upon those with savings..low interest rates impose income burdens upon those who have already saved....surprisingly, those with the liquidity in the first place which saved the meltdown of 2007/2008 from being much worse. The main developed economies have argued that the low interest rate regime is in place to avert the possibility of deflation. Those with an (already) existing pool of savings would traditionally be the beneficiaries of deflation...their existing pool of assets would purchase more and more goods over time. But the central banks are trying to engineer an inflation, so that the debts of heavily indebted are erased more quickly. The difficulty with inflation is that it, by definition, is not fully controllable, and may break out in any range of avenues. The Fed seems to think ( in that very American way ) that wealth effects of higher asset prices, as reflected in share prices and real estate values, will be the feature which stabilises economic activity. A number of other countries are still too early in their adjustment cycle to be thinking about positive wealth effects....because they are still grappling with the issue of the extent of the economic adjustment. Apart from savers being disadvantaged, and by implication forced to take financial risks to achieve even adequate investment returns, the other disadvantaged componentry is the worker, who is still not dealing with normalised economic conditions in any event. Given that the inflation is, at the very least, Government sanctioned ( in some stunning belief or hubris that they will be able to both spot and control any outbreaks of unsatisfactory inflation ) , I am reminded to look to some past periods of inflation, and how it was able to be both spotted, and correctly dealt with. The next series will be quotes from prior periods..." It should be clear by now that one of the most fateful legacies...was a feeling throughout ..society that various groups and individuals were unfairly advantaged or disadvantaged by the ..economy, and that many of the social and economic consequences ...were unjust and illegitimate." Anyone following social media comments about any of the lawsuits/actions against financial market organisations or individuals cannot help but notice how vituperative some of those comments are. One simple recurring feature at present is that a broadening mix of people are feeling disenfranchised by the pay-out system which is flowing from the current policy responses of the authorities...and as I have commented before, the statute of limitations period is fast closing on a number of scoundrels. I am guessing the there will be an audible hiss when the first action is defeated by the passage of the actionable time. Lets hope the advantage/disadvantage argument doesn't rend the social fabric like the quoted country/ period did during last century.

AUSTRALIAN ELECTION WATCH - THREE

Leadership Matters: So, early days for campaign positioning, but the debate about Goldilocks economy...is it too hot, too cold, or just right.....got an "external" comment with the central bank dropping interest rates to 2.5%, a drop of 0.25% for the day. Widely anticipated, which doesn't make it right, just widely anticipated. INTERESTING, but for a whole series of reasons which raise their own questions. Australia has largely been seen as well served by its central bank, and I have observed too many people at the RBA over the years to have anything but respect for them. That, of course, does not mean that they do not become captive to policy perspectives subsequently. BUT....I can remember being at a function with the then Deputy Governor, now head honcho, Glenn Stevens, who at that stage had believed that the nominal value of house prices was too high, the householders were too indebted, that there was too much systemic risk flowing from housing, both to the population, and to the banks. In the meantime, banks have generally become more reliant on householder deposits ( by dropping the proportion of offshore wholesale deposits ) , and Basle which encourages mortgage debt for its ( Australian ) low risk of default. The "captive" also extends to the government guarantee to low level deposits, which is not for social stability, but for bank stability [ shame the banks do not reply to their saviours by recognising their social obligations not to reward themselves inordinately, and arrogantly...yes Mike Smith, you are a douche ]. The moral here is that Glenn's observations were in 2007. And house prices are now higher. One thing is better....those with existing mortgages have tended to reduce their indebtedness, but that was from a position of general negative equity, and so needed to right their balance sheets quickly. One thing that is not better...existing and new mortgage holders have principal loans at drastically low interest rates. I can remember mortgage rates at 17.5% in the late 1980's/early 1990's. Only low nominal mortgage principal saved that period from being disastrous for home buyers. If Glenn thought the household risk was high at 2007 principal, and 7% mortgage rates. What happens at 2013 principal, and rates move from 5% to 7%. Glenn was a contemporary at Sydney Uni with Tony Abbott. We know Tony doesn't quite cut the mustard yet as a possible leader. Glenn used to. Glenn would also know that the USA's Fed wants to falsely boost asset prices to try to turn the wealth effect positive in the US to break the negative rational expectations that existed there. We didn't need to follow that path...hopefully Glenn you are not responding to political, rather than the doubts you once had, about sustainability of economic behaviours.

