Massive Blows to the Foundations of Our Faith-Based Capital Markets
by Rob Kirby, Kirby Analytics. May 4, 2009
Most widely accepted and reported accounts of our current global financial difficulties place its beginnings in the August 2007 timeframe, when sub-prime [mortgage] credit markets “seized up”.
The precarious state of our financial system was echoed some time before August 2007, when none other than Dallas Fed President, Richard Fisher, espoused [in a rare moment of clarity and candor] back on April 16, 2007,
“I have spoken in previous speeches of our “faith-based currency,” a term I use only slightly tongue in cheek. The dollar—like the euro, the yen, the British pound and other currencies—is what economists call a fiat currency. It is backed only by the federal government’s power to raise the revenues needed to meet its obligations and by the rectitude of the U.S. central bank. If the market were to lose faith in either assumption, the dollar would be debased.”
Fisher’s [then] words elicit connotations of “a sales job” – to make believers out of skeptics. After all, instilling faith in skeptics “IS” fundamentally what any religion is all about anyway, ehhh?
Why We Should All Be Skeptical
Generally speaking, Central Bankers are paid to lie. We know this because former Federal Reserve Vice Chairman, Alan Blinder, “slipped” back in the 1990’s when, on national television, he uttered the words,
"The last duty of a central banker is to tell the public the truth."
When one stops and connects the thoughts of these two esteemed Federal Reserve officers one can easily arrive at the conclusion that lies [or omissions of truth, if you prefer] are in all likelihood, tied to “keeping the faith”.
Recent changes in accounting procedures of FASB [Financial Accounting Standards Board] at the behest of the assemblage of Central Bankers at the latest G–20 meeting in London will serve to obfuscate the true financial condition of financial institutions. As Trace Mayer recently articulated, FASB Changes Perpetuate Fair Value Lying;
The Spineless Gelatinous FASB
Financial companies [read: the privately owned Federal Reserve] have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. Yahoo! Finance reports,
“The changes will allow the assets to be valued at what they would go for in an “orderly” sale, as opposed to a forced or distressed sale. The new guidelines will apply to the second quarter that began this month.”
You see folks, the real reason behind the lies of the bankers and their owned, puppet politicians through ACCOUNTING CHICANERY is, yet-again, to “keep the faith” in a dying, irredeemable fiat currency regime that has long past its due date.
This same mob would like us all to believe that they are doing their level-best to “unfreeze credit markets” and get the banks lending again.
If this were truly so, we must ask why the Obama Administration last week chose to villain-ize hedge funds and make spurious claims that they “stood” with ‘reasonable banks’ and the Chrysler employees.
The reality, folks, is that this issue has been severely [and purposely, perhaps?] mischaracterized:
You see, the hedge funds that were cast in the role of “villains” in this case just happened to be the most senior, secured debt holders of Chrysler.
When one contemplates what debt is, as an asset class [as opposed to common equity] and why an investor chooses secured / unsecured debt over equity, one must consider where each of these assets stands in a receivership. Secured debt or fixed income, by virtue of its FIXED coupon, limits the upside return of investor in favor of SECURITY – that of being first in line for repayment of principal should a company fail. Investors in equity [common stock] of a company have consciously and willfully chosen more risk and the prospect of greater, unbridled returns, but assume that risk at the expense of knowing – in the case of receivership – they stand BEHIND the secured lenders of said company. A recap of President Obama's remarks,
He [Obama] lauded the company's management and the United Automobile Workers, for making concessions. He even praised J.P. Morgan and other financial firms that "agreed to reduce their debt to less than one-third of its face value to help free Chrysler from its crushing obligations" and German automaker, Daimler, for agreeing to give up its stake.
Then he slammed unnamed hedge funds that rejected the government’s settlement offer in hopes of getting a taxpayer-funded bailout. "They were hoping that everybody else would make sacrifices, and they would have to make none," he said. "Some demanded twice the return that other lenders were getting."
Then, with pointed anger, the president added:
I don't stand with them. I stand with Chrysler's employees and their families and communities. I stand with Chrysler's management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don't stand with those who held out when everybody else is making sacrifices.
President Obama’s proposed solution to the Chrysler crisis would see secured debt holders recoup the same amount [percentage] of their investments as unsecured debt holders and equity holders.
Because secured debt holders would not agree to this proposal, the Obama Administration has forced Chrysler into bankruptcy, where they hope to use the power of the courts to “stuff” secured debt holders with their prescribed outcome.
If the Obama Administration is successful in enforcing this solution on the secured debt holders of Chrysler, this might constitute a “wooden stake through the heart” of global debt markets – effectively shuttering them forever.
Remember folks, President Obama is being counseled in this regard by an esteemed list of current, as well as former, Central Bankers. Should this action end up irreparably shuttering the debt markets forever, it would run contrary to the stated goals of Fed and Treasury officials that they are doing their level best to “unfreeze” credit markets and get banks lending again, wouldn’t it?
But then again, if Alan Blinder was telling the truth when he said that “the last duty of a Central Banker is to tell the public the truth”, should any of us really be surprised?
Got physical gold yet?
Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 149 points to 8,977. North American markets responded in kind with the DOW ahead 214.30 to 8,426.70, the NASDAQ adding 44.36 to 1,763.56 and the S & P up 29.75 to 907.25. NYMEX crude oil futures gained 1.36 to finish the day at 54.56 per barrel.
On foreign exchange markets the U.S. Dollar Index lost .50 to 83.96.
In the interest rate complex the benchmark 5 yr. bond finished the day at 2.03% and the 10 yr. bond ended the day at 3.16%.
Precious metals were higher across the board with COMEX gold futures up 15.70 to 902.50 per ounce and COMEX silver futures ahead .53 to 13.07 per ounce. The XAU Index gained 6.09 to 126.53 and the HUI Index added 15.21 to 316.56.
On tap for tomorrow, at 10:00 a.m. April ISM Services Index data is due, expected 43.0 vs. prior 40.8 [any number short of 50 the U.S. economy is said to be contracting].
Wishing you all a pleasant evening and a prosperous tomorrow!
© 2009 Rob Kirby