Power & Market
Was That the Dip?
A few days from now marks the one-year anniversary of the article: Will You Buy the Dip? It was there I told everyone I know that eventually the Federal Reserve will conclude its Quantitative Tightening (QT), and a new round of Quantitative Easing (QE) would emerge. This was both inherent and inevitable due to the inflationary nature of central banks. So the idea was to buy the stock market once the Fed resumed the QE process.
The question is: Did last Sunday’s announcement of the Bank Term Funding Program usher in a new easy money era, i.e., was this the dip / pivot / stock market buy signal?
Consider the last two years of the Fed’s balance sheet. Between March and May of 2022, the Fed’s assets topped out at just under $9 trillion. Since then the Fed began its slow descent into QT, where last month it reduced its balance sheet, composed mostly of US Treasuries (UST) and Mortgage-Backed Securities (MBS), by around $80 billion a month. During this entire round of QT the broad stock market made no new highs and has instead slowly declined.
The Fed’s balance sheet has also become quite interesting as of late:
Incredible! It took one year for the Fed to reduce the balance sheet by $600 billion, and in just one-week, from March 8-15, the balance sheet increased by $300 billion!
This is what I was referring to, some event or crisis occurring that would be used as an excuse to get the Fed to return to the market… but human action is complex, and nothing seems to go according to plan. The increase in the balance sheet is not a result of the Fed buying-up more US debt or mortgage securities. As far as the public is aware, the Fed is still committed to QT via rolling off its existing UST and MBS holdings.
The balance sheet increase actually came from the loans the Fed granted for troubled bank relief. Details in the Fed’s notes reveal the elements comprising the $8.689 trillion balance.
Loans amounted to $318 billion, whereas a week prior, it was only $15 billion. The current $318 billion consists of Primary credit ($152 billion) and Other credit extensions ($142 billion). The new Bank Term Funding Program only accounted for $11.9 billion.
On one hand the Fed is reducing ownership of securities owned (loans to government), but on the other hand it’s creating money to loan to banks. It would be great to know how large this temporary one-year program will get, but we’re not privy to this information. However, with no limits on how much the Fed could create, it could amount to trillions of dollars.
Like the World Bank and IMF which grant loans to bankrupt nations, only to make them worse off by ending up in more debt, the Fed appears to be engaging in a similar scheme. By lending to bankrupt institutions, the hope is that within a year from now these failed banks will be better off than they are today, paying back the Fed in full plus interest.
The new funding program may very well push the Fed’s balance sheet to new all-time highs, and if it were to expand by a few trillion dollars more, one could expect to see this reflected in asset prices. But having no idea as to how big these bank loans will get, coupled with the Fed’s continual shredding of UST and MBS holdings, I still lack conviction that the Fed is serious about pumping the stock market back to new highs at the moment. Good luck in your trades.
Washington Miffed as China makes Peace
For those who have followed the background noise of US activities in the Middle East over the past year, since it was last seriously in the news following the disastrous execution by the Biden administration of the long overdue withdrawal from Afghanistan, they will recall a vague haze of reported drone strikes, arms sales, and Israeli assassinations; more recently, they will recall resistance to attempts to end the U.S. military roles in Syria and Yemen, the death of the Iran nuclear deal, and the blocking of earthquake relief.
China, by contrast, with no military presence in the Middle East at all, just quietly concluded talks between the Iranian and Saudi leadership that resulted in the normalizing of their diplomatic relations.
Quite the contrast.
And despite complaints by the hawks and Israel-firsters in the Democratic and Republican parties, this deal is good for multiple reasons. First, it will help end the wars in Yemen and Syria where Iran and Saudi Arabia have been among the chief backers of opposite sides of the two proxy conflicts. Together, they’ve gone on over twenty years and killed well over a million people.
Two: it signals that China, who buys most of the oil from the Gulf monarchies these days, is going to start more actively investing political capital in the region. The only party that can be trusted by all sides concerned, as Beijing is ideally situated to mediate invariably arising disputes. There are real costs involved, and it would be good to see someone other than the American taxpayer start footing these bills.
Naturally, Washington acts like anything that happens anywhere without its imprimatur constitutes a threat to national security – much like Ted Cruz recently embarrassed himself by claiming the same about the mere temporary docking of two small Iranian warships in Brazil.
