Monday, October 19, 2009

It's The Banks (Plus Kissinger On The Dollar And China)

If you are wondering what lead the recovery of broad stockmarket indexes, look no further than the chart below (click to enlarge). A comparison of relative performance between S&P 500 (yellow line) and the KBW bank share index (black line), it shows that banks rose almost three times faster, since the market's nadir in early March 2009.

BKX +160% vs. SPX +60%

The reason for such outstanding performance is quite simple: Washington's credo of "too big to fail", i.e. trillions in public bailout money. Once it was fully understood just how far the Fed and Treasury were willing to go to prevent "our crowd" finance from going under (sorry Bear, sorry Lehman you weren't "in"), the rebound happened almost instantly.

And it's not only happening in the United States. In the same period bank shares have broadly outperformed in Europe, too: the DJ EURO STOXX (Banks) index is up 175%, whereas the broader index is up 60%.

DJ EURO STOXX (Banks): + 175%

DJ EURO STOXX 50: +60%
Charts: STOXX

Such nearly identical behaviour between American and European markets is not a coincidence, of course. Even though the EU does not possess a common Ministry of Finance (Dept. of Treasury), it does have one European Central Bank. And it is acting just like the Fed - at least as provider of ultra-cheap credit to banks in return for dodgy collateral.

As of last week, the ECB's own balance sheet has grown 50% to 1.8 trillion euro versus 1.2 trillion in the same week in 2007. The entire increase has come from long-term refinancing operations (i.e. term lending to banks against collateral) and "other" securities held for its own account.

Important P.S.

Henry Kissinger is no dummy, whatever you may think of his politics and career. He had this to say about China, the US economy and the dollar, during an interview with Le Figaro, France's newspaper "of record". (In my dear friend Debra's honour, I have kept the title of the article in the original French. The rest of the relevant passages I translated into English, with some help from Babel.)

«Les Chinois ne veulent plus de la domination du dollar sur l'├ęconomie»

Q. You just returned from Beijing. What is the feeling of those Chinese in government about the international financial crisis, which started in the summer 2008 in the United States?

HK. I will give you my personal opinion, which is only that of an informed observer. I do not speak on behalf of the Obama administration, for which I have much respect, but to which I do not belong. There are always important political divergences between the Chinese and us, the Americans. They are not very serious, they do not threaten peace in the world, but they exist. They are managed by very intense diplomatic relations, by the existence of very many work groups between our two countries.

The Chinese do not trust America to carry out the great political affairs of the planet well. They find that ideology forms too large a part of the way in which Americans conceive international relations. On the other hand, the Chinese, before this financial crisis, regarded us as serious and reliable people in the fields of finance and the economy. They trusted our model and wished even to imitate it. The violence of the crisis, the irresponsibility shown by the great institutions of Wall Street much surprised and shocked the Chinese. We deeply disappointed them.

Today, they have accepted their losses, but they will never again trust us in financial matters. This is the great change. As they are pragmatic people, they understood it was necessary to manage this crisis in co-operation with us, so as to limit the damage to the real economies of our two countries. They take into account that a very large majority of their immense monetary reserves is in dollars and that their exports of consumer goods to America remain vital to the health of their manufacturing industries. The Chinese leaders managed this crisis in co-operation with their American counterparts during the last twelve months, and they will continue to do it. But nothing will be like before.

Q. You alluded to the fact that the director of the central bank of China declared, at the beginning of this year, that the dollar could not continue to be the world's reserve currency, and that the world should seek to create another standard, applying the model of the SDR (Special Drawing Rights ) of the IMF?

HK. It is clear that the Chinese do not want the dollar's domination of the worldwide economy any longer. They do not yet have a real solution, they know that it does not depend only on them, but they are patient people, who are accustomed to rise to long-term challenges. As always, they will only act very gradually.

Hmmm.. Bob Fisk a couple of weeks ago, now that ultimate realpolitik operator (and original China hand) Henry Kissinger. Anyone think warning rockets are being sent up? Eh?


