In Memoriam

Hello Everyone. One year ago, Charles James passed away due to a very short battle with cancer. He was 75 and left a family of 3 -- a wonderful wife and two sons. At the time I had thought about writing something on this blog to announce his passing, but it never seemed to be the right time. One year later it finally feels like the right moment.

Charles was a extraordinary Father to me. While I never had his talent for understanding the global financial system, he did succeed in teaching me (and my Brother) the value of kindness and humility towards others. I would like to think that of all of his successes in life, that was one of the things that he was most proud of.

I know that many of you visiting this site knew him through his professional career that was unfortunately cut short. Despite some of the regrets that accompanied that transition, I know that he found a great deal of peace and joy writing for all of you, to include my Brother and I. One of the things that I miss most is the phone calls to talk through his latest post, particularly the who's who that found it interesting (and there were certainly some interesting readers over the years). For that I am grateful to all of you for the time that you gave him.

I don't know if this will be my (or others) last post about my Dad, but perhaps, for tonight, that's enough.

Here's to you Dad, we miss you.

A DIFFERENT PERSPECTIVE

The Wall Street Journal had the same take on My last post on Monday with a different perspective.  The leading article was bemoaning the fact that both Stan Fisher and Janet Yellen were in the legislative business having both strongly warned about refining Dodd/Frank except perhaps for a bit of tinkering with the Volker Rule.

Now I have all the respect in the world for the editorial board of the WSJ, but come on guys, let's move back to Realville.  What do you expect from a bunch of beaurocrats...very smart beaurocrats mind you...who for the last  God knows how many years have been given a free ride on all things economic through the damn near complete abrogation of the Congress' fiscal responsiblities.  If you have been placed on the top of the hill you ain't Colin' down.  The view is good from up there.  Don't blame the Fed, blame the politicians.  The Fed is composed of human beings (surprise!) with all the foiiablies of humans.  Don't like it?  Tell your pol friends to start doing their job.  If they don't don't complain.

Anyway, having gotten that off my chest, a review of the past couple of days.

The economic data today was  surely surprising.  The economy is the second quarter grew at an annual rate of three per cent. Why? How?  To be honest, who knows?  There are explanations and concerns that this is not sustainable, which maybe true, but there are a lot of smart people scratching their heads today.  More surprisingly, to me at least, was that despite hurricanes, riots, the Little Fat Porker, Congressional disfunction and every thing else swirling around out there, consumer confidence came in at the second highest number in years.  What's going on?  On this one I return to what we observed on our road trip; every one seems to be hiring and with jobs, comes confidence. Yes, there are the usual load of bed pans and burgers but there's real stuff out there even in the fly-   over zone.  In our town there has been a tremendous resurgence in the downtown which is not exactly  Battery Park.  But $400.000 for a three bedroom out here is mucho dinero me amigo.  Something is going on and one can only hope it continues.

On a global note, despite all the good news, the dollar continues to head south.  The Euro hit 1.20 today since...well...I can't remember when.  One thing I can't understand is whilst the currency weakens the ten year touched 2.10% briefly yesterday.  Any help out there?  It honestly makes no sense but these are strange time.  Of course the strength of the Euro is making life rather for Sr. Draghi and his conviction that continued QE is the way to go.  In theory, the plan should strengthen the long end and weaken the short end: nope, it's been the other way around.  And now he's running out - of product.   Perhaps approach the pols to go further into debt?  Just kidding...then again, that just might work.

AH, RATS

They have all ganged up on me.  Janet, Mario, the whole monetary mob at Jackson Hole.  Janet is happy; Mario sounded really happy.  Nobody sending any kind of signals of worry.  If you take this meeting on face value--and there is no reason not to--the punch bowl will be refilled forever.  Which means that there is nothing going on, which means poor Charlie  is in deep doo-doo and may have to shift over to a political blog for which there is of course a tremendous need..........Not going to happen.

Somewhere, deep down for no other reason than gut, I still think the Fed is going to move before the end of the year but I must admit the confidence level is considerably lower.  On a grander scale,  I'm afraid that the administration's fiscal agenda is dead as today's central bank positioning will relieve any concern on the part of politicians for meaningful tax reform.  If the economy is as strong as believed, the view will be--all politics being local--take no risk and assume the tide will lift all boats. Of course if the nature of the congress changes...well, worry about that when it happens.  I'm not real confident about that scenario either.  More and more, risk seems to as being defined in global, political terms.  Perhaps that is the right outlook.  Why should I worry what with the Premier league in operation and the start of the college season next week.   And of course it's still georgeous out here but prayers for our countrymen on the Gulf Coast. This is going to be bad, gang.  They are going to need all the help they get.

