Page 1 of 2 Truth is too hard to handle
By Chan Akya
Kaffee: I want the truth! Jessep: You can't handle the truth! Son, we live in a world that has
walls. And those walls have to be guarded by men with guns. Who's gonna do it?
You? You, Lieutenant Weinberg? I have a greater responsibility than you can
possibly fathom. You weep for Santiago and you curse the Marines. You have that
luxury. You have the luxury of not knowing what I know: that Santiago's death,
while tragic, probably saved lives. And my existence, while grotesque and
incomprehensible to you, saves lives ... You don't want the truth. Because deep
down, in places you don't talk about at parties, you want me on that wall. You
need me on that wall. We use words like honor, code, loyalty ... we use these
words as the backbone to a life spent defending something. You use 'em as
a punchline. I have neither the time nor the inclination to explain myself to a
man who rises and sleeps under the blanket of the very freedom I provide, then
questions the manner in which I provide it!
From A Few Good Men, Columbia Pictures, 1992.
In an article that will discuss the world of finance and the apparent illogic
of the current market rally, the longwinded quote from one of my favorite films
of Jack Nicholson isn't as misplaced here as it initially seems.
The role played by the actor, of a smarmy self-justifying army general who
condones human rights abuses in the guise of defending America's freedoms, is
the same role that has been undertaken by various members of G8 governments in
recent weeks: be it US Treasury Secretary Tim Geithner and Federal Reserve
chairman Ben Bernanke in the US, President Nicholas Sarkozy of France, Prime
Minister Gordon Brown of the United Kingdom or any of their support staff
speckled around the establishment.
In another manner of discussing this, we could say that all of the Keynesian
initiatives are already being given the all-clear by world asset markets, egged
on by the "Jessep" in everyone.
Jesseps around the world will have you believe in the following: 1) There are green shoots of economic recovery to be seen everywhere in
the world; 2) The banking system has been rescued globally; 3) Corporate earnings will rise by the end of this year; 4) There is no danger of a new pandemic (see
Swine flu over cuckoo markets, April 29, 2009, Asia Times Online, ); 5) Palestinian assassins will bump off North Korea leader Kim Jong-Il to
prove their seriousness to create a lasting peace with Israel.
Okay, I may have made the last one up, but one never knows these days when
propaganda machines are in full scream night and day. In any event, it perhaps
behoves me to comment on the other items that now appear consensus for stock
and bond market investors.
About those green shoots: I have been hearing the term "green shoots" so often
for the past few weeks that it almost appears curmudgeonly for anyone to
question the notion of an incipient economic recovery. The most recent example
came on Friday when the US economy was reported to have lost "only" 539,000
jobs in April, as against the estimates of around 575,000 jobs by economists
employed at the major Wall Street banks.
Now this was supposed to be great news in and of itself because it offers proof
that the US economy is shedding jobs at a slower rate than previously. That
notion is of course complete nonsense, but more importantly, the point to note
that continuing declines in employment cannot be treated as good news in any
market; seeing as the linkage between people curtailing consumption after
losing their jobs is rather straightforward. So the first question to ask
yourself after Friday's US jobless report is whether an economy that loses half
a million jobs every month is a good place to spot economic growth.
Then comes the heavy hand of "Jessep", as a good 72,000 jobs were added on a
temporary basis by the government as it commissioned a new national census.
Take that into account and suddenly the numbers look worse than the consensus
estimate.
After that we come to the issue of serious underemployment that is now building
up in all the major economies. Much like the French sleep over nine hours a day
because very few of them are gainfully employed in the first place, there is a
lot of similar momentum being built into the other economies as governments
provide sustenance support through jobs. In effect, everyone gets to show up at
an office for wages slightly higher than the minimum, which money is used for
maintaining their standstill payments to banks and other creditors; whatever
remains probably goes to Burger King.
Nothing wrong with any of that in theory; but none of these folks on
pseudo-employment support will be any good in actually pushing up asset values
through their actions, that is, improving the quality of assets; nor will they
provide much support for consumption in quarters to come. These are people who
used to feel rich, with their US$1 million Mac-mansions paid with $1.2 million
mortgages and $200,000 in credit card limits that were provided on their
$50,000 per year jobs. With homes either repossessed or in arbitration with the
banks, such folks have been reduced to an existence long on savings and short
on disposable income.
The bad news continues on another end. Banks have been cutting credit card
limits with gay abandon as they have to demonstrate new prudence to the
regulators; so that $200,000 credit card limit is probably around $5,000 now.
I am hardly picking on just the US economy here. News out of eurozone and Asian
economies is worse; with both consumption and industrial production falling off
a cliff in places such as Germany, Japan and so on. While some countries such
as China are showing a bounce in their purchasing manager surveys (PMIs), this
is almost entirely due to the benefits of heavy-handed government intervention
in certain sectors of the economy (see
China's unreal estate, Asia Times Online, April 10, 2009 ).
Meanwhile, Marxist policies are pushing the UK into its sharpest economic
downturn, which threatens to accelerate rather than decelerate due to the
policy actions (see
G8's first bankruptcy, Asia Times Online, April 25, 2009). With the
financial sector threatening to quit the City of London over the government's
punitive tax regime and crumbling physical infrastructure, there is no hope for
the UK showing any semblance of economic growth until at least 2011 and even
that looks iffy with every passing day.
About the only bit of really positive economic news that I could discern in
recent days is that Zimbabwe has hit its economic bottom and no longer appears
to be contracting. Even the International Monetary Fund has noticed this,
despite being preoccupied with all the supposedly rich countries queuing up at
it doors, and announced a possible resumption of economic aid over the next few
months. That might actually hurt the poor folks of Zimbabwe over the
longer-term, which seems rather cruel after all the evils endured with Mugabe
regime, but such is the natural course of justice.
Rescuing the financial system
One of the proximate causes of the current rally in financial markets is the
idea that the worst is over for the world's financial institutions. This notion
is so hilariously discordant with reality that I struggle to even begin
responding without collapsing to the ground clutching my stomach laughing
uproariously.
Painful as all that is, I still need to go on. Firstly, let's look at these
wonderful stress tests that were promulgated on the US banks and serially
leaked to the markets over the course of last week. Look at the ones that the
US government decided didn't need any new capital: these include the likes of
Goldman Sachs, American Express and Capital One. Then let's examine the ones
that the government said did need new capital, such as Bank of America
and Wells Fargo.
The first one is Goldman Sachs. The bank holding company (previously an
investment bank) announced outsize profits for its first quarter, but only by
the sleight of hand of avoiding to report the rather thumping loss suffered in
December 2008 because it changed the financial reporting period from a
December-February (financial year ending November) to the more conventional
January-March (financial year ending December). That change alone meant a neat
$1.85bn addition to profits; a trifling figure that meant the difference
between a loss and a profit for the quarter.
Then there is the wonderful bit of news on the company's credit default swap
contracts (CDS) with the defunct American International Group (AIG). Thanks to
the September rescue of AIG, the government was able to pay Goldman Sachs in
full to the tune of some $12 billion, give or take a few hundred million. This
is in sharp contrast to what happened with brokers such as Merrill Lynch, who
had bought their insurance from other insurers like XL (that were not rescued
by the US government), that returned less than a fifth of what was owed to
those firms: in effect pushing those firms into significant loss positions.
Call it corruption or happy coincidence, what the AIG-disguised rescue of
Goldman Sachs does reveal though is that the firm itself is not very good at
either picking its investments or covering its possible losses. No word from
the US government whether it evaluated these two aspects: the company's actual
ability to make money and its ability to hedge the large proprietary exposures
when the "all clear" was given for the bank.
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