Worth noting as an aside, their permission to dock came despite months of reported pressure by Washington to deny them port and after Lula had already been to Washington to meet with Biden.
Apart from knowing that somewhere at the State Department someone is being paid a six-figure salary to harass Brazilian officials for literal months about a pair of small Iranian vessels taking port in their ostensibly independent and sovereign country, everywhere everyone seems to be taking every opportunity to try to send Washington the message that they have no interest in yet another round of so-called “great power” competition.
A minor, potential downside to the deal being done between Riyadh and Tehran is that it may complicate efforts to normalize Saudi-Israeli relations. But here it should be noted that any potential deal to get that done already looks terrible from the point of view of the average American: Riyadh’s demands include formal American security guarantees, more weapons, and a nuclear program.
Realistically, given the power of the Israel lobby, Washington’s failed policy of wasting American lives and treasure in pursuit of Israeli policy priorities in the Middle East hardly looks likely to be seriously disturbed by China’s mediation of Riyadh and Tehran’s most recent spat.
If it is going to be disturbed by anything, it will be by the new Israeli government. But that is another story.
In short, China facilitating these talks between Iran and Saudi Arabia was a good thing to see. It will help bring peace and save lives.
Or, as State Department shill Jonathan Panikoff, writing for the Atlantic Council put it:
“It should be a warning to U.S. policymakers: Leave the Middle East and abandon ties with frustrating, even barbarous, but long-standing allies, and you’ll simply be leaving a vacuum for China to fill.”
Fill with what? Peace? To replace four decades of Washington’s war?
What Do We Mean by Corruption?
Back in December, a county treasurer buddy of mine informed me of a “dead period” when campaign donors cannot give to state legislators since they’re about to go into session. It’d therefore be more likely that they could give to candidates for local office.
If the donors have business before the legislature (or a local body) though, how proper is it that they give at all? That question popped to mind after perusing local campaign finance reports.
Whether it’s securing the right to defend yourself with guns, or shielding individuals from discrimination based on race, sexual orientation, etc. we’re dealing in terms of personal freedoms.
What if, on the other hand, we’re talking about an engineering company, or its PAC (political action committee) that is donating? How about a construction or real estate business?
As questionable as it is to be on the giving end, it’s completely noxious to be on the accepting end. It sends the wrong message, especially when the elected representative does not reject the funds.
For one, it arguably says you’re for sale as a policymaker.
Donors might claim it gets them access, and that if they don’t, someone else will step in line ahead of them. That’s still concerning, but point taken.
This is where the officeholder should make clear that access, not to mention their vote, is not up for auction. Otherwise, they embody the adage that “the second oldest profession (politics) bears a close resemblance to the oldest (prostitution).”
This dynamic also narrows the window of opportunity for smaller competitors who can’t afford a line item in their budget for lobbying. Plus, they’re likely too busy trying to stay in business, now having to work that much harder to overcome this additional government-created barrier.
And it’s not difficult to uncover these connections, though they exist on a sliding scale of transparency.
Some donors make no mention of the companies that they own that will benefit. Others do. Some go to the trouble to set up a PAC to carry out the favor-buying, but name it the same as the benefiting company.
Still others are so brazen in their contributions, that they misspell their names by one letter, or add a suffix like “Jr.” so as to circumvent donation limits altogether.
And so shameless are some politicians that they push to raise those limits.
I have the utmost respect for business owners and entrepreneurs. The risks they take, and the rewards that the rest of society derive from it, are things I try to shine a light on in class when discussing the supply side.
That admiration erodes however, when they try to buy a fast-pass to the head of the line. Worse is when elected representatives grant it to them. It’s another way in which they rob from taxpayers by depriving them of a fair bidding process.
Adding insult to injury is when a politician proposes a law to solve this problem. Either they’re naïve enough to think that this will be the law to do it, or it’s a blatant attempt to distract voters. Cue donations from lawyers who benefit from the opportunity to decipher all this.
If we’re really concerned about “mechanism(s) to incentivize good work,” how about clicking the “refund” button on these ethically-questionable high-dollar donations?
