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Jim Rickards
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I am a seasoned counselor, investment banker and risk manager with over thirty years experience in capital markets including all aspects of portfolio management, risk management, product structure, financing, regulation and operations. I'm also the best-selling author of Currency Wars: The... More
My company:
Tangent Capital Partners, LLC
My blog:
Rickards Finance Blog
My book:
Currency Wars: The Making of the Next Global Crisis
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  • Why Jamie Dimon Should Resign

    Of all the tricks Wall Street uses to pull the wool over the eyes of regulators, Congress, and everyday Americans, none is more effective than the pretense that the strategies used in finance are so complicated that few outside the banking industry could possibly understand them. Wall Street CEOs ask to be treated like nuclear engineers and say "trust us" when it comes to the complexity of their tasks. In fact, no trust could be more misplaced and no claim to superior knowledge could be further from the truth.

    The $2 billion loss announced at J.P. Morgan last week is the latest example. Management, starting with CEO Jamie Dimon, would have the public believe that the loss was due to a complex hedging strategy involving hard-to-value instruments and embedded risk that eluded the best and brightest minds at the bank until it was too late.

    This is nonsense. The trade was a simple bet on the difference, or "spread," between the price of a group of bonds and an index based on those bonds. In theory, those two prices should be about the same. In practice, they may vary due to factors such as the relative liquidity of the bonds and the index. At a certain point, the J.P. Morgan trader, known as the "whale," took a view that the index was expensive and the bonds were cheap. In effect, by selling the index and buying the bonds, the whale would own the spread. As the spread comes back to normal, the whale reaps enormous profits and finally unwinds the trade by selling what he bought and buying what he sold at better prices.

    The problems begin when the trade is done in huge size. Others in the market such as hedge funds smell blood. Instead of bringing the spread back to normal they begin to widen it by buying the index and selling the bonds. Whether this makes fundamental sense is irrelevant. What matters is that if they inflict enough pain on the whale in the form of daily mark-to-market losses, he will eventually have to get out of the trade by selling it back to the hedge funds. Sooner than later, the original spread will return to normal, but it will be too late for the whale.

    Jamie Dimon has been working around the clock to explain that this loss is not life threatening. He makes the point that the loss represents only part of J.P. Morgan's earnings and that capital is not impaired. What he does not explain is that J.P. Morgan's "earnings" are actually not earnings but are a form of theft from savers, retirees, and others pursuant to the Federal Reserve's zero interest rate policy.

    The Fed has engineered a massive wealth transfer from everyday Americans to large banks. They do this by holding interest rates near zero. Savers get nothing for their hard earned savings. However, banks get free money because they pay almost no interest. Banks then invest the money in Treasury notes and earn the difference. The Fed permits this to rebuild the capital of the banks. The Fed doesn't mind hurting everyday Americans if they can prop up bank capital.

    Even if you favor Fed policy, it is unconscionable that the bank earnings derived from small savers should be squandered on a leveraged bet that a rookie trader could see was flawed. If the bet had worked out, the whale would probably already be shopping for a Lamborghini to buy with his bonus.

    Apart from the risk in the trade, a more fundamental question is why it was allowed in the first place? What purpose was served? No new loans were created. No new jobs were created. Absolutely nothing of value to society was derived from this trade. At best, it was a form of gambling for the whale and his colleagues. Next time they should go to Las Vegas and skip the drama.

    And please spare me the Kudlowesque lectures about "free market capitalism." Banks don't operate in the free market because their liabilities are guaranteed by the taxpayers. Banks are public utilities designed to make commercial loans and should have no more freedom to make derivatives bets than the Post Office.

    Banks are propped up by taxpayer guarantees and fatten their earnings at the expense of everyday American savers. Then they risk those earnings on bets that serve no purpose but to enrich the greedy executives who make them. When things go wrong those executives cry that markets are too complicated to manage. In fact, the bet is no more complicated than putting money on red at roulette. As a last resort, the executives hide behind the flag of free market capitalism when in fact they are the new welfare queens with government subsidies galore.

