Tuesday, 20 January 2015

Is the TransPacific Partnership Being Brought Back From the Dead?

With a new Republican Congress, and Obama himself a Republican who occasionally wears Democratic clothing, the Administration is making noise that the TransPacific Partnership and its ugly sister, the Transatlantic Trade and Investment Partnership, are moving forward in a serious way.

But the Administration tried that sort of messaging last year to keep up a sense of inevitability about these regulation-gutting, mislabeleed trade deals, when reality was very different. Democrats, joined by a not-trivial block of Republicans, revolted due to the unheard levels of secrecy being maintained around the deal (for instance, the Administration refused to provide current versions of draft language) as well as, for many of them, what they had inferred about the content.

Needless to say, the Republican majorities may well change that dynamic. But what about the considerable opposition for the TransPacific Partnership’s hoped-for foreign signatories, particularly Japan? You’d think the negotiations were full steam ahead based on a Japan Times article last week, Japan, U.S. target reaching broad TPP agreement at March meet. Key sections:
Japan and the United States have agreed that 12 countries discussing a Trans-Pacific Partnership free trade deal should hold a ministerial meeting in the first half of March to reach a broad agreement, informed sources said on Friday… 
Japanese and U.S. officials signaled that the two sides narrowed gaps over auto trade, during the latest Tokyo session. Deputy chief TPP negotiator Hiroshi Oe said he strongly feels that the United States is serious about concluding talks successfully. 
But Japan and the United States remain apart over farm trade. Elsewhere in the broader TPP talks, the United States and emerging market economies such as Malaysia are in dispute over intellectual property protection.
Yves here. If you read the text closely, there is less here than meets the eye. The two sides have agreed to talk again. And Oe’s remark is wonderfully ambiguous. It’s only about US eagerness, not about where the Japanese are.

We decided to check in with NC’s man in Tokyo, Clive. His report:
There’s been some on-and-off speculation in the Japanese press about what U.S. lawmakers in the post-midterms Congress could or couldn’t do, might or mightn’t do, how it does change the prospects for TransPacific Partnership, how it leaves things much as they were… and so on. As you’d expect with speculation on that subject, you never get any definitive conclusions. But once in a while you get pieces like the Japan Times’ one rehashing the “U.S. really wants to conclude a deal very soon” line – but without saying why the long-standing areas of disagreement might magically be resolved. 
And for each vaguely encouraging article which is in the JP media, you get several ones like this from last Friday’s Mainichi newspaper which is representative of a now increasingly downbeat set of reports appearing. The headline reads “TPP: For an Agreement, the US is ‘Really Serious’… Furthermore Japan Shares a Sense of Impending Crisis” which sets the negative tone for what is drawn out in the remainder. The feature goes on to explain that the well understood areas of disagreement between the U.S. and Japan in the TPP negotiations such as agriculture remain unresolved and quotes Japanese negotiators again trotting out the familiar phrases saying that “more serious problems remain, there is still considerable [negotiating] work to do”. 
Once you go outside of Japan’s MSM (where verifiable facts get, um, a bit thinner on the ground – but of course that can often be where the real stories can be found!) the TPP negotiations are being reported as being in an even more dire impasse. The Iza news blog – amongst many others – had this from late December last year which is credited to the Sankei newspaper (a reasonably respectable outlet) which then dropped the story and is no longer listed in its online archive, but it was still carried extensively in the news aggregator sites. The article says that Japan’s chief negotiator Amari reportedly shouted at USTR Froman “Japan isn’t a vassal state of the U.S.!” (which I’d also translate as “Japan isn’t a U.S. colony”) with the December TPP negotiation meeting turning into a right old slanging match – real handbags at dawn stuff. Some very unkind things were apparently said about Froman and his “negotiating” “skills”. 

I’d say that the Japan Times story is more an attempt by official channels (either in the U.S. or Japan – or perhaps both) at damage limitation to counter the increasingly dire stories leaking out about the level that the TransPacific Partnership negotiations have sunk to than anything to be taken too seriously.
Even though the degree to which Froman has overplayed his hand is turning out to be a huge benefit to US citizens, relying on his continued ineptitude is still taking a risk. When you have time, please call or write your Representative and Senators and tell them how you and people you know are clued into how terrible the TransPacific Partnership is. Remind them it will be used to weaken banking regulations and you don’t want them to be approving pro-bailout policies by supporting the TTP and the TTIP. 

Source

Monday, 19 January 2015

ECB Stimulation: The Trap Closes

European Economy ... No More Excuses for Draghi ... For months, European Central Bank President Mario Draghi has hinted that he's ready to announce a full-blown program of quantitative easing. [Now] the EU Court of Justice's advocate general cleared away a possible legal obstacle. With prices in the euro area now falling, any further delay would be inexcusable. The euro zone has gone from bad to worse, and it is dragging the world economy down with it. The World Bank just slashed its 2015 growth forecast for the euro area to 1.1 percent, down from June's estimate of 1.8 percent. The forecast for global growth was cut to 3 percent from 3.4 percent. Europe's economies desperately need an injection of demand, and the ECB can deliver that with QE. – Bloomberg

Dominant Social Theme: Only the European Central Bank can save us now.

Free Market Analysis: So now it begins. Last week the EU Court of Justice advocate general ruled that the central bank could purchase sovereign debt.

One by one, the hurdles are toppling and the reality of ECB market purchases grows closer. Of course, last year the German constitutional court ruled – understandably – that such purchases are NOT constitutional. This is setting up a significantly adversarial environment and one wonders how it will end.

According to Bloomberg editors who penned the above editorial, the "end" should come quickly with Draghi implementing a quasi-QE as fast as possible. There is apparently no time to waste.
Here's more:

Legal finding said that ECB purchases of sovereign debt are permissible. It referred to an existing ECB program called Outright Monetary Transactions -- which isn't quite QE but which does involve purchases of government bonds. The court won't rule for another four to six months, but it's likely to follow the advocate general's guidance. That's good enough for Draghi to act now.

Many in Europe, especially in Germany, remain opposed. They see QE as a ruse by which the richer members of the currency bloc will end up paying for the fiscal misadventures of their neighbors. They point out that Europe's single-currency treaty forbids "monetary financing of the member states." Hans-Werner Sinn, head of Germany's highly regarded Ifo economic institute, this week accused the ECB of scaremongering about deflation to justify bailing out the weaker economies.

