Notes From Underground: Deceptions and Lies (Or, Just Another Day in the Life of the Western Political Economy)

First, let me take to the time to direct you to an article that is critical to the basis of NOTES FROM UNDERGROUND. In the weekend edition of the WSJ there was an interview with Jim Grant titled, “THE SCOURGE of the FAITH-BASED PAPER DOLLAR.”The interview covers many issues that I have covered during the last 20 months and serious, difficult issues are presented in a world-class format. There is a quote that must be shared:

  “The winners in wall street have always been hugely rich and therefore have been objects of great envy and great populist animosity. This is one of the great evergreens of American politics,” Mr. Grant says. “But the earlier financiers got to participate fully in the DOWNSIDE AS WELL AS THE UPSIDE. YEARS AGO, GOLDMAN SACHS WAS A PARTNERSHIP AND PARTNERS WERE AT RISK FOR EVERYTHING THEY OWNED. I THINK ITS FAIR TO ASSUME THAT ATTENTION TO RISK MANAGEMENT IS DIFFERENT NOW.

Enough said as this should be repeated by everyone in Washington. The banking system is badly programmed as risk is never properly priced due to the fact that risk is socialized while rewards privatized … always a dangerous proposition.

Today was another day of risk-on, risk-off as the uncertainty in Washington and Brussels gave rise to a sell off of EQUITIES, a moderate rally in the DOLLAR and pressure on the global commodity markets, except GOLD and SILVER. Again, it seems as if the PRECIOUS METALS are being sought as HAVENS. The lack of credibility on the part of the ECB and the FED, as well as the world’s finance ministers has led global investors to increase holdings in GOLD. The GOLD/EURO has set record highs since the second week of the new quarter. As long as deception and malfeasance are the watch words of the European DEBT CRISIS and America’s BUDGETARY CHARADE, the market will seek alternative investment, especially in a zero interest rate environment.

The question is: When will investors begin to seek investments other than the illusionary rewards offered by the U.S. Treasury markets? Again, it will be important to be aware of the reallocation trade take hold, when money finds greater FAITH in the corporate equity and bonds of U.S. institutions rather than the DEBT of the U.S. government. When the S&Ps rally in the face of negative news, it may  signal that a change in the risk-on/risk-off model is about to change. BONDS VERSUS S&Ps will be as significant as the ITALIAN BONDS VERSUS BUNDS.

Tomorrow morning (8 a.m. CST), the Bank of Canada will announce its overnight lending rate. The consensus is for the Canadians to hold rates at 1%. As  usual, the bank’s statement will be important as to its outlook on the global economy. The Canadian economy has been a mixed picture as energy has supported higher growth than the U.S., but the BOC has been worried about the recent slowing in the manufacturing sector. It will be important to see if the BOC cites the Japanese earthquake as to the reason manufacturing stalled in the second quarter and therefore is deemed to be a transitory event. Otherwise it will be a return to the continuing drama of sovereign debt .

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