What the US Government's Annual Financial Report Doesn't Tell You
Last week, two federal government entities produced financial reports. The Treasury Department issued the latest annual (FY2022) Financial Report of the United States Government (FRUSG), and the Federal Reserve Board of Governors issued its weekly H.4.1 report on the financial condition of the Federal Reserve Banks. These reports deserve closer scrutiny by citizens and taxpayers.
Treasury Secretary Janet Yellen introduced the FRUSG with a traditional “Message from the Secretary of the Treasury.” Yellen’s message laid claim to much broader responsibilities than one might think appropriate for a report on the government’s finances.
Yellen opened with a paragraph describing positive trends in the overall economy, including how “the American economy continued its historically strong recovery from the pandemic amid serious global economic headwinds …” Again, this is a report describing the finances of the federal government, not the economy. The report theoretically secures accountability for government stewardship, or lack thereof, in the dollars it takes from citizens by force in taxes, or those it borrows on the backs of future taxpayers.
Yet Yellen chose to emphasize claims for the federal government’s responsibility for the (growing) overall economy -- not how well it managed the public purse. She went on to identify three specific laws passed by Congress and signed by the President she deemed responsible for strengthening “American” economic growth over the long-term. One of them was the “Inflation Reduction Act,” which she called:
… our nation’s most aggressive action to tackle the climate crisis, while also providing funding for fairer enforcement of our tax code and improved taxpayer service.
Her opening message didn’t identify how the “Inflation Reduction Act” would reduce inflation, however.
More importantly, she didn’t discuss how the laws she advertised mattered for the federal government’s financial performance – the key reason for an annual financial report in the first place.
Following these opening claims, Yellen asserted that the report serves as a “comprehensive view into our nation’s finances and economic outlook.” Consider the possibility of a dangerous extension of authority underneath this “comprehensive view.”
The report looks not at our federal government’s finances, but at “our nation’s finances and economic outlook.” If Yellen considers financial accountability to include not only accountability for the federal government’s finances, but the finances for all of us, what happens to the nature of private property? How about popular sovereignty?
Yellen then provided some brief (and selective) observations on results in the report, including “a decrease in the federal budget deficit.” Unfortunately, this decrease was to a deficit of $1.4 trillion, a still-negative-result and a rate of deterioration in government’s financial position more than 50% worse than the three years before the arrival of COVID and associated government spending responses.
And while focusing on the budget deficit, Yellen chose not to report on the more-economically-meaningful result in the accrual accounting measure called the “net operating cost.”
Take a look at the summary chart below, from p. 3 of the 250+ page report, showing the cash-accounting-based “budget deficit” and the accrual-accounting-based “net operating cost” over the last five fiscal years.
The trend in the red bars (the budget deficit) is much easier to see than the trend in in the white bars (the net operating cost). But the net operating cost trend is distinctly unfavorable, on closer inspection.
In closing her introductory message, Yellen repeated an alarmingly broad claim of responsibility for the scope of the federal government’s accountability:
It is my duty and pleasure to present the Fiscal Year 2022 Report to the American people, which demonstrates the government’s steadfast commitment to accountability and transparency in managing the nation’s finances.
The government’s (possessive “s”) “steadfast commitment” apparently relates to its role in managing the nation’s finances – not only the federal government’s finances. And an alarmingly possessive “s” continues to appear in another context later in the latest annual report.
On p. 65, in the financial statements section, the report includes an overall balance sheet for the federal government. Assets fell short of reported liabilities by about $30 trillion in FY 2021. In the latest fiscal year, that shortfall mushroomed to $34 trillion -- a $4 trillion deterioration far in excess of the budget deficit strategically emphasized by Yellen in her opening message.
Introducing the unbalanced balance sheet, the report delivers (on p. 55) the following comforting words:
There are, however, other significant resources available to the government that extend beyond the assets presented in these Balance Sheets. Those resources include stewardship PP&E in addition to the government’s sovereign powers to tax and set monetary policy.
The government should be OK, the implication goes, despite the picture in the Balance Sheets, given the government’s “sovereign powers to tax, and to set monetary policy.” The government can take away the money of the people, or inflate the value of their money away.