These reservations are understandable, but when the treaty was drawn up, nobody envisioned a recession as severe as the one Europe now finds itself trapped in. This is an economic emergency, and exceptional measures are needed. The U.S. Federal Reserve has shown that QE can provide needed monetary stimulus when interest rates cannot be cut any further. No plausible alternative presents itself.

The new legal finding isn't as permissive as it should have been. It opposes bond buying in the so-called primary market, restricting the program to secondary-market purchases of existing securities. That's a pity, because it narrows the ECB's options. The finding, again needlessly, warns about price distortions resulting from the ECB's holding on to bonds until they mature. But its main point -- that monetary policy should be for the ECB rather than the courts to design -- is wise.

Above, we read what we have already explained numerous times: That emergency situations inevitably expand government power. In the West, the constant expansion of government power has been achieved by creating environments that are essentially unbalanced and will fall into crisis sooner or later.

Here's Mario Prodi explaining the plan to Euronews back in 2012.

Prodi: "Well, the difficult moments were predictable. When we created the euro, my objection, as an economist (and I talked about it with Kohl and with all the heads of government) was: how can we have a common currency without shared financial, economical and political pillars? The wise answer was: for the moment we've made this leap forward. The rest will follow ... Then instead came the Europe of fear: fear of China, fear of immigrants, fear of globalisation. So it was clear that this crisis would arrive. But the euro is so important, it's so convenient for everyone — especially Germany — that I've no doubt that the euro won't just survive, but it will be one of the landmarks for the world economy." – Euronews

EU's Prodi Admits Leaders Knew Euro Would Cause Ruin but Hoped Political Union Would Follow \

Prodi says that once a common currency was installed, "the rest will follow." And he follows up by saying, "It was clear this crisis would arrive."

Now we have Bloomberg triggering the very events that Prodi anticipated. "This is an economic emergency and exceptional measures are needed," write the Bloomberg editors.

And then there is this statement, above: "When the treaty was drawn up, nobody envisioned a recession as severe as the one Europe now finds itself trapped in." These editors obviously don't read Euronews. Prodi says bluntly three years ago, "It was clear that this crisis would arrive."

This is the kind of directed history that we often write about. But rarely do we have the chance to compare mainstream rhetoric as the media seeks to implement yet more economic globalism.

Internationalism advances regularly. But the power to interfere directly with markets throughout the EU is a really big step forward.

Throughout most of the 20th century, the idea that European countries would not have their own currencies would have been considered absurd. And the idea that a single central bank would have the ability to further distort markets and interest rates by buying and selling fixed income instruments would have been seen as questionable if not more so.

Yet that is what is happening. Bloomberg writes, "There's a risk that, despite this green light, the ECB will still act too cautiously ... The next ECB meeting is on Jan. 22. Markets expect Draghi to act. Anything short of an open-ended commitment to buy government debt in impressive quantities will disappoint investors and worsen the euro area's plight."

Who are these investors? Central banks have been doing a terrible job in stimulating economies since the Crisis of 2008. Why would investors believe that doing more of the same will create the prosperity that has so far eluded bank strategists?

This presents us with an ideal VESTS paradigm to consider. On the one hand we have elitist institutions promoting economic solutions that further concentrate financial power and have proven dysfunctional in the past. On the other hand, we have investors involved in a variety of instruments, commodities and physical holdings who will have to evaluate the success of elite formulations.

Those with interests in Europe or around the world will watch this latest stimulation closely, recalling that even failure will likely be treated as a success. There will be ramifications no matter what occurs.

Conclusion: 
It is an open question as to whether established interests will be able to maintain these programs and the rhetoric surrounding them. If control slips unexpectedly away, the results could be powerful and chaotic indeed.

Source

Friday, 16 January 2015

Why Our Central Planners Are Breeding Failure

Success, we’re constantly told, breeds success. And success breeds stability. The way to avoid failure is to copy successful people and strategies. The way to continue succeeding is to do more of what has been successful.

This line of thinking is so intuitively compelling that we wonder what other basis for success can there be other than 'success'?

As counter-intuitive as it may sound, success rather reliably leads to failure and destabilization. Instead, it’s the close study of failure and the role of luck that leads to success.

In the macro-economic arena, I think it highly likely that the monetary and fiscal policies of the past six years that are conventionally viewed as successful will lead to spectacular political and financial failures in 2015 and 2016.

How can success breed failure?  It turns out there are a number of dynamics at work.

Survivorship Bias

Survivorship Bias is the natural tendency to look at the survivors for the keys to success rather than to examine those who didn’t survive, many of which disappear without a trace. If 100 restaurants are founded and five of the new eateries achieve rip-roaring success, business schools usually study the decisions and strategies of the five survivors, not the 95 failures which closed their doors and left no trail of decisions and strategies to study.

As David McRaney observes in his excellent account of survivorship bias, by focusing solely on survivors rather than those who failed, the causes of failure become invisible. And if the causes of failure are invisible, the critical factors that determine success also become invisible.

Even worse, we draw faulty conclusions from the decisions of the survivors, as we naturally assume their decisions led to success, when the success might have been the result of luck or a confluence of factors that cannot be reasonably duplicated.

We are often reassured by the financially successful that perseverance and the willingness to accept risk are the key factors in success.  But as McRaney explains, this is the equivalent of asking the one actor from a rural state who achieved Hollywood stardom for the key factors of his success, on the assumption that anyone else following the same path will reach stardom.

But magazines never track down the 100 other aspiring actors from the same region who went to Hollywood and persevered and took risks but who failed to become stars. 

Examining the few hundred miners who succeeded in finding enough gold in the Klondike in 1898 and returning with enough of their newfound wealth to make a difference in their life prospects while ignoring the experiences and decisions of the 100,000 who set off for the gold fields and the 30,000 who reached the Klondike but who returned home penniless (if they survived the harsh conditions) will yield a variety of false conclusions, for luck is never introduced as the deciding factor.

The narrative that success breeds success has no role for luck, which is by definition semi-random and therefore uncorrelated to the stratagems of the survivors. Here is McRaney’s summary of the role of luck:
In short, the advice business is a monopoly run by survivors. As the psychologist Daniel Kahneman writes in his book Thinking Fast and Slow, “A stupid decision that works out well becomes a brilliant decision in hindsight.” The things a great company like Microsoft or Google or Apple did right are like the (World War II) planes with bullet holes in the wings. The companies that burned all the way to the ground after taking massive damage fade from memory. Before you emulate the history of a famous company, Kahneman says, you should imagine going back in time when that company was just getting by and ask yourself if the outcome of its decisions were in any way predictable. If not, you are probably seeing patterns in hindsight where there was only chaos in the moment. He sums it up like so, “If you group successes together and look for what makes them similar, the only real answer will be luck.”