    The whole thing is a disgrace. If Jamie Dimon had an ounce of decency, he would resign now. Not because his acts were criminal, but because he presides over a corrupt institution that extracts wealth from the many and directs it to the few with no value added and not even a nod in the direction of the hard-working American victims of this scam.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: JPM, Macro View, JPM, Dimon
    May 24 9:59 AM | Link | 1 Comment
  • Why War With Iran Is Likely

    War with Iran hangs over global markets like the sword of Damocles. Markets are already fragile as a result of body blows suffered in 2007 to 2009 from the housing bubble, the Madoff fraud, the Lehman and AIG collapses and the severity of the depression. Uncertainty reigns because of doubts about the sustainability of the recovery without continual doses of more zero-cost money from the Fed. The last thing capital markets need is an exogenous shock in the form of war in a critical part of the world but that is exactly what is coming.

    While many wars are well-planned acts of aggression, some of the most deadly are the result of miscalculations of the intentions of others. One example is the U.S. Civil War in which the South thought the North would not respond aggressively to provocations and the North thought the South would not sustain its efforts for long. Both sides were tragically wrong. Likewise the First World War was expected to be over in a matter of months without serious escalation but was fought for four years with 30 million combatants killed, wounded or permanently disabled.

    In the case of the current confrontation between the United States and Iran on the subject of nuclear weapons development, the world is again hostage to the probability of a war among parties whose calculations are driven by misreadings of the intentions of their opponents. This analysis begins with some known factors and moves by inference into things far less well understood.

    There is little doubt that Iran will be able to build and detonate a nuclear device in 2013 or sooner. There is no doubt that Israel will not tolerate such a device in the hands of the current Iranian regime because it poses an existential threat - the equivalent of a second Holocaust. It is also clear that both the United States and Israel have the military capability to disrupt and delay the development of the Iranian bomb for at least several years.

    Given Iranian efforts to harden their nuclear facilities against attack, it is better to launch an attack sooner than later subject to the readiness of the attack force and other logistical and weather related variables. Finally the United States has repeatedly expressed a preference for a diplomatic solution to this impasse or, failing that, regime change in Tehran, which could cause Iran to halt its weapons development efforts. For a murky situation, this is a relatively long list of knowns from which one can begin to plumb the unknowns.

    The first unknown is how long the U.S. will wait for diplomacy or regime change to work before deciding that military action is required. Until recently there was some reason to believe that the cumulative shock effect of Iran's ejection from the global financial payments systems and the resulting currency collapse, sky-high interest rates and surging inflation along with shortages of certain goods and an oil embargo would either destabilize the country or force them to the bargaining table. However, Iran seems to have weathered these disruptions well and its return to negotiations seems just another in a long list of delaying tactics.

    The second unknown is how long Israel will wait for the U.S. to decide that military action is required. Israel would much prefer that the U.S. take the lead in any attack provided it is done in a timely way. However, Israel will act if the U.S. does not and the U.S. knows this. At the bottom of the Israeli relationship with the U.S. is distrust based on a fear that the U.S. is prepared to tolerate a nuclear Iran and is just talking tough to stay Israel's hand long enough for Iran to achieve a fait accompli.

    The most important unknown is whether Iran itself is indifferent to being attacked and perhaps even welcomes it. Consider the following: Iran is explicit about its desire to destroy Israel. Iran has been consistently provocative in promoting Shi'a unrest against Sunni rulers in Saudi Arabia, Bahrain and UAE. Iran has powerful proxy assets it can unleash against Israel and the Sunnis and has terrorist sleeper cells from Paraguay to Minnesota and Manhattan.

    Ancient Persia invented chess. Skillful chess players will sacrifice a high-ranking piece such as a bishop in order to capture a queen. The modern day equivalent would be for Iran to sacrifice its conventional navy, air force and nuclear program in order to pose as the aggrieved party while it destabilizes the Gulf, assaults Israel and terrorizes America. No one seriously proposes a full-scale invasion of Iran; therefore the regime will survive. Taken in full, Iran has much to lose but much more to gain. It is this version of an Iranian deep game that makes the war all but certain.

    So the stage is set. Iran underestimates American resolve in the face of its nuclear ambitions. The U.S. underestimates Israeli impatience with American diplomacy. The U.S. and Israel both underestimate the fact that Iran's goal of Shi'a supremacy outranks its nuclear program in importance. It is Iran's own confidence in its asymmetric warfare capability including proxy wars and global terror that make it indifferent to attack.