Great weekend.

A TROUBLING REASSESSMENT

At the start of the year I was pretty convinced that we were into a new paradigm in regard to controlling interests affecting global economies.  I'm less convinced today.  It is true that we are witnessing what appears to be, for the first time in a long time, a lock-step move--upwards by the way--in global economic development but not because of fiscal or agreed economic reassessment.  The controlling modifier in all regions is Central Bank activity, or lack of the same, with the slight and rather hesitant exception of the Fed earlier this year.  But the ECB or the B of J?  Or for that matter the Bank of England?  I think not ol' so, we rather like it where we are.

Consequently, the only game in town is Jackson Hole and tomorrow is the day that has dominated talk all week: what will Janet say?  Who knows. This situation is so fluid and so dominated and influenced by politics I suspect that Janet is probably not exactly sure what it is she should say.  Then again, does she want another term as Chair, and if she does what does she say to convince The Donald that she deserves one?  As to that, like everyone else, I'm sure she has no clue. But the world watches and waits as shall we.

Whatever happens I am afraid it is looking more and more as though the next couple of years, at least through the next U.S. Election cycle, that is is the Central Bankers who hold the Trump. Cards...every pun intended.  This, IMHO, is not a good thing despite what has been so far this year a rather successful turnaround, especially in Europe.  Does anyone really believe that the elected heads of the governments of France and Germany wield more influence over the European economy than does Mario Draghi?  And in the U.K...well, perhaps it would be an easier question if one could determine just who it is the political leader of the U.K.  To say that Ms. May has been a bit of a disappointment....well we are British you know a prone to understatement.  Americans just might call her dim.

So we await The Janet.  At 2.19% it is too low you know.  There's a lot going on out there and somebody, hopefully it's Ms Yellen, had best start shooting in front of the duck despite the seemingly begine inflation data.  Perhaps we'll have a better handle on where we go from here this time tomorrow...or not.  Anyway it's still a wonderful summer in the Fly Over Zone.

BACK IN HARNESS

Ten days and about 2500 miles later.  It started out as a simple drive down to NorthCarolina for a wedding but...developed.  This is a really big, beautiful country. We had never seen the Smokey Mountains;  Wow!  Friends all along the route who were needed to restore confidence as T & S managed to remind me for at least 2200 miles what a lousy driver I am.  She says she's still surprised she made it home alive.   One of these days......

A couple of impressions:  it doesn't appear that the part of the nation we visited is in imminent danger of revolution, civil war, Nazi takeover or anything else for that matter. As a matter of fact the one thing that struck me throughout the entire trip was the presence of "help wanted" or "now hiring" signs.  It's been a while since I have seen so many; it was truly remarkable which is what we did on a number of occasions.

The second thing is that there is very little sign of economic depression, at least in places like Charlotte which admittedly was hosting the PGA last weekend.  The joint was jump in'...really jumpin!  And along the entire route concern over the spending of money didn't seem to exist.  From what we could see the attitude out there is clearly different than a few years ago.  Same here in the Flu Over Zone.  It was kinda fun and refreshing.  I had to read the NewYork Times today to realize that it is all a myth and that we are really doomed.  Oh well, back to reality.  I could I be so foolish.

SUMMER THOUGHTS

Remember the London Whale?  He was the guy who managed to double down on a bad position and lose J.P. Morgan about a gazillion a couple of years ago.  Ok, bad things happen to good guys and even jerks but the ballon really went up when Jamie the Greek poo-pooed the whole thing with what amounted to "a billion here a billion there moment, who cares."  Red meat to the thugs that ran the Justice Dept and the Financial overseers. penalties, fines, law suits and...wait for it...criminal prosecutions!  The World's greatest Asst. Attorney General, Preet Baharra was all over this one.  He was going to take down the Whale, the Greek and J.P. Morgan Chase itself.  'Ol,Preet was going to be bigger than the biggest Sacred Cow you ever did see.   So he did what any good prosecutor would do.  He flipped the supposed head perp in order to spear bigger fish...and then Trump won.  Bye, bye Preet, but in the meantime, the Whale skates, rolls over on his two off-siders and the prosecution begins. But there were a couple of problems right from the start.

Preet had convinced the Whale to admit to all the bad things that had been done but then some kill-joys starting asking whether these events were crimes or acts of stupidity.  Then of all things the bad guys decided to hire some pretty good counsel who were becoming some real pains to the new team in the Southern District and just last week the Whale decided that his guys didn't have anything to do with the bad stuff at all; the real blame was with Jaime and management.  And he went public.