Drawing Over-Arching Conclusions from Single Examples

A similar form of bias appears when commentators attribute China’s great developmental success to its command economy, or Silicon Valley’s enduring role as a center of innovation to America’s military-industrial-academic-research complex and the U.S. culture’s broad acceptance of risk-taking.

Who can say with certainty that another model of development might have duplicated China’s growth record but avoided the endemic corruption, environmental destruction and widening wealth inequality that are the negative consequences of the command-economy model?  No one can say, as there are no other Chinas to refer to for comparison.

If duplicating Silicon Valley were just a matter of government support of research and close ties between corporations and universities, there would be dozens of Silicon Valley rivals, as billions of dollars have been expended globally to duplicate the Silicon Valley model. But Silicon Valley remains in a class of its own.  Clearly, Northern California’s engine of innovation cannot be distilled down to a simplistic model that can be duplicated by policies and investment.

The conventional conclusion that the major central banks—the Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of China—succeeded in saving the global economy from depression in 2008-09 is another example of drawing over-arching conclusions about success from single examples.

Since each nation/region is unique, any claim that the policies of any one central bank can be applied to other nations/regions with equivalent success is a highly questionable assumption.  Since there is only one European Union, Japan, China and U.S.A., there are no opportunities to test the assumption that the central bank recipe used in 2008-09 can be applied with equal success in future financial crises in these very different economies.

Previous Policies Have Changed Conditions

One reason we cannot draw over-arching conclusions about the drastic monetary policies enacted in 2008-09 is that those policies have changed the financial-political landscape. As a result, what worked in 2008-09 may not succeed in the next financial crisis because those policies only worked in the specific set of conditions of that crisis. If the conditions have changed, then the strategies that were 'successful' in the previous set of conditions will not yield the same outcome.

For example, central banks lowered interest rates to near-zero in 2008-09 to spark borrowing and refinancing of existing debt. Now that rates are still near-zero, this policy and outcome cannot be duplicated.  Lessons drawn from successes that cannot be repeated are suspect.

Previously successful policies may fail in the next crisis due to diminishing returns: for example, policies that extend credit to marginal borrowers to bring demand forward (i.e. subprime auto loans) eventually reach all but the riskiest borrowers.  Extending those policies essentially guarantees rising defaults as people with no business borrowing money are given credit to maintain consumption.

As defaults soar, lenders record losses and sales decline, as consumption was already brought forward.

Due to diminishing returns, a policy that was successful at first fails when extended.
In effect, successful policies may be time-stamped; not only do they only work in specific circumstances, they only work for a limited length of time in those specific conditions. Beyond those conditions and timeline, the supposed factors of success no longer work.

Are the Outcomes of Monetary Policies Truly Predictable?

As noted above, any policy identified as the difference between success and failure must pass a basic test: When the policy is applied, is the outcome predictable?  For example, if central banks inject liquidity and buy assets (quantitative easing) in the next financial crisis, will those policies duplicate the results seen in 2008-14?

The current set of fiscal and monetary policies pursued by central banks and states are all based on lessons drawn from the Great Depression of the 1930s. The successful (if slow and uneven) “recovery” since the 2008-09 global financial meltdown is being touted as evidence that the key determinants of success drawn from the Great Depression are still valid: the Keynesian (or neo-Keynesian) policies of massive deficit spending by central states and extreme monetary easing policies by central banks.

Are the present-day conditions identical to those of the Great Depression? If not, then how can anyone conclude that the lessons drawn from that era will be valid in an entirely different set of conditions?

We need only consider Japan’s remarkably unsuccessful 25-year pursuit of these policies to wonder if the outcomes of these sacrosanct monetary and fiscal policies are truly predictable, or whether the key determinants of macro-economic success and failure have yet to be identified.

The Seeds of Failure Are Sown in the Initial Flush of Success

Even more troubling is the possibility that these monetary policies have sown the seeds of systemic failure in their pursuit of the extremes that yielded the initial flush of success.

That this initial success might be brief and transitory rather than enduring is rarely considered.  If this is the case—and the slowing global “recovery” suggests this is indeed so—then the success of these extreme policies is illusory, and the truly key determinants of success and failure remain elusive.

In Part 2: The 6 Reasons The Next Economic Rescue Will Fail, we examine why the current unstable "recovery" must topple despite the central planners' best efforts to sustain it. They simply don't have an accurate awareness of the true situation, nor have the right tools and skills to address it -- and so, in their ignorance and fear, are pulling levers that are inconsequential (at best) or will hasten the destabilization of the system.

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Thursday, 15 January 2015

This Is Exactly How Markets Behave Right Before They Crash

When the stock market starts to behave like a roller coaster, that is a sign that a major move to the downside is right around the corner.  As I have stated repeatedly, when the market is very calm it tends to go up.  But when the waters start getting really choppy, that is a clear indication that stocks are about to plummet.  In early 2015, volatility has returned to Wall Street in a big way.  At one point on Tuesday, the Dow was up more than 300 points.  But then the bottom dropped out.  From the peak on Tuesday, the Dow plunged nearly 700 points in less than 30 hours before recovering more than 100 points at the end of the day.  The Dow has now experienced the longest losing streak that we have seen in 3 months, but that is not that big of a deal.  Of much greater concern is the huge price swings that we have been seeing. Remember, the three largest single day stock market increases in history were right in the middle of the financial crisis of 2008.  So if stocks go up 400 points tomorrow that is NOT a good sign.  What we really need is a string of days when stocks move less than 100 points in either direction.  If stocks keep making dramatic moves up and dramatic moves down, history tells us that it is only a matter of time before they collapse.  Any student of stock market history knows that what we are witnessing right now is exactly how markets behave right before they crash.

Examine the chart below very carefully.  It is a chart of the CBOE Volatility Index from 2006 to 2008.  As you can see, volatility was very low as stocks soared during 2006.  Then things started to get a bit choppy in 2007, and investors should have recognized this as a warning sign.  Finally, you can see that the VIX absolutely skyrocketed during the financial crisis of 2008…

VIX 2006 to 2008


Looking back, it seems so obvious.

