News and Politics
There never has been such extensive and thorough coverage of financial markets.
That's in the geography of global markets as well as the ability to quickly
make historical comparisons.
The former really has changed little from generations ago when customer rooms
were used to circulate "inside information". The struggle has always been to
make decisions on today's immediate stories that will be effective six to twelve
months out.
These days, the main stories are largely conjecture about how the EU will
solve the Greek problem. It is best to use the history of so many previous
such disasters to conclude that all the talk about Greece and bailouts will
not work.
The other distraction has been about when the Fed will raise rates. The event
and all of the discussions about it just doesn't matter. In the culmination
of financial manias, the senior central bank has been months behind the changes
in market rates of interest. That includes 2007, 1929 and 1873. Also when credit
markets become fully stretched, they have had no influence upon the action
in spreads or the curve.
The EU was formed to build a bureaucracy in Brussels. We have called it "Moscow
on the Maastricht", without the prerogative of state murder.
The Federal Reserve was initially touted to prevent the financial setbacks
that forced recessions. Since 1914 there has been 19 recessions, as well as
the Great Bubble of 1929, the Great Crash and another Great Depression. More
recently there was the Great Bubble of 2007 and the Great Collapse, followed
by today's Great Complacency.
It seems that this year's policy machinations have filled the screens with
opinion. Nonstop. But it has only helped push the hard realization about Greece
into the season when consequences of bad dealings have often been discovered.
More concerning is that the overly generous financial system funded wages
and pension benefits for government workers greater than those received by
the local taxpayer. In 2012 this page quipped that the European crisis could
be fixed. Workers in Germany should not be allowed to retire until age 75,
so that Greek bureaucrats can retire at age 50.
Last year a Berlin taxi driver said as much.
The irony is that far too many states and counties in the US have been suffering
similar rip-offs. In the US, one in seven workers are government employees.
Bad enough? In Greece, it is one in four.
The problem of parasitic bureaucracies is global and reminds of the original
Robber Barons. It was most abusive on the Rhine River from early medieval times
to around 1800. A centralizing authority called the Holy Roman Empire favoured
knights and bishops with the right to tax commercial traffic up and down the
river.
Arbitrary taxation was brutally imposed without consent of those taxed. As
no improvements were provided on the river there was no value added by the
state.
Today's Robber Barons are on the Maastricht and their objectives have been
that bureaucrats even in lesser economies will live a life better than the
average citizen. Value-added is questionable.
In the 1980s and in the political capital on the Volga River the governing
classes had abandoned the asceticism of Communism and were living well at the
public trough. As the 1980s progressed, public complacency turned to private
criticism and then to a popular uprising. Which shut down one of the most murderous
police states in history.
In the Western World, greedy bureaucracies have employed intrusive economic
theories and reckless central banking as the sales force for the most massive
transfer of wealth in history.
The boast that bureaucrats can "manage" financial history is not without precedent.
The Third Century in Rome recorded a dreadful experiment in authoritarian government.
Diocletian maxed it out with price and wage controls, backed by the sword.
Nevertheless, the concept of managing the economy has always required massive
amounts of audacity. Even greater is that the concept of "managing" the Earth's
climate history is audacity
hitherto attributed only to gods.
The next contraction will likely prompt the public to dump complacency for
commonsense. Under similar discovery in England in the early 1600s an energetic
pursuit of commonsense began to overwhelm that experiment in authoritarian
and predatory government.
Milton described the intrusion as "Tyrannical Duncery".
Credit Markets
"Junk bonds have enjoyed the three strongest years on record for issuance
and annual returns of 15% since the start of 2009."
This was reported by Bloomberg last week. Also noted was the shift from good
times to something else. The ratio between rating upgrades and downgrades has
quickly become the worst since 2009. What's more (maybe what's less), is that
the price decline in June was the worst since the November-December disaster.
JNK set its high at 39.10 in early May and took out the 50-Day in early June
and the 200- Day in late June. The low was 37.99 and the rebound has made it
to 38.38, which is right at the 200-Day ma. This sector has been likely to
churn around through August. Perhaps with a bias to the upside.
It depends on how many times they have to fix Greece between now and early
September.
The best on narrowing was obtained at 176 bps on May 19th. With a number of
corrections the trend has reversed such that the breakout at 193 bps on June
30th was similar to that of June 30, 2007. Both are similar to the equivalently
fateful break out on July 1st in 1998.
The key to both of those disaster years was the extension of widening spreads
accomplished at the end of July.
On the similar pattern on this speculative year, the key step would be breaking
above the high of 197 bps set on July 8th. This spread is now at 196 bps.
Further widening has ominous implications so we should wonder what the Fed
can do to prevent it?
Well, in a hundred years the makeup of the Fed has changed from bankers and
treasury people to Greenspan as a consulting economist and Bernanke as a purely
academic economist. Yellen can best be described as a career bureaucrat. No
matter how prudent, aggressive or reckless the Fed has been it has never prevented
the action in spreads from becoming speculative and failing.
Maybe this time it really will be different.
After all it is the core of central banking.
Nice action on the TLT, but the next bounce to the 120 level was delayed.
They fixed Greece prompting another flight to risk, marking TLT down to 115.39
on Monday. However, it has been recovering. At 118 now, getting above the 50-Day
at 118.40 would be constructive.
Representing long Treasuries, it could take a while but through the 50-Day
and it could rally to resistance at 123.