Now I happen to think that the Whale had this in mind all along and flat suckered Preet & Co. not that I have any evidence to support that theory but simply because I detest Preet and the slugs to whom he reported.  But in the mean time, this exercise in arrogance has cost the shareholders of J.P. Morgan billions and as of Friday, his successor dropped all charges stating that the case...if there ever was a case...was unprovable. And the taxpayers, along with a half dozen other cases that have been thrown out or reversed, millions.  Of course Preet and his mob where paid millions in bonuses as well.  Who said thuggery (no pun intended) doesn't pay?  No one I guess.


Second thought: the continued slide of the dollar especially against the Euro.  I can't figure that one out.  The common theme has been the solid performance of the EU economy but if one actually looks at the numbers, the U.S. Economy is (surprisingly) doing just as well if not better.  American exports have never been higher...is that good for the Euro.  American technology is becoming more and more dominant.  Trump may be a complete jerk but as William Jefferson put it, "It's the economy, stupid:" jobs are up as is pay, unemployment is at record lows, confidence numbers are sky high.  This keeps up, the guy is going to be hard to beat in mid-term elections despite the predictions of t he experts...and we know how right they have been in the past.

So, is it monetary policy?  Today, the buzz word was "two and through," in so far as Fed was concerned.  No tightening, low rates; but our ten year as opposed to the Bund right now?  Hell, if that was the standard it's own dollars all day long.  Besides, there WILL be another rate increase this year.   So why?  If anybody can help me out, let me know.  In the mean time, I'll just keep thinking.

SCHANDENFREUDE

Not nice I know but sometimes you simply have to give in.

Goldman Sachs showed up at the bottom of the fixed income list today.  It's pretty clear they misjudged the--at least short term--the direction and disposition of the business much to the benefit of the Two Morgans and Citi.  Happens in the best of families.  Wholesale distress at Goldie; firings, departures, finger pointing, etc.  And, according to sources close to the situation who spoke under conditions of confidentiality, a movement for a charm offensive with their best clients.

Many years ago, we shared a client with Goldman.  Big name, big money.  Goldman put forward a very, very complex financing/risk management program.  It made sense to the client who showed it to us but didn't try to shop it.  Good client.  They engaged Goldman but not before having a conversation that sort of went like this:


"Look, we're going to do this but I know you're screwing us. It's not going to make a difference...we're going to do it with you.  But you have to tell us how you're screwing us because we can't figure it it out."


Goldie did and did the deal.  Years later, one can't help but smile.  They were goooooood.

THE END OF THE AFFAIR

LIBOR.  No More.  Banished by 2021.  It's like haven't your girlfriend announce she's leaving.  To be replaced by...well, we're not sure about that.

In one of the greatest cynical,acts of all time since Looie shut down Rick's Cafe Americain, the banking authorities in England has determined that the City could no longer support the touchstone that for the last 50 years has been central to international credit and today supports probably $500 TRILLION of financial transactions about which we have knowledge.  More?  Probably.  The reason?  Sacre Bleu!   There might have been some messing with the rate!  Les Banques Horrible!  Of course the buggers knew nothing of this...why they all thought that LIBOR Was the perfect lending rate.  Of course they were the only ones.

We've gone over this ground a number of times but you really have to stand in amazement and shake your head at the latest attempt on the part of beaurocrats and overseers to reinvent the wheel.  A short recap.

LIBOR came into existence to support the growth of syndicated lending simply because no bank would trust another bank to set a borrowing rate on its own.  NO BOD EE thought it was accurate to any degree as reflecting a universal lending rate among "First Class Banks in the London Market..." as was the definition of LIBOR.   Indeed, in scouting for quotes among syndicate members, upon the entry of Japanese Banks, one ALWAYS asked for a quote from a Japanese syndicate.  No Japanese bank could ever borrow dollars at at level equal to, say, Morgan Guaranty, and you would therefore get a higher quote from the Japanese reflecting it's cost of funds (or a tad higher) meaning that the definition itself was a fraud.