So why aren’t more people alarmed this time around?

As CNN is reporting, the VIX is up almost 20 percent so far in 2015…
Volatility has returned with a vengeance this January. The Dow has been moving up or down by at least 100 points nearly every day this year. 
CNNMoney’s Fear & Greed Index is showing signs of Extreme Fear again. And a volatility gauge known as the VIX, which is one of the components in our index, is up nearly 20% so far this year.
Meanwhile, there are lots of other signs of trouble on the horizon as well.

For example, the price of copper got absolutely hammered on Wednesday.  As I write this, it has fallen more than 5 percent and it has not been this low in more than five years.

In financial circles, it is referred to as “Dr. Copper” because it is such a valuable indicator regarding where the global economy is heading next.

For example, in 2008 the price of copper was close to $4.00 before plummeting to below $1.50 by the end of that year as the global financial system fell apart.

Now the price of copper is plunging again, and many analysts are becoming extremely concerned
One growing global worry is the steep decline in copper, which is used in many products and is often viewed as good gauge on how China is doing. The price of copper hit its lowest price since 2009 on Wednesday at $2.46. Copper is down nearly 7% this week alone.
Meanwhile, the recession (some call it a depression) in Europe continues to get even worse, and the euro continues to plunge.

On Wednesday, the euro declined to the lowest level that we have seen in nine years, and Goldman Sachs is now saying that the euro and the U.S. dollar could be at parity by the end of next year.

That is amazing considering the fact that it took $1.60 to get one euro back in July 2008.

Personally, I am fully convinced that Goldman Sachs is right on this one.  I believe that the euro is going to all-time lows that we have never seen before, and this is going to create massive problems for the eurozone.

With all of these signs of trouble out there, the smart money is rapidly pulling their money out of stocks and putting it into government bonds.  This usually happens when a crisis is looming.  It is called a “flight to safety”, and it pushes government bond yields down.

On Wednesday, the yield on 10 year U.S. Treasuries fell beneath the important 1.8 percent barrier.  We will probably see it go even lower in the months ahead.

As the rest of the world economy crumbles, the remainder of the globe is looking to America to be the rock in the storm.  For example, the following quote that I found today comes from a British news source
The global economy is running on a single engine… the American one,’ the World Bank’s chief economist, Kaushik Basu, said. ‘This does not make for a rosy outlook for the world.’
Well, they may not want to rely on us too much, because there are plenty of signs that our economy is slowing down too.  For example, we learned today that December retail sales were down 0.9% from a year ago, and this is being called “an unmitigated disaster“.  

Americans were supposed to be taking the money that they were saving on gasoline and spending it, but that apparently is not happening.

Back on October 29th, I wrote an article entitled “From This Day Forward, We Will Watch How The Stock Market Performs Without The Fed’s Monetary Heroin“.  In that article, I warned that the end of quantitative easing could have dire consequences for the financial system as bubbles created by the Fed began to burst.

And that is precisely what is happening.  In fact, many analysts are now pinpointing the end of QE as the exact moment when our current troubles began.  For instance, check out this excerpt from a CNBC article that was published on Wednesday
Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group. “It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended.” 
Indeed, the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October.
We are moving into a time of great danger for Wall Street and for the global economy as a whole.

If we continue to see a tremendous amount of volatility, history tells us that it is only a matter of time before the markets implode.

Hopefully you will be ready when that happens.

Source

Wednesday, 14 January 2015

Senator Warren and America Win in a Skirmish in a Long Struggle Against Wall Street’s Coup

There is an excellent indicator that Senator Warren’s successful effort to block the appointment of Antonio Weiss, an Obama Wall Street bundler, to a senior Treasury position while merely a skirmish was an important accomplishment. The financial media that pander most slavishly to the Wall Street and the City of London’s CEOs is enraged at Warren’s success. The headline in the UK’s Business Insider reveals their angst “Elizabeth Warren Wins, The Treasury Loses.” The article doesn’t try very hard to support that headline with facts because there is no real case to support the claim.
A number of former Treasury officials thought Warren was way out of line, and that Weiss’ experience was perfect for the position he was being nominated for. 
The White House stood by its nominee throughout, stating last month, “This is somebody who has very good knowledge of the way that the financial markets work, and that is critically important.” 
No argument on that here.
Let’s begin with logic. There’s no logical way to declare that “Treasury lost” without knowing who else is willing to take the position of Under Secretary for Domestic Finance. No one thinks President Obama selected Weiss on the merits. He was selected because he bundled Wall Street campaign contributions for Obama’s campaigns. Treasury does not “win” when we appoint such people – Wall Street wins. We have no way of knowing whether Obama will select someone for the position who is better or worse than Weiss. The Undersecretary position is prestigious enough that we know that Obama has the ability to appoint hundreds of people who would like to take the position and are better qualified than Weiss. As a matter of logic, therefore, the authors could not support their claim.

The authors also don’t seem to have felt they could even try to make a case for their claim. They simply quote authority rather than reasoning. Their effort unintentionally made Warren’s opponents look bad. Consider the extraordinary arrogance of the statement “A number of former Treasury officials thought Warren was way out of line.” A U.S. Senator who is a member of Treasury’s oversight committee is completely “in line” to oppose nominees. Warren obviously did not oppose Weiss for partisan reasons. She opposed him on the merits. Weiss does not have a strong background for the skill sets required for the Undersecretary position. Again, no one can claim with a straight face that Obama selected Weiss on the merits. Of course, the same thing was true of many of the Treasury officials who think it is “way out of line” for Senators not to rubberstamp political reward-style appointments of Wall Street bundlers.

The best that the White House could come up with was that Weiss “has very good knowledge of the way that the financial markets work.” That description fits about one million Americans.

Conclusion

Warren has given Obama a golden opportunity – a “do over.” Obama can appoint someone who has a “very good knowledge of the way that the financial markets work” – and a passion for changing how they work in order to end the Wall Street culture of corruption and create radically improved markets based on integrity and service to investors with radically reduced profits. Obama could pick someone good for America, not “Treasury” and its Wall Street overseers. It is “critically important” that the financial markets be restored to a condition in which they aid Main Street and small investors rather than acting as parasites and predators.