  1. Yup, the EU Central bank behaves JUST LIKE the Federal Reserve.
    It's the contagion factor. It's... contagious.
    Why belabor your neurons trying to find NEW solutions to old problems when you can just go ahead and... COPY your neighbor's BAD solutions to the same problem ?
    Handel, Messiah :
    "All we like sheep have gone astray.
    We have turn├Ęd every one to his own way."
    Reading this post reminds me how much I HATE the banks. "They" are arrogant, imperious, and painfully conscious of being our modern... temples.

  2. It's human nature to become arrogant when given lots and lots of power.

    And there is no greater power (except for times of war), than to be able to issue "money" (aka credit) at will and with minimal regulation. In other words than to be a Banker (capital B).

    But, as with all human affairs since time immemorial, the wheel turns at the peak of hubris and the fall comes, as sure as night follows day.

    And you know what the absolute peak of hubris is, Debra? For the bankers and financiers, I mean?

    It's right now: the current sense Bankers have that, not only have they dodged the bullet they themselves fired from their own guns pointed to their own hearts, but that they are now poised to become even MORE powerful than before.

    They actually believe that. Just look at the monstrous bonuses they are about to announce.

    I have a sneaking suspicion it's not going to sit very well with the People.

    A tout a l'heure..

  3. It's no surprise that the banks will lead the recovery since they got most of our money to bail them out. But now there will be billions of dollars in bonuses again. Isn't this ridiculous; since it's our money that bailed them out, we should have a say on whether they deserve their bonuses or not. They say that it's because these people are not going to stay at their job if they don't get those bonuses. I say let them go because I bet there will be people out there who will work harder for less money.

    Evelyn Guzman (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)

  4. these people are not going to stay at their job if they don't get those bonuses

    I think the main concern is that the disgruntled employees might throw a narcissistic fit of rage and narc on their former colleagues!

  5. fajensen,


    By which I mean, by their stripes shall ye know them. How have the Bankers operated so far? Blackmail and extortion, coercion and fear?

    Then why should we expect anything different from within their ranks?

  6. I think people underestimate the power of fear and Fox. Did you notice any organized tea-bagger protests to the bailouts from Fox? No, it's all about nickel and dime corruption (Acorn, stimulus waste) and socialized medicine.

    Fox, and the other "news" agencies, will air the agents of the banks talking the scary scenario of collapse.

    Therefore its probably a ten to fifteen year recessionary payback by the taxpayers, at least that's the rosy hopeful future.

  7. Hell, why would you not read Kissinger's comments as an recognition by the Chinese that there they may indeed take something of a bath on their US investments?

    If I have understood you correctly, you have always said the Chinese would see a deliberate dollar collapse as an act of war. This seems to suggest they now see it as almost inevitable.

  8. Putin is The Man:

    Russia ready to abandon dollar in oil, gas trade with China
    "Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said.

  9. Marcus, Fox news and the people aren't really connecting with all of this because American EXCEPTIONALISM, alias hubris on another plane, has been self inflating for so long that nobody any longer can imagine what it would be like for the dollar to bottom out.
    Maybe the U.S.'s shitty TV and entertainment industry has dumbed down John Q. Public for so long that this is possible (not in all circles, I definitely concede).
    The question : will this drama act out with all the violence of Elizabethan Shakespearean tragedy, or will we go out, rather, with a ... whimper ?
    Thanks for the Figaro, Hell.
    It certainly is quite a luxury to read the Figaro in translation on this blog, given that I NEVER read the Figaro in French, even...It leans a little too far to the... right for my anarchist tastes.

  10. Debra,

    Exceptionalism whether French, British, Chinese, or Islamic is indeed destructive. We may be the champs now but by no means unique in this conceit.

    How will we go out? With a whimper.

    That is the basis of my argument, there is no substantial "home-grown" right-wing movement in this country outside the confines of a Fox News, Rush Limbaugh construction--and they have dollars to protect, for them and theirs.