Yeah, in more recent years as other, internal, products developed, bad actors undoubtably did collude to try to enhance internal positions but as of this date I know of no successful suit by a borrower or a holder of any instrument whose return was determined by LIBOR who has successfully recovered either damages or losses as a result of collusion.  Who was hurt?  The institutions and their shareholders who were perhaps duped into paying higher remuneration that deserved to dishonest employees.  And who paid the price?  Well, the institutions and the shareholders of course as a result of regulatory shake-downs measured in the billions which were based on absolutely nothing even remotely resembling actual loss or damage.  Oh yeah, there is some poor guy from Citi doing an 11 year stretch for being the "ringleader;" not another person has been incarcerated.  And now ends LIBOR.  Finito.  WE have done our job.  WE have eliminated the problem.  WE will build a greater system.  WE cannot longer be blamed for whatever happened that got politicians mad and which no one understands to this day.  WE are safe.  Of course there will be no more prosecutions.  We got lucky with one; let's not press our luck.  On top of that it might cause people to remember.  Pity the British Bankers Association had to go.  The dinners were always grand, but that's progress.  Oh Clive, another large Malt please...one piece of ice.

Greatest weekend of the year...have a good one.

A LOVELY SUMMER DAY

Another one for pity sakes.  That makes Seven on the trot.  And as if to mimic the weather in the Fly Over Zone, the world...with the exception of the press and the Trump administration...continue in this summer swoon.

The Fed did exactly what it was supposed to do this afternoon; nothing.  Back to the beach.  Of course everybody figures that Janet & Co. will begin to taper the QE holdings later in the year (announcement in September, being in November?) assuming that the "data" supports that action.  The Fed pretty much confirmed that today.  Maddeningly, inflation refuses to play along remaining invisible but I suspect that a solution to this when the time comes because there remains a strong belief that "it's the right thing to do".  And yet...

The consumer confidence number this week damn near broke records but the "real yield" on govvies remained low which in other times might have been perceived as a really strong view out there that the economy wasn't real hot and in truth there have been some underwhelming numbers as of late but not this week.  With expectations remaining strong for the Fed tapering the dollar has been in a steady slide since the first of the year but is this really a bearish sign particularly in respect to U.S. Exporters?   I think not, then again if this were the case wouldn't the equities markets be anticipating a slow down?  Another record close today and looking at high yields...equities by any other name...like, Dude, there's a TRILLION AND A HALF outstanding.  Want to worry bout something?  How's that for a start.

Is the Euro Zone in the same spot?  Well, Mario seems to think that the robusto economic performance he talked about is a bit too spotty to tighten up just right now despite the fact that Greece of all people just floated a highly successful 5 year issue--yielding 4.65% mind you--and with a substantial portion reserved for a debt exchange for bonds dated in 2019.   But Greece!  How bad could things be?   Anyway, in the always interesting Heard on the Street column on Monday there appeared an article on the "shadow rate."  Two Chinese ladies have apparently presented a paper gauging at what level rates need be set, using longer dated credit instruments to calculate the real rate at which the ECB's. Benchmark rate need be set to be truly stimulative.  Apparently, the rate is -5.1%

Now I know the Chinese are really good at math and I'm sure the math adds up but come on gals, let's spend a bit of time in Realville.  Full disclosure:  give me the study and a road map and I probably wouldn't understand it, but frankly the argument made that when the QE was undertaken by the U.S. Yields remained relatively low because in the highly integrated markets the yield effect flowed through in the foreign exchange markets rather than in yields as in past years.  So I ask, "what years?"  
The follow-up might be, "who cares?"

It is a fun article...read it.  But I bring it up not for that purpose but as an example of the extraordinary  amount of effort going into explains what remains unexplainable.  We have never, at least not in my long lifetime seen a set of circumstances such as those which have brought us to this position in which we find ourselves...for good or not so good.  The fact is we are in unchartered waters and guessing as to the course to steer.  My concern has always been that coming from confusion and having arrived at a place that has little resemblance to any previous location, might it not wise to perhaps do as sailors have done since the first keel was laid: go with the flow and the tide for a while?
An admission that we are somewhat in the dark might be a good first step

MARIO, PUMP PRIMER

I suppose one should simply conclude that Mario just wasn't ready despite his comments that the Euroland economy was robust and the future was looking bright.  Funny, when I was growing up central bankers were viewed as exterminators and the bug they were after was inflation.  Worse than a cockroach, inflation.  Tall Paul, starting in 1979 killed most of Latin America and points east and west for a generation.But by God he killed inflation!  Oh, he didn't mean to wipe out half the world but not even a guy as smart as Volker can always spot the Law of Unintended Consequences at work. But today?  Mario has a strong economy, a strong currency, a tame IMF but what does he want?  INFLATION,  When does he want it?  NOW!   Until he gets it, free money for everybody.  Why, one might ask.

I suppose there are really good reasons for this and in what was an attempt to justify the same there appeared a story in one of our great New York newspapers as to how Sr. Draghi's policies saved an Italian manufacturer of railway cars in a moderate sized Italian city.  The names shall remain unmentioned here.