AUSTRALIAN ELECTION WATCH - TWO

Gotta love it: perfect feed through by the two 55 year olds. Both born in 57/58....both mid to late teens through the inflationary 70's, university courses under the whitlam free education. I even remember Tony doing his early feminist hating during the SRC elections in the late 1970's. Were the rumours correct , Tony, about you unzipping your fly as an act of agression against the feminist "stars" candidate at one SRC meeting. All very 1970's. Just watched a Four Corners show on Afghan civilian injuries...why not project our "alien" hatred against boat people now, can't always bomb them directly. Hang on..when did Osama get toasted? Wy are we still hating, and maiming people. And opening a zip is our only exposure to foreign action, isn't it, TONY. Gotta love it. But the big one...Kevvie want to give more money to the pokies...refer edition one of these missives. Kevvie got credibility in the 2007 election by saying "these silly promises to spend money has got to stop". Kevvie does anything to win; and Tony unzips to dominate.....what was the choice that Australians have? I really do not want a hung Parliament....by all accounts Tony wasn't well hung!!!!

AUSTRALIAN ELECTION WATCH - ONE

Leadership Matters: [ this will be a special series based upon the campaigning period for the Australian Federal Election scheduled for September 7 ]. Early out of the blocks is the argument by the Labor Party that they got Australia through the Global Financial Crisis. I have commented upon this contention before, but lets put it to rest. The GFC started as a crisis of trust between banks who had almost exclusively relied on short-term funding, because of the positive carry they got from, say, borrowing at 3%, and buying shares/CDO's/etc which on the face of it was paying 5/6/7% if not more. Whilever the game was going on, the banks were booking good notional profits, provided they could continue to fund themselves. The corporate funding/ short term funding began to dry up in late 2007 and early 2008, and became much more obvious with the collapse of Bear Stearns in February/March 2008.... Much earlier than the Lehmans problems in September 2008. The Australian banking sector did not have the same sized investment banking bets, although they did have some short term funding issues, but principally some offshore funding issues...they relied upon offshore markets for their wholesale funding. As it became obvious that stresses in offshore financial markets were manifesting themselves in reductions in the volumes of money being lent to foreign banks, the Australian banks had to prevail upon both the Reserve Bank, and the investment portfolio of the Future Fund, to take up some of the shortfall in wholesale funding sources. When China decided that the GFC represented a serious threat to social stability, and went on a massive infrastructure spending spree, then Australia's immediate future was as safe as big mining holes-in-the-ground. The only policy steps the Labor Government did was to send out cheques to the lower income earners, who then used this free cash to buy TV's , and to put it through poker machines- one apocryphal story was that some hotels had to hire extra space for all of the cash they had received, and not yet had a chance to bank. Australia easily got through the GFC, but don't accept stories that it was leadership.....think about it, current revenue forecasting has been hopelessly inaccurate in being able to determine what is happening in the economy...so by extension of this, they could not have known what policies to adopt in 2007/2008/2009. To claim credit for happenstance is not leadership. Cash for poker machines, and pink batts to kill kids, and promises of building works within schools, did not save Australia....and was not good policy.

DIGRESSION THREE- please explain,?

FABULOUS, AND WHY? The news items on the Bloomberg news site about the conviction of the Fabulous Fab seemed to generate a significant interest from the general public, based I what I saw in terms of the comments which were posted. The majority of the comments seemed to say that he deserved the jury verdict, but then typically commented that a number of other people must also be similarly culpable, particularly his superiors who had given him the product to sell. I can understand that the US, in its inimitable fashion, would have a navel-gazing session about the jury system after the recent Trayvon case, but I just listened to a Bloomberg video, where the "talking head" was paying out on the jury's decision in Tourre's case, saying that he was just some foot-soldier in the Wall Street world of their version of "he was only following orders", so the implied comment being that he was not guilty. Let me get this right...it was a civil case where the fraud he was being charged with, was the fraud he committed against Goldman clients. Forget that Goldman paid for his defence, so impliedly supported his fraudulent behaviour, but the heart of the issue was deception/dishonesty. If Tourre was a foot soldier, and according to the Bloomberg expert, not responsible for his deception/dishonesty, then can I ask, " who was?" I really don't care that much for the use of the media to try to establish apologists positions, and I would hope that the typical Bloomberg audience is sufficiently intelligent to also look through these sorts of ruses for what they are...but the wording used by the videoed correspondent along the lines that as a foot-soldier, he needed to follow orders or he might die.....is starting to invoke metaphors and imagery which need to be more carefully considered next time. I would have thought that the " I was only following orders" defence was correctly demolished during the Nuremberg trials at the end of the Second World War. What I find so sadly ironic, and faux poetic, about the apologists position this time, is the reason the "only following orders" defence was correctly demolished was because the population was seen as being required to operate to a higher moral code, and even under pain of real death, the population was expected to ignore immoral orders/behaviours as part of its broader obligations to the human race through the social contract. Fab was found guilty of dishonesty/fraud.....he could have not followed orders, and possibly been sacked. If it is the orders which are at heart here, then there are a number of more senior Goldmans people who should also be up on charges, and so, a number of the general public comments on the Bloomberg site, would have some validity, about seeking out others within the Goldmans business, and its diaspora, and similarly charging them. That might be a much more effective way of trying to get the community to believe that the social contract still has some value, and is worth maintaining. I also must admit, I find it outrageously ironic if the Nuremberg defence is attempted to be invoked by people who worked for Goldmans. Not only has honesty seemingly been abandoned, but even irony sometimes disappears, when the pursuit of profit is the only thing that matters!