This report theoretically secures financial accountability of the government to We The People – the real sovereign, in our United States. Yet the government claims to possess the sovereign power to tax the People to assuage any concern for its unbalanced balance sheet.
Yes, our government has the power to tax. But does it possess, as an entity reporting to We The People, the sovereign power to do so? Isn’t our nation grounded in popular sovereignty? Do we have to bend and bow to our Sovereign?
And speaking of the “sovereign” power to set monetary policy, what about the other report that came out last week – the Federal Reserve Board’s weekly H.4.1 report on the financial condition of the Federal Reserve Banks?
A longer story, but in a single week, we had a $3 billion increase in a curious negative liability called “earning remittances due to the U.S. Treasury.” Granted, it’s only one week, but that’s a big chunk of change on an annualized basis. These are effectively financial losses in the Federal Reserve Banks whose financial statements are not consolidated in the Federal Government’s overall financial statements.
More to read, and report on, in the days ahead.
Wyoming Senate Votes to Hold, Invest, and Receive Tax Payments in Gold and Silver
The Wyoming State Senate today voted 16-15, on a bipartisan basis, to pass a bill prompting the Wyoming state treasurer to hold gold and silver “specie” to protect the state – as well as establish a process to receive certain tax payments in specie.
Introduced by Senator Bob Ide (R-Casper), SF 101 amends and further implements the Wyoming Legal Tender Act, a popular 2018 law that had removed all tax liability from gold and silver transactions and affirmed that the monetary metals are legal tender in Wyoming.
Senate File 101 prompts the Wyoming state treasurer to create a formal system to deal directly in constitutional money – a system that would also include holding gold as an asset to help the Cowboy State hedge against its high exposure to Federal Reserve note dollars and potentially invest in precious metals leases and bonds.
The Department of Revenue could receive mineral tax payments denominated in specie, i.e. gold and/or silver. And in executing its duties, the state treasurer could hire precious metals firms that are experts in receiving, authenticating, exchanging, and storing gold and silver.
In specific terms, the bill requires the Wyoming treasurer to implement the Wyoming Legal Tender Act by:
- Authorizing the use of specie and specie legal tender for the payment of mineral taxes, subject to authentication procedures as determined by the state treasurer that are consistent with precious metals industry standards;
- Determining, maintaining and publishing market-based exchange rates between specie, specie legal tender and other legal tender currencies on a real‑time basis on the website of the state treasurer for the purpose of calculating tax payments to or from the state.
- Exchanging specie and specie legal tender for other legal tender currencies;
- Holding specie and specie legal tender;
- If market conditions warrant, investing in precious metal leases or bonds payable in precious metals.
Wyoming has vast natural resources, and the Department of Revenue receives significant tax revenues from producers of commodities such as oil, gas, and metals.
By creating a mechanism which enables Wyoming to receive tax payments – or to potentially make payments – in gold and silver, the Cowboy State would establish an alternative unit of payment in the face of a Federal Reserve note that continues to be devalued.
In his testimony before the Senate Revenue Committee last week, Sound Money Defense League policy director Jp Cortez said:
Proposals encouraging state gold holdings have come before the legislature since January 2019, but no bills have been passed. During the last four years of inaction on sound money, gold bullion, priced in declining dollars, has risen by 50 percent.
Given the financial risks facing the U.S., Wyoming should take these modest steps toward creating alternative ways of transacting and saving using sound money.
Since 2018, Wyoming has established itself as a leader on sound money issues, as evidenced by the Cowboy State’s first place finish in the 2023 Sound Money Index.
Several other states are considering their own sound money bills this month, including Alaska, Missouri, Mississippi, South Carolina, Tennessee, and more.
After passing the Senate, SF 101 now heads to the Wyoming House for further consideration.
We Need a Che Guevara of Our Own
The title might be misleading at first, but there is a good reason for that. To understand the needs and opportunities for the contemporary Right, we first need to understand what got the Left into power at first.
Enter Che Guevara, or more exactly, enter Ernesto Guevara de la Serna.
For anyone in either the free-market or the classical conservative sphere, the travel log of his motorcycle trip around Latin America should be a required reading. Not because it is an historical account of the radicalization of one man, who from well-educated Argentinian bourgeois doctor went to terrorist, revolutionary and guerrilla leader, but because it shows the seeds of how a simple man with ideas (albeit in his case, the worst ones) can become an archetype, a religious icon for a set of beliefs.