At this juncture, the White House is signaling its continued opposition to serious reform.
“‘We continue to believe that Mr. Weiss is an extremely well-qualified individual, who is committed to the policy goals of this Administration and firmly supports the Administration’s policies on fostering economic growth and supporting our middle class. We are pleased that he has accepted the role of counselor to the Treasury secretary.’”
The administration continues its policy of never missing an opportunity to miss an opportunity to openly side with the American people (all of them, not simply “our middle class”) and demand the end of the corrupt culture of Wall Street. Warren has given Obama a priceless opportunity for a “do over.” No one expects Obama to do the right thing on the appointment, but Warren is doing the right thing by giving Obama a new the chance to do the right thing.

Source

Tuesday, 13 January 2015

The Central Banks Still Appear To Be In Control (Or So They Think)

2015 has started much as 2014 left off which should come as no surprise as markets care little for arbitrary changes in dates after all; so no predictions! Oil is one of many unknown variables including the fate of Greece the strength of the dollar the flight of Abe's third arrow relations with Russia and the greater Chinese slow down. Then of course we have elections in the UK which will be interesting in the debate but almost certainly inconclusive in the outcome. It has been suggested a coalition government might be formed between Labour, the Scottish Nationals and UKIP; if so I'll be catching the first flight to somewhere a long way off.

The central banks still appear to be in control; well they seem to think so. Now he is no longer in that particular club Alan Greenspan thinks things look a bit "risky". Well risk is what investing is all about after all, but what is this elusive "particle" orbiting our portfolios?

Some would have you believe that it's all about volatility. If it goes up and down a lot the ride will be bumpy but you stand to make a lot more money than in something that gives you a smoother ride. Looking back over the last 30 years or so that smooth ride would have been government bonds and for most of that period returns would have been better than equities. So a low risk portfolio should be stuffed full of them right? Yes indeed if your risk model looks purely at long term historical data and ignores where we are in the journey.

But markets have an enormous propensity to make us look like fools. This time last year the predictors were saying, to a man, that sovereign debt was hugely expensive and due a very significant correction as rates were bound to rise weren't they? If there is one data series that is consistently called incorrectly this is it - perhaps a reason why the largest component of the derivatives mountain is in interest rate futures!

So in the UK a gilt tracker would have made you nearly 15% against a pretty much flat equity market and the 10 year gilt now resides at a scanty yield of 1.6%. Over in Europe the 10'year Bund is at 0.4% and everything under 5 years duration pays a negative yield. Yes investors are willing to pay a premium just to get their money back!

As the chart of the 10 year Treasury yield shows, we have come a long way in the interest rate journey and whilst further gains are possible can yields go much lower. If we are going Japanese, and the Germans already are, then of course they can. Ten years ago, having 50% in investment grade bonds in a portfolio for a cautious investor would have been eminently sensible especially with one’s attention in the rear view mirror, but today?

The major unintended consequence of government and central bank intervention since Volcker's stand against inflation has been to generate its nemesis; deflation. With interest rates near zero in the major economies, there is nowhere for rates intervention to go to provide a stimulus. Strangely the answer must be higher interest rates. We will then see some "creative destruction" which is what the financial system needs to reset and start a proper economic cycle, but with the investment banks, who stand to lose the most, controlling the strings (just how do you think the US Budget bill got changed to allow banks’ derivative positions to be included in subsidiaries covered by FDIC insurance? ie the taxpayer covers their losses) we need stronger hands at the tiller than a coalition of "politicians" or a lame duck president. We need somebody with balls and I don’t mean the second fiddle in the Ed Miller band... any volunteers?


Source

Monday, 12 January 2015

Citi, Goldman, ICAP And Others Prepare For Grexit... Again

Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece should stay in the Euro but if it exits it won't be a disaster, 3) the ECB reminds everyone of the lie that it is not preparing for Plan B (it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario.

So far this time around, we had everything but step "5". We do now.

According to the WSJ, "banks and other financial institutions in Europe are stress-testing their internal systems and dusting off two-year-old contingency plans for the possibility Greece could leave the region’s monetary union after a key election later this month. Among the firms running through drills are Citigroup Inc., Goldman Sachs Group Inc. and brokerage ICAP PLC, according to people familiar with the matter."

And soon enough Bloomberg, because who can possibly forget the mysterious appearance of the "XGD Crncy" in June of 2012, only to disappear moments later after a few hurried phone calls from Frankfurt...

But back to the banks: "The firms’ plans include detailed checks on counterparties that could be significantly affected by a Greek exit, looking at credit exposures and testing how they would provide cross-border funding to local operations."
Some firms are also preparing for the impact on payment systems and conducting trial runs of currency-trading platforms to see how they would cope with adding a new Greek currency or dealing with potential capital controls.

The moves come as Greek leftist opposition party Syriza continues to lead in recent public opinion polls ahead of national elections on Jan. 25. The ruling coalition government has framed the election as a de facto poll on whether the country stays in the eurozone, saying Syriza’s antiausterity policies would force a break with eurozone partners. Syriza, though, hasn’t campaigned on an exit and most Greek voters want to stay in the monetary union, according to recent polls.
Summarizing Europe's only strategy for the past 5 years is Frederic Ponzo, managing partner at consultancy Grey Spark: "Hope for the best, plan for the worst."

At some European banks, that currently means dusting off plans drawn up a couple of years ago, when a eurozone breakup was a hot topic. In 2011 and 2012, banks, brokers and companies with significant exposure to Greek assets put in place contingency plans to minimize the fallout from a breakup.

Which is smart, because absolutely nothing has changed in Europe where not even "Mr. ECB Chairman got to work" but merely verbally hypnotized the bond vigilantes into a state of paralysis, and as a result, nothing at all has been fixed, aside from the idiotic low yields on European bonds all of which have been bought to ridiculous levels on what is now a 3 years frontrunning of an ECB action that has been three years in the coming, and which many say will never actually arrive: the outright - and illegal according to Article 123 - monetization of European sovereign debt across the board.

It goes without saying that should the worst case scenario take place, the immediate question is who is next, and will the "XIL" be the next ticker everyone eagerly awaits:
The head of currencies trading at a large European bank said that reintroducing the Greek drachma to its trading system wouldn’t be too difficult, but dealing with a larger breakup would be more challenging.