  11. Great stuff Okielawyer, referring to the RS article.

    And this leads to another element of my argument and prediction:

    This swindle is complicated stuff, and the average person will depend on their "news" organizations for explanation and clarity. So how do you think Rupert Murdoch, GE, and Viacom will handle this clarification? With easy to understand graphics and time-lines?

    Don't hold your breath.

    What is it that Warren Buffet says about a poker game? If you are in a poker game and you don't know who the patsy is, you're the patsy. The American people don't yet realize they are in a poker game.

  12. "This swindle is complicated stuff, and the average person will depend on their "news" organizations for explanation and clarity."

    Based on my reading of history, I am very confident that a demagogue will take over the country and the issue at hand will be settled by large-scale violence. The best solution is to take no sides and leave the stage sooner rather than later.

  13. Greenie, one small correction: such an approach would still be considered taking sides.

    In the end we will all have to take a side.

    Mine will be to put the injured back together so they can fight some more (Indeed I did it all weekend, violence seems to be making a little surge of late).

    ... And like Wall Street, my honorable profession will still continue to take its 1-2% regardless of performance (whether we take it in a private system or a government controlled system or any hybrid model of the two). ;-)

  14. I disagree with you Greenie. A demagogue is indeed called for by history, but this goes counter to the corporate interests which now control the media and Congress.

    At least I hope this stays reality--a populous ignorant of the real swindle perpetrated against them. The magnitude of this deception is beyond the people's constitution to deal with it.

  15. Arrogant and imperious, Debra? I think you forgot profoundly rapacious and corrupt, but then perhaps you felt those were a given.

    Hell, I agree, it's not going to sit will with the people. It doesn't sit well now, and I hope it doesn't sit well going forward to the extent that "We The People" take extraordinary action, because that is what it is going to take to dislodge the cancer that is the big banking system. I must admit, though, that I am skeptical of our will to really take to the task.

    Randag wrote:

    "It's no surprise that the banks will lead the recovery since they got most of our money to bail them out."

    There is no recovery, though some of the big banks may be healthier than before. As for the general economy, it is in a state of collapse despite propaganda to the contrary.

    Greenie wrote:

    "Based on my reading of history, I am very confident that a demagogue will take over the country and the issue at hand will be settled by large-scale violence. "

    Yes, we will have a corn pone fascist.

    As for Henry K,

    I am not surprised he has a lot of respect for The Obama Administration given that they have achieved so little worth lauding.

    He also offered:

    "The Chinese do not trust America to carry out the great political affairs of the planet well."

    I'm not sure they ever did, but our mutually reinforcing financial/economic arrangements super ceded whatever concerns the Chinese had about how the U.S. comported itself beyond its own borders and sphere of influence.

    I am going to offer up that, from a contrarian standpoint, one should be on the lookout for a sharp reversal of the dollar as the trading universe is utterly saturated with dollar bears. On the other hand, if we do not turn around within a reasonably short period, we may be in for something that would make what has occurred to date appear tame by comparison.

    Whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it, and to institute new Government.

    -Thomas Jefferson

  16. Hell,

    I must disagree with your conviction the bankers hubris will bring about the retribution of Nemesis. All human systems have some degree of corruption (medicine, law, politics, business, labor, clergy, marriage, sports, entertainment, science,...). The common people are inherently no less corrupt than the elites. Power simply allows corruption more opportunity and amplifies its effect. A fall does not always follow pride. What goes around usually does not come around. You don't always reap what you sow. Nice platitudes, but life shows us innumerable exceptions throught history, in all nations. Certainly, Gandhi was right, most of the great tyrants in history have fallen. But all but a few of their consenting minions escaped significant reprecussions. The Banker's power may wane in time but Karma is a feckless idea. Justice is only a lofty ideal. Even a person that allows corruption to influence some part of their life may strive for justice in some areas of their lives. Thus we have imperfect laws and the imperfect people that make and enforce them. The ROI for outsized hubris can be pretty good. It's an opportunity some politicians and bankers can't refuse. I don't see high risk in their choice regardless of what We the People think.