Seems as though this manufacturer was having a spot of trouble in obtaining financing to supply Ferrovia Della Stato, the national railway of Italy.  Up pops Mario and his plan for quantitative easing and lo and behold the unnamed corporate heads straight to the bond market with the idea that there might be a bid out there for his debt (where did it get that from?).  Corporate gets money, Ferrovia places an order, jobs come back and the town is saved!  What could be better?

Now by this time you know I'm a suspicious sort but in this case there's nothing about which one should be suspicious.  I mean, just because it appears that the lack of purchases might have been caused by the fact that technology had rolled past the Italian cho-cho manufacturer (it had) or that the manufacturer wasn't Italian any more--it had been sold to a Japanese competitor who apparently was on the cutting edge for the product.  Which leads a stinker like me to wonder why the company needed subsidized financing at all unless.........and of course this could NEVER happen in the EU that someone dropped a dime to inquire about the availability of cheap financing if the going broke company in the declining city might negotiate a sale of itself to a White Kn...er...Samurai.  Could it?  Nah.  So why should I be suspicious?  I'm a troubled person, I really am.

Anyway, it's nice to see that stateism  is alive and well in all corners of the EU.  What would we do without it?  And perhaps we can learn.  Take Solyndra for example.  Governments...even central bankers are not real good at picking winners.  Not even graduates of the Goldman Sachs School of Crony Capitalism like brother Mario but he's better than most I guess.  It was better when all these guys and gals needed to do their jobs was a can of Raid.  When I was very young.

Have a great weekend.

HUH?

This was to be a provider of deep insight into the financial future of the Euro Zone following Mario Draghi's press conference today.  He gave the presser: I have no idea about what the hell he was speaking.  I'll spend the rest of the evening trying to figure it out.

Tomorrow.

BEEN THINKING (AGAIN)

...but before that, there seems to be no end to this thing.  Equities up again; yields down; weather is great (until tomorrow...mucho caliente).  Despite all that is swirling around the pollsters (now THERE'S trouble) are telling us it's the economy stupid which everybody thinks is good and getting better.  Works for me, but I was really thinking about Asia and in particular Korea and along with that China and what we had discussed a couple of years ago.  A reserve currency.

 The Little Fat Porker is a real problem.  Worse yet the solution to the problem--China--will not, do not even consider CANNOT-- help solve this thing.  One word and the Little Porker is bacon but nope, not in the cards.  Apparently nothing else either.  Forget about sanctions, pressure, harsh words...the Porker could care less.  But on China?  Ah.

Now I rarely get into political questions but clearly, if pressure is to applied to anyone in this picture with any chance--however remote--of success it is China.  And so let's go back in time a bit and revisit the Yuan, the IMF, and the one overriding concern that this blog had at the time.

Your scribe had expressed concern at the time as to appropriateness of the rush to judgment  as to the currency given the somewhat, ah, spotty record of the PRC in regard to manipulation, convertibility, openness, honesty...well, you get the picture...but most importantly was asked the question, "From a foreign policy standpoint do we really want to risk a substantial portion of global trade to be exercised in Yuan?"I think the answer, once one thought about it was, "No," but the pressure and the willingness to bow to the same by the IMF was quite overwhelming.  As was usual, the Obama administration was less than fully involved.

Remarkably, in the intervening time frame all of the conditions  causing the concerns not only remain but in some cases have been magnified.  Had the PRC played a very good hand with any form of skill the landscape today might be a good deal different.  As it stands, the dollar remains far and away the dominant world currency with the Euro solidly in second place.  But had China chosen to liberalize?

The most important point to take away from this both then and now is that because of the currency the options available to the government of the United States are really quite broad.  Access to the financial system of the United States is essential to any internationally focused nation and absolutely essential to any financial institution therein. Even China and  Chinese institutions.   If the solution to the Korea quagmire is through China and if China need be pushed, the pressure will come through the financial sector.  This is going to be very, very difficult as, unfortunately, the Euros hardly feel as threatened by Korea as do we or especially our Asian allies, and it will be a true test of the ability of the Trump administration.  To this point we dodged a bullet as a result of the incompetence of the PRC and the ability of such a regime to conform to required standards.  Luck, however, is not a strategy.

A LOVELY SUMMER'S DAY

We've had a lot of those here in the fly-over zone.  Georgeous.  Don't want to do a damn thing including attempting to write a financial blog when nothing of real importance is happening.  One of my buds from the West Texas Town of El Paso rang up today to add to the mood.

