I particularly like this from today's Lex column in the FT:

Finally a central banker has admitted he is as clueless as everyone else. “It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” said the Federal Reserve chairman in a speech on Monday. Ben Bernanke then contradicted himself, however, by adding: “It’s not obvious to me in any case that there’s any large misalignments currently in the US financial system.” Given the first statement, how can he know?

The Nikkei 225 continues to display the most negative characteristics of any of the world's major equity indices. In trading Tuesday (November 17th) the index dropped back and the short term support line close to 9700 is in danger of being violated. The clear breaks below two recent "fan" lines also underline the fact that the Japanese bear market which began in 1990 has almost lasted for 20 years and that the Nikkei has lost, in nominal terms, three quarters of the value seen in late 1989.

In saying "nominal terms" one has to be less concerned about adjusting the Nikkei price to account for inflation as this is not a concern for the Japanese economy. In fact, as evidenced in this interesting piece, the real problem facing the second largest economy is deflation.

A recent posting at Seeking Alpha contains the following citation from a speech made by a professor of Economics at George Mason University on how we need a new rule of law to prevent financial crises in the future:

If it is known that nobody is “too big to fail”, or too well connected to fail, then lenders will not let financial firms leverage up cheaply in the belief that they will be protected.

Until last week it seemed that the solution as to what to do with all of the jaw dropping amounts of "liquidity" being created by the world's central banks, was to buy Australian dollars.

Now to quote Borat - not so much.

The following are some musings on the U.K. economy, prompted by an adage that seems quite appropriate for our times of thinking the unthinkable.

1. The U.K. public finances are in dire straits with a likely deficit this year well in excess of £200 billion and with red ink as far as the eye can see. It seems highly likely that within the next three or four years outstanding public debt will exceed 100% of GDP.
2. The U.K. is still in recession with a -0.4% GDP reading for Q3, 2009
3. The fact that the U.K. faces a national election within the next nine months means that there is no immediate political will to address the problem or even to spell it out to the electorate.
4. The markets are expected to fund the deficit through the continued purchase of gilts despite the fact that the Bank of England has indicated that it is winding down its Quantitative Easing program.
5. Sterling recently has exhibited as its default mode a tendency for sudden plunges against other major currencies.
6. A recent posting here reveals that the price of gold as expressed in terms of a variety of currencies showed that holders of the U.K. currency had lost the most purchasing power vis a vis the precious metal over the last five years. The real point of this is to highlight that the U.K. economy has historically been more inflation prone than many others.
7. Could the U.K. government - whatever flavor it takes after June 2010 - be faced with the awkward choice of having to approach the IMF for an emergency loan to bail out the gilts market and prevent a collapse in sterling, or to adopt the euro to seek some safety under the umbrella of a more globally acceptable currency?
8. Will Tony Blair, as the possible new President of the European Union, find that he has been provided with the unique destiny of rescuing the U.K. economy by facilitating the early adoption of the euro in place of sterling?

The New York Times for October 25, 2009 has a fascinating article about the likelihood that a considerable number of homes in the U.S. do not have valid mortgage documentation. In the super hurry to securitize anything and everything it appears that the collateral packaging wizards have been remiss in maintaining adequate paper trails and back up documents on many of the properties covered under MBS's etc.

This adds another dimension to the financial black hole story. Not only do we have no idea what is the real mark-to-market value of products resulting from mortgage-backed securitizations, but, even more bizarrely, the banks may not literally know what properties are actually covered under such contractual packages.

Close inspection of the graphic above really tells you all you need to know about the much heralded "super-talent" on Wall Street. The large red columns on the chart shows us just how much of Goldman Sachs' (GS) revenues come from trading its own capital. When I say its "own" capital this has to be seen in the context of that wonderful sleight of hand of modern capitalism - when times are good banks will vigorously protest how they are putting their own capital at risk and deserve to be compensated mightily; when times are not good, they will quietly use the public's capital to play with, but still make the case that they need to be rewarded generously in the interests of maintaining "orderly" markets.

In 2007, when capital markets were extremely cooperative the red column put in a rather staggering peak performance. 2008, which some may recall was a little more troublesome for markets in general, saw the red column drop back substantially.