  17. Well, the last anonymous has definitely given us a nice dose of... Ecclesiastes, which y'all should definitely read, as it is very pertinent to our problem.
    The wise man, Quoeleth (Ecclesiastes), was definitely one of the most... LUCID, disabused people ever to leave his trace in the Bible.
    And his conclusions are based on hard observation, the kind of observation that makes me wonder at MY OWN tendancy to apocalyptic thinking. Everywhere around us we see evidence of the fact that the rich and powerful can do amazingly destructive things while the poor suffer, and the middle class continues to work 24 hrs a day in the blind hope that IT TOO will become rich... And the rich rarely suffer from it, or are punished, and this since the world began.
    This blog is organized around the premise that WE are exceptions, because WE are not duped by what's going on THE WAY THE PEOPLE ARE (notice that in a subtle way we affirm at the same time that WE are NOT the people...).
    So... if we are not duped THE WAY THE PEOPLE ARE, does that mean that we are totally lucid about all of this ?
    Fat chance, in my book. Not only do we not know how this is going to turn out, we also don't have ALL the elements to make a totally correct assessment of the situation BECAUSE... nobody (HUMAN....) has all those elements. To affirm the contrary is to indulge ourselves in... HUBRIS.
    Sometimes I think that the (Shakespearean) belief that the wheel turns is at base, a disguised relic of our Christian heritage. A built in mechanism to "control" our greed by suggesting that at some point in time we will be PUNISHED for it.
    This "ideal" of punishment has its limits in founding a viable social order, in my book.
    Making people behave by threatening punishment is LESS EFFECTIVE than allowing them to participate in a common goal where they can experience shared joy.
    I know that you are sneering Marcus.
    All negativiy has its roots in un unhealthy dose of self hate...
    This I believe.

  18. The Judaic interpretation of Ecclesiastes leads eventually to the existential dilemma. The Christian interpretation has its own answer. The Atheist sees it yet another way. Asimov's fictional science of Psychohistory fails to take into account chaotic systems in nature that preclude precise predictions of human behavior and other natural phenomena. However, some people are better informed than others and there is a practical advantage to this in daily life. This should be tempered by the wisdom of knowing how little you know on the global scale and acting accordingly. Negativity may sometimes simply be an intellectually honest observation of human nature. One can be happy with themselves and still espouse negative assertions. It does not preclude finding joy, fulfillment, and meaning in life.

  19. "One can be happy with themselves and still espouse negative assertions. It does not preclude finding joy, fulfillment, and meaning in life."


  20. I acknowledge that I am advancing my (perhaps) irrational beliefs, but...
    gotta be careful with that powerful negativity bomb.
    It's not the opposite of.. the power of positive thinking.
    Negativity follows its own logic.
    And that logic tends not to be... inclusive.

  21. Might as well check out these:

    What's your take?

  22. Could the Chinese lead us to back to the gold standard? It would definitely enforce discipline on the NY/ Fed bankers.

  23. I see that the dollar is at another new 52-week low today. And I think that until the government sets out a plan to deal with the core structural problems in our economy of too much debt and not enough savings and capital, we will not have a real recovery. So while the stock market can stay irrational in the shorter term, in the long run I believe it will go back to reflecting the fundamentals of our boom and bust economy. And that's why I continue to feel that for most people it is safer to remain in cash and gold. In my view the gold price will continue to rise due to a lack of confidence in central banks' policies and in fiat currencies. I recently read some very solid articles on these topics at, which discuss the relationship between the dollar, the gold price, and gold mining companies given the Federal Reserve's easy monetary policies. I thought the article titled "Gold Price Up, Dollar Down - Does it Really Matter?" was particularly useful for investors to read to get a better sense of the relationship between these asset classes, and to get an understanding of the consequences of all the money printing and its potential impact on the dollar.