"Charlie, yo'all better tell the folks out there that's it's different this time.  Ain't nothin' to worry 'bout. Nothin'."

 Michael is an interesting and learned guy.  Far as I know the only two W-2s Michael ever earned in his life came from the U.S. Army in fulfillment of his ROTC commitment.  Michael is in the oil bidess.

"Yes sir.  Everything's gonna keep going up.  Ain't no chance of nuthin' goin' wrong."  Nuthin' but geniuses runnin' things now."  And the whole world's safe.  Ya hear. Tell 'em Charlie."

"Where do you have your money, Michael"

"Cash. I've made too much.  Just gonna leave some for the rest of the poor people out there.  Christian thing to do, Charlie.  I'll talk at ya."

I always wind up looking at the phone for a few minutes after Michael calls, trying to figure out whether he's a genius or simply starkers.  Still don't know.  It sure is quiet out there, however, even with the insane goings on over health care with which more people seen bored rather than concerned...at least around here...so maybe he's a genius.  Anyway, with nothing happening, aside from a real, well-received outburst from Jaime the Greek last week, I started thinking on more global issues.  Korea, China and financing popped up.  Tomorrow.  We'll go over some old ground that suddenly has become very relevant.  Right now, I'm going to sit on the porch, sip on the other half of a Bombay and actually have a Fidelista for the first time in a long time.  It's really quiet.







.

THE FED AGAIN

I mean unless you are devoted to another daily Russia Trump conspiracy story, the only real news out there is the Fed.  Janet was up on the Hill today making it clear I thought that this might be her last hurrah.  In the mean time it was about an upbeat report as one could have expected: with the exception of lower than expected hourly earnings and inflation (?), everything is looking good.  Equities responded with another record-setting day and bonds were benign.  Anticipation is building in regard to second quarter earnings even among airlines and especially banks.  The latter bunch should really knock it out of the park as all the stars aligned in the past three months.

But the really interesting event of the week was the nomination by the Trump administration of Randal Quarles as a member of the Fed, as a Vice Chairman and the head of Supervision finally filling the seat occupied by the unconfirmed Big Danny (unconfirmed due to having never been proposed, having no chance of being confirmed, having...oh, forget it).  With all the talk of Draining the Swamp, there is no more of a D.C. Insider than Mr. Quarles.  Bush 41 and 43 insider, Carlyle Group, this dude is Son of the Swamp Monster.  Then again, from what I hear he's not a bad guy with few ideological hang-ups and he will certainly come to the position without the madness of Big Danny and with considerably more real world experience which is exactly what is needed.  Things are looking up all over.  Remarkably, with the headlines dominated by the political reporters, it is surprising to note that The Donald is actually getting stuff done which...without any plan on his part other than some serious serial dumbness...under the radar.  Genius?  Ha!  But it's happening.  Guy's off to Gay Paris tomorrow to meet with the new French Prez.  Not a word among the talking heads about that.   Macron may just find common cause with this guy from the standpoint of attempting to demolish the status quo of Euroland (Germany, if you haven't been paying attention).  Problem is I'm not at all sure as for what purpose.  Allons Enfants!  Could be a good ride.

FED WORLD

it's always good to get a look inside at the musings of the Fed as occurred today in another release of it's minutes from last month.  Reassuring as well.  Seems as though the decision has been made to reduce the balance sheet from its present $4.5 trillion level and thank goodness the Fed is sure that there will be no upsetting the market while so doing.  Whew!  Knowing that is, I guess we should pay no attention to the movement of 10's all over the world in the past week at the suggestion of what was announced would be announced.  The again, $4.5 trillion are a lot of bonds to be moving around, keeping in mind that the Euros and the Japanese and the Brits have more than that on their own as we keep pointing out and which are going to be moving at the same time.  Look, I certainly hope the Fed is right but.......

From the mysteries of international finance we turn to the Little Fat Nut who shot off what people are calling a game changing missile to celebrate July 4, a G-20 meeting that according to some has the potential of turning into a Brannigan and the mess that is the Middle East...all of which seem to have absolutely no effect on global markets (other than bond yields) as equities slowly reach new highs every week.  I continue to stand in amazement at the seemingly complete lack of concern.  Then again, the Triplets turn 10 in two days so what do I have to worry about.  We're headed off for the birthday party weekend and will be back on Tuesday.  May try to sneak in one tomorrow on The Donald's Excellent Adventure Over There but the bet is nothing happens until he and The Put go Mano a Mano.  My bet is that is anti climatic as well.  The Little Fat Nut?  Ah,  that's a different deal, but not this week.  The U.S.A...in the year of its Independence, the 241st. And the Trips in their 10th. Not sure which event is more glorious, but I know it will be a good weekend.