SECTION TWO, PART FIVE

Children of an Indifferent God; Are We There yet? Any one who has taken a driving holiday with children in the back-seat of the car will be aware of the refrain. Typically, the driver will answer, in frustration, that it is not much further. This is an appropriate time to ask the question about central bank responses to their on-going experiment with your and my money, and why I think it will fail badly. Let's break it down into bite size pieces. Firstly, collectively, government budgetary policies have been stretched to the point that they had little capacity to respond to what happened in 2007/2008/2009, because the freeze in economic activity destroyed the collective tax bases, at the time that the pressure on their social spending was not able to show the same elasticity, by falling in equal measure. Some countries responded differently, depending on their capacity to handle the loss of confidence, but in general, all have a constrained fiscal environment as a fundamental starting point. Flowing from this, where it was possible to do so, respective countries left it to their central banks to try to rescusitate their economies via monetary policies, i.e. the lowering of interest rates. Unless of course they reach the zero bound, where interest rates are zero, and there is no further capacity to influence the term structure of rates...which are designed to create points of indifference between savings, and consumption. The transmission mechanism at the zero bound has NO empirical history, unless we talk about Japan, and the outcomes are reasonably non-determinable for reserve currencies. This is why Bernanke's research in the early 2000's said that the zero bound should not be a policy objective. Secondly, what do central banks do. They create a false role for themselves. In the old days, central banks roles were limited to the preservation of the value of the currency. A logical role, given that central banks are typically charged with the printing and issuance of bank notes, i.e. the currency of a country. If that role becomes redefined as the stability of prices...then we can only assume that the country is a believer in the economic theory that the issuance of bank notes is a significant prima facie driver to inflation. Fair enough, if that is the accepted view, because at least the response has a reasonably well recognised series of expectations, and pathways. But when the central bank either gives itself further policy roles, or is gifted that role by gutless legislators - of fostering economic growth - and that role is seen as trying to artificially inflate asset prices. This is not consistent with price stability [ it is, after all, directly contradictory to price stability...it is designed to create instability]. At the very least, central banks' ability to control asset price inflation has been demonstrated as incompetent....so to give them that role is truly stunning. But the central bank in the US, which is solely designed to look after the welfare of its constituent banks ( and presumably the largesse which flows from sinecure appointments into other positions in the financial system ) is indeed different to the attempted central bank co-ordination which must take place in Europe, or indeed the central bank mechanism within China's technocratically driven managed economy. And so, one country's asset price inflation, will be different to another country's, and the solution set should correspondingly be different. The need for the difference is obvious...each country will have different transmission mechanisms and speeds, because each will have a population which carries their own cultural biases about how to build wealth, and get by. For instance, the US seems to think that it's stock market is important. If it was seen as the absolute way to acquire wealth, why did so many Russians quickly sell their share certificates to the caravans which lurked outside the factory doors in the 80's and 90's apart from a cultural desire to see cash quickly, rather than believe in the corporate system. Either way, central banks are ill-equipped enough at dealing with significant policy drivers as guardians of economic growth. Otherwise, why is that the untried practice of buying long dated securities to put a cap on interest rates seen as an adequate policy response? The 2007-2009 period was not just another economic downturn! It represented a ceasura in trust. That can be the only explanation why central banks have so blindly followed a path, from which they do not know how to engineer an exit...apart from the blind belief that they can "narrative" their way out of it, through constant policy re-affirmations. Does not everyone become fearful, when they see that simple announcements of quantitative easing tapering creates significant movements in fixed income markets. What happens when the game begins in earnest! Or are the central banks that stupid that they think that if it looks like it will go pear-shaped, that they can just start it again, with more quantitative easing. European governments have been bludgeoned into believing that the US methodology is sound. The sole, and devastating, problem here, is that there is no single central bank in Europe, and the first country that pulls the trigger will see its bond market devastated. Why should the UK be bound by continental Europes' solutions, and why should the continental Europeans be bound by the "special relationship" stupidity of the UK in its pattern of behaviour in following so slavishly the US belief/ methodology set. The mere fact that Individual European countries have differing cultural mores dictate that this policy will end in disaster. Only when all countries have set an almost inevitable path of currency destruction, will the true magnitude of this unknown policy be recognised. I hope the general population refuses to accept that this was a successful, or necessary feature of the wealth transfer systems which have been knowingly, or with reckless indifference, been foisted upon them.