Even for someone like Murray Rothbard himself, Che Guevara was someone worth of interest, to the point of writing a highly critical but yet prophetic obituary for him, and Rothbard, of course, was right, because Che Guevara has probably become the most well-known political figure in recent Latin American history, and outside of the developed West, that is, the US-led Anglosphere and Western Europe, his face and his name have become synonymous with armed struggle, with guerrilla warfare, with an utopian socialist ideal that knows no limits nor boundaries.
His death at the hands of the Bolivian Army, helped by the CIA, in a failed attempt to spark an agrarian Marxist revolution in the Andean Altiplano, only contributed more to his already legendary status among those who oppose the ideas of freedom and civilization.
In practice, his death made him a martyr of the Left, a religious symbol of a revolution that never came but is always presented as the gospel of egalitarianism. Say what you want about Che Guevara, say he was a killer and a terrorist, and you will be right. But that doesn't take away the fact that Che was ready to die for his ideas, and in fact did so.
The Right, neither conservative nor libertarian, doesn't have a single person who has gone to such extents. We don't have martyrs, and our beliefs are not religious. We may think of the self-immolating acts committed by the likes of Alex Jones or Kanye West as martyrdom for our causes, like free speech, but they are nothing but counterproductive folk activism.
In fact, our beliefs, are quite the opposite to a religious fanatism, for they are rooted in the reasonable analysis of history, nature and society, and as such, the results of our ideas, even if adequate on a long term, are not easy to sell to high-time preference masses, who have become used to receive subsidies from governments and have internalized the propaganda created by the corporate-managerial class that works in tandem with policy-makers.
Our society is deadlocked between an individual struggle for freedom and an organized struggle for power, and our times are stranger than ever, for they represent what Francis Fukuyama still insists is the End of History, but look closer to the civilization end stage described by Oswald Spengler in his Decline of the West magnum opus.
The problem is that if we take either Fukuyama's or Spengler's words for granted, we're still left without some key elements to understand the mechanics of our age: liberal democracy is indeed the dominant system all around the world, but it is not liberal (for it is not generous, as defined by Erik von Kuehnelt-Leddihn, and because it creates false, unstable prosperity out of heavy taxation, inorganic monetary emission and general government intervention of the economy), nor it is democratic (for it allows everyone to vote, no matter who or what "the People" is or is intended to be, and reserves power only for an unelected managerial class.)
If this account of facts is remindful of James Burnham's ideas, it is because he, like Spengler, identified elements of our current collapse, and tried to predict its future by equating the imminent managerialism of the West with Soviet Stalinism and Italian fascism, and in many senses, Burnham was right, and Western managerialism has indeed become something akin to fascism, although without the nationalism, as Lew Rockwell has repeatedly warned us.
But where does that leave us and how is Che Guevara connected to all of this?
Simple: for Burnham, as well as for Spengler, as theorists of Western collapse, the system that would be in place in the endgame of civilization would depend on strongmen like Cecil Rhodes to work smoothly, for they, as the Great Men in History described by Thomas Carlyle, would be the only ones able to take the reins of power to direct society.
This mention of Cecil Rhodes is not random, because he could probably be considered the best example of how a Great Man idea must be compensated with a sound understanding of historical processes, and because Rhodes, like Che Guevara, was strongman, a tactician and a born leader. In Hans-Hermann Hoppe's words, he was a natural elite.
From an English boy with poor health, the son of an Anglican priest, he became a mining magnate and then an important politician in South Africa. His talent for business allowed to thrive and prosper, and his short stay in Oxford University shaped his worldview into one of British dominance and influence.
In the same fashion as other strongmen before him, Rhodes was elevated into the highest prestige in his last years and after his death, with the British colonies he helped to acquire getting named after him (not unlike Bolivia being named after Simón Bolívar), with his South African estate becoming the campus for the University of Cape Town, and with his large fortune left to fund the Oxford scholarship named in his honor, which has helped educated thousands of politicians and enterprise heads from all around the Anglosphere, with the original intent of shaping them to think in the same way Rhodes himself thought about a British-dominated world.