BANK WEEK ENDS

Just a few short comments.

1.  From a regulatory standpoint, the system is in good shape.  Query: do we have the right regulations?

2.  Whether correct or not there are a hell of a lot more regulations with which the banks have to deal.

3.  Regulations in every situation one can imagine will restrict or make more expensive any business.

4.  Regulatory applicability must be examined more closely.  Citibank and the First of Boot Hill belong to different holding companies.  They should be regulated differently.

5.  At the present, the industry is looking more like a bunch of utilities.

6.  What we have seen, as expected, has been the roll-out of plans to return excess capital to shareholders through increased dividends and share repurchases.  Is the repurchase of shares he best imployment of capital?

7.  The answer may be "yes."  Why?  A global economic expansion in developed countries of less than 2%', substantial regulatory limits on the use of capital, substantial reduction on the ability to trade for one's own account, reduction in international business (Big Danny Lives!), increased competition from a mostly unregulated shadow banking business and, yes, the continued advancement of artificial interest rates.

An aside.  Interest differential lending in the corporate sector was never a particularly attractive business, hence the increased emphasis on retail and credit card exposures both of which, however, from a risk standpoint are greatly affected by overall economic conditions.  Enter off balance sheet activities leading to, for example, the creation of assets for resale and the distribution of the same.  But this being the case, under present conditions big is going to be waaaaay better so expect to see a decline in the number of community banks in the future.  Let's hope we see banks in the future.

AWAY TO THE RACES

As expected, the subjective portion of the stress tests posed no problem.  Everybody passed and as a result the flood of excess capital being returned to shareholders has begun with Citigroup expected to be allow to distribute 135% of its earnings as a result of being in Big Danny's dog house for the past four years.  The entire sector went nuts on the equity side with the expectation of higher returns coupled with the continued expectation for further central bank tightening and the beginning of the unwind of bond portfolios moving bond yields sharply upwards resulting in better lending spreads.  Unfortunately, everything else got killed in the rotation which includes the dollar.

Now we all know that central bankers are among the world's smartest people, right?  So why can't these guys and girls do a bit better in presenting a common front so that most of the Hoi Polloi can figure out what the heck is going on rather than bouncing off walls for the past four days in an effort to get their positions right.  Or maybe, just maybe it's not the central bankers' fault at all.  Might it be that the latest  crop of Masters of the Universe aren't so masterful.  As we keep saying there is about a $10 billion overhang out there that has to get "rationalized" at some point so why not now?  The bet has to be on rising interest rates which, if coupled with fiscal structural adjustment just may present a soft landing.  There is a shot at it.  Better than I thought.  Clearly, Trump ain't no Obama but what I really missed was this new guy in Paris, Macron if he continues on the course he has chartered.  I though the guy was all hat and no cattle but I may well have been wrong which I will happily accept. In fact, if he is the real deal, he margin of victory at the polls could make him unstoppable.  He's so confident that he made nice,nice to The Donald in inviting him to the Bastille Day events.  Great fun by the way.

So just a word to the Very Wise.  Be careful boys and girls because those affected may not be as bright as you think and from the little fat nut in Korea to...well, pick a spot...there's a lot of knarly weather.  What many tend to forget is that there is no difference between a Euro and a Dollar.  There's a time for everything.  Get it right.

THE DIVINE COMEDY

Dante wrote the original version.  Italy and The Boys in Brussels and the ECB have been busy on the sexual.

For those who pay attention to such things Banco Populare did Vicenza and Venetia Banaca are well known; for those who do not they are a couple of busted Italian banks who have been in that shape for some time.  Kept on life support, last week the situation became impossible causing the ECB to declare the banks as having failed and requiring a dissolution under the Euro version of the "living will" as we call it  Over Here.

Simple, right?  Except that this is Italy and Italy is Over There.

Seems that there is a section in the ECB rules and refs that says if a national government determines that the survival of the bank in question is important to the region, rather than The provisions of the EU and the ECB, the government can apply its own bankruptcy laws to the resolution of the problem. OOOOOO-K.  Just what does that mean?   Well in the case of these two sterling institutions here's what happened.

