Information asymmetry

Dinner With Joseph Stiglitz

By The Mad Hedge Fund Trader on February 8, 2012in Diary

The great thing about interviewing Joseph Stiglitz over dinner is that you don’t have to ask any questions. You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof.
The unfortunate thing is that you also don’t get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.
Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of Glass-Steagle in 1999. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.
This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz’s own work on ‘information asymmetry,’ which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, often the seller.

MF Global

Martin Armstong

The MF Global story may have fallen off the front pages but it is clear that the Judge Martin Glenn is not about to hold the feet of any of the bankers to the fire. Instead, the $1.2 billion in missing client funds is simply going to vanish in thin air like a magic trick. Moody’s has suggested that will be the case and those who were not even trading are taking the losses.

The House Financial Services Committee will continue grilling the ratings agencies, but this is just a show. There will be no indictments and no demands for the bankers to return the stolen money. New York simply does not obey the law. Even in the case of Princeton Economics, a managed a public fund for Deutsche Bank was seized by O’Melveny & Myers who made every investor in the fund prove it was their money in order to claim their own property. That was totally illegal. They are supposed to TRACE funds and demand their return if tainted. O’Melveny & Myers illegally seized everything and shifted the burden to clients to prove it was their money. It was the classic presumption of guilt. New York protects New York banks – period! It will neither honor the laws of the United States nor those that govern international property rights.

For this reason, you simply have to be insane to have funds in New York, or at any fund who keeps their cash in New York. MF Global has shown that all the regulations & laws mean NOTHING and the USA has been reduced to a third world country untrustworthy of one’s capital. Money that was taken from client accounts AS A MATTER OF LAW must be returned by those to whom it was paid for MF Global’s losses.

HyperInflation- 2013 / 2014?

David Knox Barker

The CPI, like interest rates, is following its natural long wave trend. It is on schedule to reverse higher in a new long wave spring in 2013 and beyond. Unfortunately and ironically, the Fed's attempt to produce inflation could prolong the deflation by socializing bad debts and weighing down the U.S. and global economy. The CPI annual rate of change below demonstrates the long wave forces at work.

The natural global long wave disinflation and deflation is in the process of clearing non-viable bad ideas out of the global economy with what Schumpeter called creative destruction. QE wants to keep those bad ideas in business, taking profit and reward away from the more prudent and better ideas in the market. The problem is that central banks are pouring trillions of additional debt into the economy when a long wave spring is right around the corner. This creates a real risk of hyperinflation once the long wave winter season is over and a new long wave spring gets underway, a real life bonfire of the vanities.

Bank Bailout

Martin Armstrong-

The number one question pouring in is about the banks and their profit margin. Yes, the bottom

line remains that the cost of money declines sharply for depositors while the cost of borrowing

rises. Where the value of cash for three years is 0.7% to a depositor, for a fully collateralized

borrower, the cost is about 4%. This is a profit margin for the banks of 571%. In other words, when the discount rate was 17% in 1981, this would have been the equivalent of a prime rate at 9707%. The profit margin at banks has

NEVER been so high. The Fed has increased the profit margins of banks but they in

turn are not accommodating the economy. They require more stringent collateral today than at any

time in the past and want

ZERO risk failing to stimulate anything. Have a brokerage account? Ask the

broker how much he will lend you against fully collateralized shares. You will quickly see that the profit

margins are

EXTRAORDINARYILY high for no risk at all! This is becoming a giant shell game whereby

everyone

THINKS the objective is to “stimulate” the economy, but in reality, it is bailing out the banks

once again covertly by allowing their profit margins to increase dramatically. Therefore, lower interest

rates only widen the spreads increasing profits to the banks while the economy fails to expand

significantly. It has not led to a borrowing boom in the slightest – essential for inflation.

Martin Armstrong on Gold

The critical key to understanding

HOW the

economy functions is this

perpetual shift between

money v assets

– PUBLIC v

PRIVATE

. Simply put,

DEFLATION

prevails as long

as the demand for cash

exceeds that of assets. The

key to the shift in this trend

will be the shift from PUBLIC

assets (CASH) back to

(ASSETS)

PRIVATE. We face

the beginning of this shift

with the

BIG ROLLOVER OF

2012

. In other words, we are

looking at €600 billion in debt

of Italy and Spain for starters

that needs to be rolled over

this year 2012. This is setting

in motion the rise in interest

expenditures in the future

that will blow out the deficits

that is so necessary to create

the

“inflationary” trend that

begins ONLY when the demand for cash shifts back to assets. This is the trend we need to see develop in

Europe that is a leading indicator to the USA trend. It unfolds

when we begin to see interest rates rise

that signals the shift in demand from

PUBLIC back to PRIVATE assets that many will perceive as inflation

and the breakout will then unfold in gold at last. Those who think gold will drop to it 1999 low based

upon the Great Depression ignore the fact the USA was not the debtor then by the creditor much as

China is today. So there will be

NO deflationary collapse any more than there will be a hyperinflationary

blowout. History repeats, but more like a Shakespearian play – the actors keep changing with time

2012 start

A good start to a new year.

I am long,  India long term debt, US equity and increasing India equity exposure on good base breakouts.

There are very few breakouts to new highs but several stocks have bounced off 50% lows. Welcome to the Indian markets.
I am watching the IPOs also. Lets see.

Wish luck !!!

2013- Deflation

Martin Armstrong

This is part of the final stages of DEFLATION. As debt defaulted in 1931, the INFLATIONARY turn around took about two years to unfold. As it stands right now, this downgrade is still reflecting the collapse in asset values. As sovereign debt is downgraded, the resale value of existing debt declines. This not only undermines the banks giving them incentives to avoid sovereign debt investment, but pension funds are hit as their asset values also decline. Thus, this is very much the final stage of DEFLATION. Inflation starts only when the majority of bond holders begin to realize that they are better off with private assets. This will make the shift from PUBLIC to PRIVATE asset investment come alive.

No government debt will be safe! Nobody will ever pay off anything. It is merely a question of time. That appears to be coming next year – 2013. By 2017, we may end up with a new World Monetary System.