The high beta index, the Russell 2000 (RUT) could be stalling at current levels and notably has failed to make a comparable push this week to that which has been seen on the DJIA and S&P 500.
The index has certainly been very user friendly during the most lively part of the rally since July but the high beta stocks are not the best place to be if, and when, a corrective episode arises.

In this Huffington Post article on Wednesday, Dylan Ratigan (ex CNBC TV journalist and now host of MSNBC's Morning Meeting show) is remarkably candid about the modus operandi of certain Wall Street activities, especially the over the counter versions of credit default swaps.

The key to success here is that when there is a default or claim against that so-called credit insurance -- the banks keep all the past payment -- and the taxpayer under threat of collapse pays off the claims while getting nothing in return.

The graphic above shows an index for the price of gold as measured in each of the five currencies where the base level for the index was set five years ago.

Perhaps not surprisingly the two nations with the most highly developed financial services sectors are showing (according to the benchmark of gold purchasing power) the most debasement of their currencies.

The report yesterday in the UK's Independent newspaper by Robert Fisk triggered several slightly bizarre reactions which ranged from brandishing the respected reporter as a conspiracy nut to dismissing the allegations as not very useful since Mr. Fisk is not by training an economist. (Actually I would have thought that was to his credit).

What was questionable about the Independent article was the emphasis that was placed on the notion that pricing oil in another currency than U.S. dollars was really the thin end of the wedge which will lead to a phasing out of the greenback's role as the global reserve currency.

In Asian trading on Friday October 2nd, 2009 the Nikkei 225 broke below two major support levels as the chart above reveals. The index completed its move below all three key moving average levels with a close below the 200 day EMA (the green line on the chart). In addition there is a clear violation of the uptrend line through the lows since the March bottom.

Click to enlarge:

The comments which follow from Larry Kantor - head of research at perma-bullish Barcap (Barclays Capital) - are cited in this short piece at the FT Alphaville site.

In our view, the main risk to the current bull market in stocks and corporate bonds is not that the global economic recovery will falter. Rather, we believe that it is the strength of the recovery itself — or at least the recognition of it — that provides the greatest source of risk to the continuation of the market rally.

The following report from Bloomberg could be the teeny first signs that the Fed may be sending smoke signals to the market that it has an exit strategy after all.

Almost certainly they will take baby steps and tread very carefully as they would not want to see those holding up the equity markets also thinking about heading for the exits.

The chart above shows the use of an over-looked measure for determining the risk of owning equities. The graphic depicts the Ulcer Index as applied to the Dow Jones Industrial Average (DJIA) since October 1928 - which is when easily accessible archived records are available.

The index is sometimes applied as a metric for indicating the strength or weakness of a portfolio manager's performance. Most pertinently it addresses the issue of how the portfolio has suffered in terms of its maximum draw-down. The notion of draw-down is useful for determining risk and volatility of the returns that one would actually experience in holding a portfolio (in this case the 30 stocks of the DJIA). It differs from the more commonly used Sharpe Ratio which is used and is based on the standard deviations of the returns.

The following interview between Maria Bartiromo and Robert Prechter took place some weeks ago and since then the U.S. dollar has been trashed even further. So the question is will the dollar ride up on a new wave or risk aversion or will it keep getting hammered to the point where that will trigger another crisis for the financial markets?

Either way one answers that seems to have "difficulties" for the new speculative mania.

Dominic Lawson has a piece in the Sunday Times (Sept 6th 2009) which is entitled Cut bankers’ bonuses and we will all suffer . Here is part of his "reasoning":

Yet when people get a cheaper mortgage because some financial whiz-kid on the trading floor did some clever forward buying in the currency markets, they don’t feel any particular sense of gratitude to the bank.

Paul Krugman's essay in the NY Times, already referenced in my earlier posting today, has attracted quite a lot of commentary including an interesting piece by John Lounsbury which is available here.

John Lounsbury cites research work done by Dirk J. Bezemer at Groningen University which, it is claimed, may contain the seeds of a new paradigm for macro-economists. Bezemer's flow of cash model which is sketched out in Lounsbury's piece just might, it is alleged, enable macro-economists to be less inept at understanding and anticipating large moves in markets, asset valuations and business confidence. Indeed it is the highlighting of their current incompetence which is the essence of Krugman's piece.