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Thursday, July 12, 2012

LIBOR-Gate Will Take Down Many More Bankers, And The Claims Will Spiral Into The Trillions

Markets reacted to this crazy week of discredited, ADP-based employment forecasts, LIBOR revelations and central bank fizzle.  The result is plain ugly. In Europe, post-ECB, credit spreads widened.  Good-guy yields declined; bad-guy yields rose.  See our updated EU contagion series at  Note how Swiss yields are negative until the 5-year maturity (which is a whopping 7 basis points).  For new readers, see our archives on why the Swiss 10-year government bond is now the de facto benchmark for the eurozone.  The European Central Bankdemonstrated too little, too late.  This week’s Draghi Q&A did not help matters.  We continue to underweight Europe.  It is still too soon to bottom fish. In the US, the employment statistics release shows an ongoing but weakening, very slow recovery.  A plus 80 thousand nonfarm jobs is better than minus 80 thousand.  We see nothing to alter this slow but marginally positive growth outlook.  The Fed’s additional “Twist” is a whimper, not a shout.  In fact, that is probably a good thing, since monetary policy has its limits, and we are near them.  We expect no more from the Fed for the rest of this year unless there is a seriously negative event.  In our US ETF accounts we are still holding a cash reserve.  In managed taxable and tax-free bond accounts we are slowly bringing in duration and using tactical hedging where appropriate.  Our newly launched US high-yield debt strategy is developing well.

LIBOR-gate, as Michael Lewitt titled it, is a mess.  It is potentially huge.  We expect more ugly revelations.  Other institutions may be implicated.  Critics of emerging-market governance standards need to look in the mirror.  The so-called developed markets now exude a rising stench.  We will end this weekend missive with an email exchange.
Steve wrote, “David, Do you have any insight into this article?  To what degree is it true / false?”  He furnished this link to a Business Insider piece that discusses corruption in China.
My answer follows.
Steve, we have continuing questions about reporting from China.  It takes on-site anecdotes to gain a picture that reveals trends.  We do that by obtaining data from sources we know and trust.  For example, one can count containers on ships or coal inventories or financial holdings at public institutions. But why is the writer looking at China? Business Insider penned this opening:  “[Other articles have described the] widespread fraud that has become apparent, both in mainland and US listed Chinese companies… extraordinary number of the Communist Party and the military cadre  had massive unexplained wealth …” Let’s take a different approach.  I have rewritten his sentence into a different context.  Suppose you, Steve, were an honest Chinese observer, reading the following sentences about the United States.
“Widespread fraud has become apparent in the Mainland US and among US-listed financial firms.  Extraordinary numbers of political figures and public appointees have massive wealth.  Examples include (1) Dick Fuld, who was a director of the Federal Reserve Bank of NY until his firm, Lehman Brothers, went into bankruptcy.  He has not been charged with any crime.  He denied knowledge of any accounting irregularities.  (2) Former US Senator Jon Corzine’s firm was a Federal Reserve primary dealer before it failed.  Huge balances of client funds are unaccounted for at MF Global.  Corzine says he does not know what happened. (3) No one knows the counterparties of the transactions that cost JPM billions.  (4) Members of Congress and their staffs trade on insider information and are not violating US law because of the congressional exemption that Congress legislated for itself.” 

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