“Italy could follow Greece’s steps if the exit will prove successful in providing some relief to the country’s economic crisis,” he said.
Italy... or Spain. Earlier today we got news that Spain's own equivalent of Syriza is surging in the polls and has left the ruling socialist party in the dust: "A poll published on Sunday showed that leftist up start Podemos was again in the lead to winSpain's next general election, which could result in the formation of party pacts, or even the country's first coalition government."
The Metroscopia poll of 1000 people, published in the left-leaning newspaper El Pais, showed one-year-old Podemos (We Can) would take 28.2 percent of the vote, up from 25 percent in December when it fell back to second place behind the Socialists. Podemos stood at 10.7 percent of the vote when it was first included last August.
So assuming Europe survives the Greek election in 2 weeks it has a Spanish redux to look forward to in less than 12 months:
Spain has a general election due by the end of the year and a regional and municipal election expected in May. Most of those who told Metroscopia they would vote for Podemos said they believed Spain needed to get rid of its two-party system.
If only Americans shared the same sentiment.

And yet while democracy has always been the Achilles heel in Europe's artificial political and monetary construct which works in an ideal world dominated by technocrats, it is not even the Greek, or Spanish, elections that may be the biggest risk.

As Reuters also reminds us, a "landmark" legal opinion this week will remind the European Central Bank as soon as Wednesday of the limits it faces as it advances towards money printing. With expectations high that the ECB is on the verge of buying government bonds with new money to shore up the economy, an influential adviser to Europe's top court will give his view on Jan. 14 about an earlier unused bond-buying scheme.
"It is the latest chapter in a long-running and increasingly bitter dispute about quantitative easing (QE) between the ECB and Germany, the largest member of the 19-country bloc, that is likely to limit the size or scope of such a program. As the debate continues, the euro zone economy is all but grinding to a halt. Germany is expected to announce modest growth on Jan. 15 for last year."
Here is how SocGen summarizes the threats from just the European Court of Justice decision this week, and its potential downstream affects:
“Whatever it takes”. This was the promise made by ECB President Draghi on 26 July 2012 and cemented by the OMT on 6 September 2012. Since then, market participants have placed their faith in this promise. On 12 September 2012, the German Federal Constitutional Court (GFCC) announced it would examine whether the OMT is an ultra vires act stretching beyond the limits established by the German Act approving the ESM (link to decision here).

A still lengthy process ahead, but the GFCC will have the final say: Fast forward to 7 February 2014 when the GFCC delivered its decision on the OMT (link here), referring the case to the European Court of Justice (ECJ) for a preliminary ruling (for more on the  process click here), but maintaining that in case of an ultra vires act, the GFCC is competent to rule on the constitutionality of the OMT. The next key date is 14 January, when Advocate General Cruz Villal√≥n delivers his opinion in the case (link to ECJ proceedings here). A final ruling from the ECJ will follow only months later, and the Advocate General’s opinion does not have to be followed. Only then will the GFCC give its final ruling and it may, by then, well be 2016.

If the OMT is not adapted, the GFCC is very likely to reject it: The GFCC decision already concluded that the OMT in its current form exceeds the ECB’s mandate, by encroaching upon the responsibility of the Member States for economic policy, and by being incompatible with the prohibition of monetary financing. The GFCC also suggested a possible interpretation in conformity with Union Law. In essence, it identifies three points to address.

1. Introduce a maximum limit on OMT purchases: In presenting OMT, the ECB declared it “unlimited”. In statements submitted to the GFCC, however, the ECB noted that given that OMT can only buy debt with a maturity of up to 3 years, this de facto sets a maximum of €524bn (for Italy, Spain, Portugal and Ireland). The GFCC is nonetheless concerned that this “implicit” limitation could easily be circumvented by increased sovereign issuance on shorter maturities. 

SG view: Introducing an explicit limit on the potential size of OMT is likely to address  GFCC concerns on “unlimited”. A limit of €500bn is, in our opinion, unlikely to trigger significant market concerns as this would still leave the OMT well armed to offer targeted support to a member states under an eventual ESM program. 

2. Set a locking period around issuance: The GFCC flagged the potentially blurred line between purchases in primary and secondary markets. The former is prohibited under the Treaty while the latter is allowed. In its statements, the ECB noted that a locking period will be determined in a guideline, but not published. 

SG view: A clear commitment to a locking period should suffice on this point. 

3. Limit pari passu: A key strength of OMT is the promise to be pari passu with private investors in the event of a debt restructuring. In its statements to the GFCC, the ECB claimed that liability risk to national budgets is minimised by sufficient risk prevention, but added that should losses nonetheless occur they could be carried forward and balanced with revenues in the following years. The Bundesbank in its statements disagreed, noting every loss that it incurs burdens the German federal budget. The GFCC support this view highlighting that “the possibility of a debt cut must be excluded”.

SG view: To our minds, the pari passu status of the OMT is unlikely to survive the various court proceedings, marking a blow to Draghi’s “whatever it takes” promise and increasing loss-given-default for private investors. Note, that the decision by the GFCC on the ESM excludes the possibility of the ESM assuming OMT credit risk as this would de facto leverage the mechanism. To change this, the ESM Treaty would need to be renegotiated, with all the complications that this would entail.

Somewhat surprisingly, the GFCC decision had essentially no market impact when it was released back in February. Market faith in euro area government’s efforts to deliver growth and sustainable public finances offers one possible explanation. Given significant fears on sustained lowflation, we believe that more recently it is the promise of a large sovereign QE program that offers support to market confidence.
None of the above is even remotely influenced by the subsequent Greek elections and the ECB's potential QE announcement on January 22 (which SocGen summarizes as follows: "QE unlikely to be both large scale and pari passu").

For simplicity's sake, here is the full calendar of risk events in just the next 2 weeks, any single one of which has the potential to send the market soaring... or crashing.

Source

Friday, 9 January 2015

The CBO’s Bad Math: Putting $7 Trillion of Notional Value of Derivatives in Taxpayer-Backstopped Depositaries Will Cost Zero

So why did Elizabeth Warren lose her battle last month to stop banks from continuing to park $7 trillion notional value of risky derivatives like the credit defaults swaps in taxpayer-backstopped depositaries?

One of the less well-recognized reasons is that the CBO’s dubious analysis said it would not cost taxpayers a dime.

The Congressional Budget Office forecasts have enormous clout on the Hill. Yet as we’ve written, one of its most influential analyses, that of projected Medicare cost increases, was so rancid that two fiscal budgeting experts from the Fed roused themselves to write a lengthy academic paper demolishing it. That CBO work was so problematic on so many fronts, including that it violated CBO policies for the preparation of long-term forecasts in multiple ways, that it raises questions as to the intellectual honesty of the exercise.