    The market impact of such a war is predictable - higher oil and gold prices, a stronger dollar, and higher stock prices as the Fed eases to offset the impact of higher oil. Markets have begun to price in some of these outcomes but only in a tentative way. The potential for enormous gains and losses as the market moves from partial to full realization that a tragic series of events is about to unfold will be the most important investment story of 2012.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 27 12:04 AM | Link | 1 Comment
  • The White House War On Investment

    Better late than never some honesty has crept into the debate on Federal Reserve interest rate policy. Unfortunately the honesty consists of a candid warning by the Fed that savers will be victimized for the greater good of propping up asset values in housing and the stock market. The victimization takes the form of targeted inflation engineered by the Fed through zero interest rates and money printing. This is needed to bail out the banks, brokers and builders who bet wildly and now need a more or less permanent rescue.

    To understand why, begin with a world plagued with massive unpayable debt at the individual, corporate and government levels. There are only three solutions to this much debt - default, inflation and growth. Default is easy to understand - we're seeing it in Greece today. The borrower simply does not pay in full and the losses fall upon creditors, mostly banks and institutional investors. This can work for a small entity like Greece or Harrisburg, Pennsylvania.

    Default is not a solution for large debtors such as Italy or the United States because the creditors themselves would fail and the entire system would collapse. For large sovereign debtors the preferred solution is inflation. By printing money, the debt owed is worth less because the money is worth less. Eventually the debt is repaid in debased dollars or euros. This is why the U.S. will never default on its debt to China. It can simply print the dollars needed and hand the freshly printed dollars to the Chinese. If the dollars aren't worth enough to meet China's other obligations, well, that's China's problem.

    The Fed is doing everything possible to promote this inflationary outcome including holding rates artificially low, printing money, buying up bonds and cheapening the dollar in foreign exchange markets. Of course, the Chinese will not be the only victims of this policy. Anyone relying on a stable dollar will suffer also. This includes savers, pensioners and those holding insurance policies and annuities among others.

    This is where the Fed's new openness comes in. Chairman Bernanke and mainstream economists have lately taken to warning Americans about this outcome and all but imploring them to buy risky assets such as real estate and stocks to protect their wealth. In effect, the Fed and its cheerleaders are saying to Americans that if you are dumb enough to leave your money in the bank then you deserve to lose the value of your savings. In America today, prudence does not pay.

    What about the third way out of debt - growth? Here the discussion is anything but transparent. The neo-Keynesians at the Fed and in academia discuss the shortfall in individual consumption and make the case for government spending as a growth substitute despite clear evidence that government spending destroys wealth. The so-called "multiplier" effect is a myth. But what happens when even government spending hits a wall, as it has recently?

    There is another contributor to growth in addition to consumption and government spending - investment. Investing in a new factory or transportation hub contributes to growth as surely as buying more cars or flat-screen TV's. In fact, investment is a "two-fer" because it contributes to growth immediately and contributes again through improved productivity in later years. With Americans more inclined to save than spend these days and with ample bank reserves parked at the Fed, why is the Obama administration encouraging new asset bubbles in housing and stocks instead of encouraging investment?

    The answer is ideology. Obama prefers a Chinese model of "state capitalism" where government directs investment to favored pet projects, political cronies and union dominated sectors. He disfavors the robust private capital model where entrepreneurs compete for funds to promote innovative and disruptive technology that creates real jobs and real wealth. Obama's proposals to increase taxes on private capital gains, dividends and successful entrepreneurs while throwing government money at non-economic failures such solar panels, windmills, electric cars and unwanted mass transit systems, reveal this deep-seated bias against private capital.

    Investment can pick up the slack in consumption and power the U.S. economy to great heights. This can be a win-win for savers who can get higher yields on their savings accounts. The key is to fix the broken conveyor belt that moves safe savings into productive investment. This was the classic function of bankers before they became leveraged speculators infested with greed while regulators did nothing to stop them.

    Obama has taken the failures of bankers and regulators as a green light to substitute government spending for both consumption and private investment. It is embarrassing, but instructive, for Americans to see how Germany has successfully embraced a business-friendly investment driven model while America clings to a statist, Chinese-style government spending model. It is not too late for America to shift gears and return to its roots as an entrepreneurial dynamo, but it will take lower taxes, less government spending and improved regulation to get there. This is not the preferred policy of a second Obama administration. Yet, by 2016 it will almost surely be too late.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    Feb 29 9:42 AM | Link | Comment!
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