Italy decided that the institutions were important to the neighborhood (Venetian and Tuscany...not exactly pockets of poverty) and as a result home rule applied.  At the end of the day, shareholders and   Sub-debt holder (more on that) got creamed, the government decided that after a "transparent decision process" (who knew?), Inter Sanpaolo would assume the assets, employees and businesses of the two institutions.  And oh, the senior debt holders would be protected.  It gets better

Taking a page from some previous operations, there would be a "good" bank and a "bad" bank.  In order to deal with the "good" bank, Inter would get about five billion bucks as a thank you for taking this on.  The "bad" bank?  Eh, we gonna guarantee you about thirteen billion so you no getta hurt.  One wonders why Italians tend not to pay taxes. Or, as one guy put it a while back, gains are privatized, losses are socialized.  Banking as it should be if you ask me, but nobody is.

Aside from the farce of it all there are a couple of serious questions that might be asked such as what the hell is the real policy Over There for dealing with failed banks?  Then there is the issue of the sub debt which is not your everyday piece of paper but a specially developed instrument which in many jurisdictions has been a prime source of newly issued bank capital.  This is there first instance where it has been REALLY treated as capital in every respect.  What is is future and how will it trade?  Finally, in a moment when Dodd/Frank is being reviewed and re-written, is it possible to square the circle with the two major regulatory systems and if not, what will be the outcome.  Got me on that one but we're going to visit a few more circles Down There before we get the answer to that.

THINGS ARE LOOKING UP

There is actually stuff bubbling up about which I can write!  Stress tests, for example.  Everybody passed with flying colors!  At least the quantitative portion which everybody passed except when Big Danny was the self-appointed risk maven and he hated Citibank.  Still have the qualitative portion to go but I suspect that with the new sheriffs in town we are not going to see much action there either.  Except for...perhaps..Wells Fargo.  Hell, why not.  Pile on.  They're too dumb to worry about, but of course it's the wrong forum.

All of this is a big yawn for me of course as is most of the safety mechanisms touted as being reason the system is sooooo much safer today.  Another reason might be that those business lines about which there was so much concern have shifted to the non-banking sector...the very much under regulated sector I might add...but why repeat myself.  However, test results such as this do raise some interesting issues as it is based on these results --and other criteria--that regulators decide the amount of capital, if any, can be returned to investors.  Anyone say "Citibank?"

Back in 2008 you could have bought a share of Citigroup for about $3 a share.  I did.  I mean, too big to fail, right? Well I got my money back...last year.  Didn't make much in the meantime as Citi didn't pay a dividend for a year, but with the management of Mike & Mike, they did begin to make money, clean up an unbelievable mess and grow capital.  They really grew capital to a point where their return on capital was awful.  Could they have done better? Probably.  Are they over capitalized?  Although it's impossible to know what a bank really looks like unless you are inside of it, undoubtably.   But because of the low investment returns, clearly required in past years, the continued non recognition of the investor base by both regulators and the market not only penalizes Citigroup investors...ME...but I would argue that the continuing questioning does no good for an industry as a whole which, even to this day, is really only as strong as it's weakest member.  Ok, that may be a bit much and it is not the regulator's job to look after poor'ol Charlie, but Citibank is not the Last National Bank of Boot Hill.  It counts.  I think it's good to think about these things.


Tomorrow The Regulators Euro and La Bell' Italia.  You can't make this stuff up.

RIGHT ON TIME

The WSJ published a very interesting article concerning winners and losers in the bond market following Dodd/Frank.  Not surprisingly, it was determined that bigger is better.  No kidding, but the real tale is the switch in the nature of the market makers or perhaps a better phrase would be the participants in the market because market maker implies a very specific function.  I'm not sure the nature of the business remains the same and as I have written this could, through the lack of future liquidity, present multiple problems.  This is the real importance of the WSJ story.

We have gone over the importance of being able to move paper, in size, particularly during periods of market upset, and there is no need to replow that field again.  However, what has not been discussed is the very simple  delineation between banks and other financial corporation and it is almost as simple as Paul Volker's observation that, "Banks are different."  What's the difference between Citibank and a hedge fund or a private equity fund...or for that matter even an enormous funds manager such as Blackstone?  The association with the Federal Reserve.  These days the Fed doesn't like to point that out but in the end, it is the last refuge in a desperate situation, BUT to take advantage of what the Fed offers you have to be a bank.  Make a market?  That means you use your capital often when it inconvenient to so do.  What's the difference between capital and liquidity?  In certain conditions, not much.  At the end of it it comes down to the Fed and if you can't go there...well, you don't make a market which if the condition is enough widespread, exacerbates the problem.  So thanks, WSJ.  Between us we might fix this thing.  Of course we might need the Fed to own up to some basic truths out there in Realville.  That could really help.