In the case of the so-called swaps pushout rule analysis, the CBO came to a similarly dubious conclusion. We’ve embedded a report from the House Committee on Financial Services, which includes the CBO’s budget estimate on pages 5-6. The key bit is that “any impact on the cash flows of the Federal Reserve or the FDIC over the next 10 years would not be significant.” In budgetary terms, that is tantamount to saying it will have no cost.

This is absurd on multiple levels. There is an obvious subsidy to the banks here, otherwise Jamie Dimon would not have been lobbying personally to get the bill passed. FDIC insurance is widely acknowledged by banking experts to be underpriced, so increasing the risk held in depositaries, particularly of positions can and do go boom, makes the odds of going though the FDIC’s kitty even greater.

The CBO attributes no value to the de facto guarantee of these positions, despite the glaring contrary evidence of the $750 billion TARP in 2008 and a bailout of S&Ls in the early 1990s. Do they really have such a good crystal ball that their forecast period will manage to miss entirely one of our periodic banking system implosions? Trust me, if we have a meltdown, these positions will add to the cost. And with the Fed unlikely to be able to end ZIRP any time soon, it have less ability to use monetary tricks to levitate asset prices and thus reduce the fiscal costs of any salvage operation.

A post earlier this week by Occupy Wall Street’s Alternative Banking Group reminds us of how the last bank bailouts similarly undervalued the guarantees:
…even if we accepted the Treasury’s accounting and treated it like just another private trader, its returns are abysmal…it can’t properly count how much aid it gave — and continues to give — these businesses. Beyond the $426 billion of actual capital acquisitions the Treasury made, it provided guarantees and other support to these industries that experts have valued at more like $9 trillion. Calculate the $15 billion profit the Treasury is now bragging about using a $9 trillion base as the money that was put at risk and you start calculating minuscule returns like the 0.1 percent you’d see in a Chase money market. 
The fact that the Treasury did not have to make good on its promises to cover trillions of dollars of potential losses the financial industry had recklessly exposed itself to doesn’t mean the government did not give something of huge value. The mere fact of the government stepping in as a guarantor of things like toxic mortgage-backed securities kept the bank shareholders from being wiped out. This happened a lot as part of the bailout. But on Wall Street you can be sure to get paid for taking risks, regardless of whether the bad stuff you are insuring against happens. The Treasury, on the other hand, got paid basically nothing by putting all that taxpayer money on the line.
Let us not forget that Treasury conveniently omits a $35 billion of what Andrew Ross Sorkin called a “a tax benefit, er, gift, from the United States government.” So even on the raw numbers the “TARP made a profit” is questionable. And that’s before you get to three card monte, that the massive, ongoing subsidy to the banks via QE and ZIRP that goosed asset prices was essential to the Treasury being able to exit the TARP at all.

As derivatives expert Satyajit Das observed drily by e-mail:
The cost-benefit rationale is fascinating. I am impressed that people have determined enacting this legislation could affect direct spending and revenues; albeit not significantly. I would have thought not having to potentially bail out a depositary institution would have been a positive to public finances, not a negative. Clearly, I have been misinformed about how cost benefit analysis is done. 
It is an Alice in Wonderland view of markets.
Source 

Thursday, 8 January 2015

Fed Holds Fire on Disinflation Threat

The US Federal Reserve released its minutes from the December FOMC meeting just a few hours ago AEDST time (available here). The reaction on the markets has been mixed, whereas the pundits are chewing at the bit for signs of where the Fed shall strike next, with any rate rises put off until at least April.


Adam Button at ForexLive has the sceptical take on inflation:

U-Mich-vs-reality

The FOMC minutes show a total disregard for the signals markets are sending about disinflation. Five year breakeven rates are plunging, implying that 1.09% average inflation over that period. 
The Fed discussed this problem of signaling rate hikes while the market signals disinflation in the Dec 16-17 FOMC minutes and had this to say. 
Instead of listening to the market. The Fed decided to listen to its models — the same kinds of models that assumed house price declines wouldn’t happen or be limited. On top of that, Yellen specifically mentioned the University of Michigan survey on inflation expectations, which has overestimated inflation by 200 basis points for the past three years.
This hearing disorder probably has grown out of an optimism condition, with most members dismissing any external risks, e.g deflation in Europe or fallout from the oil price collapse, with most betting on the ECB and others “doing something”, although some saw downside risks if “foreign policy responses were insufficient”.

The question of rate rises by the Fed is being pushed out further and further, with the key point raised but not yet widely analysed is the lack of any acceleration in wages, although the huge relief from oil halving is sure to have an impact on disposable income. Wages have finally recovered from the GFC low:

united-states-wages


Whether this filters through to inflation is hard to gauge, which is stubbornly staying at or below 2% with core inflation slipping.

I would suggest unless this changes – and forward looking breakevens and the yield curve indicate no such change for a long time – rate rises will be off the table for a long, long time.

Source



Wednesday, 7 January 2015

Despite Current Glut, Oil Producers Continue Game of Chicken

When the world gives you too much oil, drill for more.

That seems to be the motto of some of the most prolific oil producers today. Iraq, Russia, Latin America, West Africa, the United States, Canada – all may increase production this year, and by more than just balancing out the reduced production in war-torn Libya. On top of this, expect even more oil on the market if Iran comes to terms with the West over its nuclear program and is freed of the constraints of sanctions.

That’s the conclusion of Adam Longson, an oil analyst at Morgan Stanley writing in an e-mailed report on Jan. 5.

All this new oil is flooding a market already awash because OPEC has refused to cut its production cap below 30 million barrels a day – and is even exceeding that level – and the United States is pumping oil, mostly from shale, faster than it has in 30 years. This has caused the average price of oil to plunge more than 50 percent, from about $115 in June 2014 to just over $50 today.

This is creating an unmitigated bear market for oil, according to Morgan Stanley. “With the global oil market just passing peak runs and Libyan supply already at low levels, it’s hard to see much improvement in oil fundamentals near term,” its report said. “A number of worrying signs have already emerged, lifting the probability of our ‘bear’ case.”

One more sign is that Iraq’s production is at its highest level in more than three decades, now that Baghdad has finally reached agreement with Kurdistan to allow it to export oil through Turkey. And just before the New Year there were reports that Russian oil output has hit post-Soviet records without any sign of abating.

“We already have an ample supply of oil, and on top of that we see this increase from Iraq and Russia,” Michael Hewson, analyst at CMC Markets, a British financial derivatives dealer, told The Wall Street Journal. “The momentum clearly continues to be bearish for oil.”

But wait, there’s more, according to the Morgan Stanley analysis. It says to expect increased production at several oil fields in Brazil, Canada, the United States and in West Africa. And, 
according to Hewson, there’s no sign of increased demand, according to reports of anemic economies in China and Europe.

And then there’s the environment. The governments of many countries – including the world’s two hungriest fossil fuel consumers, China and the United States – are striving to meet various targets for lower greenhouse gas emissions. This new green approach is responsible for “anemic global growth” in demand for oil and an “upsurge in competing supply,” said David Hufton, the CEO of the broker PVM.

“[It] is very plain for all to see that oil supply growth exceeds oil demand growth and from an oil producer point of view, this imbalance has to be rectified,” Hufton told the Financial Times.

Carsten Fritsch, a senior oil and commodities analyst at Commerzbank in Frankfurt, agreed. “The easiest path for oil is down,” he told Reuters. “Almost all market news and the fundamental backdrop are negative, and it is difficult to see much upside at the moment.”

Source

Tuesday, 6 January 2015

Stock Exchange Head: Fix Capitalism by Changing the Way Companies Are Funded

How can we make capitalism more popular? Individual investors should have access to tech start-up IPOs, giving the public a stake in capitalism, says Xavier Rolet, the chief executive of the London Stock Exchange ... Capitalism has taken a pummeling over the last few years. From the global credit crunch to the banking failures, the mis-selling of payment protection insurance (PPI) and beyond, popular faith in capitalism has been deeply shaken. – UK Telegraph

Dominant Social Theme: Capitalism is misunderstood. If we tinker with it, people may "get it."

Free-Market Analysis: The best way to make sure capitalism becomes more popular is to give people the opportunity to take a bigger stake in it.

That's the argument of the head of the London Stock Exchange, Xavier Rolet. He's not only convinced of capitalism's benefits; he also believes that capitalism can lift people out of poverty in a short period of time.

Here's more:

Few would argue that any other form of economic stewardship has ever created wealth and prosperity on a comparable scale: just ask any of the 400m Chinese people lifted out of poverty in the last decade.

What irks us about capitalism is not wealth creation but the brutality of its "boom-bust" cycles and the concentration of wealth "at the top". Can a more popular capitalism soften these sharp edges?

We do not seem to have learnt much from the past few hundred years of capitalist history. Every major crisis has had the same root cause: our inability to monitor, manage and control leverage in the banking industry.

At times, taxpayers have been asked to rescue some of these financial institutions, but many would be surprised to learn that most European countries continue to subsidise leverage in the financial sector through the deductibility of interest.

Certainly debt has an important role to play as an accelerator of GDP growth.

But imagine a fiscal regime where deductibility of interest would cease above a certain maximum leverage ratio. Would banking institutions ever again leverage up as much as some did in 2008, so that a swing of just a few percentage points in the value of banks' balance sheets would completely wipe out their equity? It seems unlikely.

We need to move away from seeing bank lending as a panacea. Banks have been dealt an impossible hand – they face enormous pressure to increase lending but also tough and increasingly complex new rules on regulatory capital and leverage ratios.

The author is certainly correct that banks have an "impossible hand" to play. But isn't that the result of regulatory pressure and central bank asset inflation? The first constrains banks from implementing a variety of defensive strategies and the second whipsaws banks with surges of inflationary depressions.

For Rolet, this cyclical destruction is apparently not inevitable. He goes on to suggest an alternative form of industrial funding based on initial equity participation, as follows:

If we are to reconcile citizens with capitalism, we must offer them a stake, facilitating individual investor access to this new wave of world-class UK tech start-ups. We should look to reinstate the retail tranche for IPOs, which contributed to the success of the privatisations of the Eighties. Abolished in the Nineties, it should be redesigned to give entrepreneurs the option to earmark a percentage of their IPOs for the investing public.

The problem with this suggestion, from our point of view, is that central bank money surges are immutable. They wax and wane as steadily as the tide and are not subject to moderation based on structural changes affecting transactions.

Rolet is like a medical technician, suggesting ways a patient's pulmonary system can be revived after a heart attack. But the underlying problem, the one that caused the initial embolism, remains unaddressed.

His "solution" doesn't deal with capitalism's unspoken flaws: monopoly money printing and corporate personhood. And thus his admiration for capitalism as a free-market phenomenon ought to be tempered, too. (Apparently, it's not.)

Capitalism as it operates in the 21st century is bound by critical court decisions that affect economies around the world. Each economy that partakes of modern capitalism also accepts its artificial constraints – restrictions enforced by the state itself involving its fundamental corporate and banking pillars.

Rolet writes:

We must rediscover a form of popular capitalism that works for us all, rather than a gilded fraction of society. One that is built upon competitive but ethical practices, innovation, entrepreneurship and the notion that risk-taking and success are good things.

This is an optimistic comment, indeed. Merely legalizing an additional funding source is surely not going to make the fundamental change that Rolet seeks. So long as central banks have monopoly money powers to generate unnecessary surges of money, so long as multinational corporations grow unrestrained thanks to the corporate personhood that shields executive from personality culpability, capitalism's boom-bust paradigm will remain unchecked.

Rolet concludes:

Distributing risk capital directly at the bottom of the entrepreneurial ladder rather than debt from the top via a handful of lenders will create a more sharing capitalism, with the corollary benefits of a less debt-dependent, less bankruptcy-prone and less fragile economic cycle.

This is simply incorrect. It cannot be correct. So long as interest rates are held artificially low, boom-bust cycles will continue to plague capitalism. As no one really knows the "natural rate" of an economy's operation, it is very difficult for bankers to set interest rates at a "proper" level. They don't have the forward-looking tools to do it.

This combined with newer methods of monetary stimulation such as quantitative easing virtually guarantee that economies will be regularly over-stimulated via rates set toward the zero-bound.

Conclusion: 
Rolet's points would make more sense if he addressed the reality of capitalism's monopoly structure and dirigisme before suggesting solutions to address a "free-market" that does not exist.

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