But his legacy hasn't prospered as much as the almost religious veneration Che Guevara has acquired, for the idea of Rhodes, the imperial businessman and politician, once respected as an ideal of the British Empire, has now become anathema even in the very institution he attended and donated his fortune to, for the gospel of egalitarianism cannot allow the veneration of natural elites, in their own times and contexts.
Che Guevara, on the other side, by living fast and dying young, by focusing and sacrificing himself to his ideas, created a myth around and about himself, a myth that men like Cecil Rhodes could have never even achieved.
And now, in our Populist age, where political and business leaders emerge out of the polarization of ideas and beliefs, where strongmen and magnates like Ron DeSantis and Elon Musk can lead thousands of supporters and yet still have troubles to hold or exercise power in their own spheres of influence, the question remains: what are we missing that the Left does have?
We may not realize it, but the Left is currently lacking this key element: they don't have natural elites, they don't have caudillos, they don't have true leaders.
In their inflation of their egos, they have elevated the likes of Klaus Schwab and Samuel Bankman-Fried into their demigods, and when the societal collapse they have caused themselves may finally come, they won't be able to prevent it or to mitigate it.
But here is where and when our duty becomes clear: if the Left is a fanatic religious movement focused on enforcing egalitarianism, and if the Left has had its martyrs like Che Guevara, then our fight, just as Rothbard said, must also be a religious crusade, one for the defense of freedom and civilization.
But to fight such a fight you don't only need fighters, you need leaders, tacticians, strategists. Not everyone can be one, because our natural differences make us spontaneously inclined to different activities and positions in life, but extreme circumstances do create extreme leaders.
Ernesto Guevara did not become El Che from day to night, he was transformed by his trip around Latin American, radicalized by the poor living conditions of his fellow men, and engaged by the common identity of a single continent from the Rio Grande to Patagonia. It just happens he took to wrong path and he fought for the wrong ideas, and instead of prosperity to the masses, the only things he brought were death and misery, in Cuba, in Angola, and in Bolivia.
His face, now a symbol, still represents carnage and poverty wrapped around an utopian ideal, but ultimately proves the point of this essay: Che was, and still is, a symbol.
We, in the Right, cannot take him for our side, because it would be incoherent and counterproductive, but we must understand what made him as such. Che emerged under the most unlikely conditions and circumstances. Our Che will probably emerge from the most unlikely of the places as well.
Because if one thing is true, that our conflict with the left is indeed a religious fight against a fanatic progressive dogma, then we will also need leaders and martyrs, just like Che was for the Left in the past.
We need a Che Guevara of our own.
When So-Called Financial Genius Failed—Again
When on Monday FTX CEO Sam Bankman-Fried (hereafter referred to as SBF) took to Twitter to reassure depositors that the third-largest cryptocurrency firm’s liquidity was fine, one could be forgiven for hearing echoes of Bear and Lehman’s c-suiters talking to CNBC to reassure their respective sources of funding, their short-term lenders, that their liquidity was also fine, when in fact their own firms were in their death throes. That sense of foreboding was temporarily eased when on Wednesday it was announced that Binance, the market’s largest crypto firm, would rescue FTX by absorbing it in a takeover reminiscent of the one that saw J.P. Morgan gobble up the smaller Bear Stearns during the onset of the Great Financial Crisis.
However, after just a few hours of Binance’s due diligence team looking over its rival’s books it was announced Thursday that the deal was off. As a CoinDesk report the week prior had noted uneasily, FTX had put much of its depositors’ money into “hard to sell” positions. These included large equity stakes taken over the summer in troubled crypto-players BlockFi and Voyager, as well as large loans to one of SBF’s other business ventures, the Hong Kong based crypto trading firm Alameda. Facing a $4 billion dollar shortfall, the firm announced Friday FTX and all its related companies were filing for bankruptcy.
It marks the largest collapse of a crypto player to date and sparked a sell off in crypto markets already badly beaten down by rising interest rates.
The irony that it was Binance that had first dangled salvation before taking it away was not lost on informed observers of the crypto space. Following a series of public spats over SBF’s perceived friendliness toward financial regulators having gone too far, Binance’s announcement that it would begin closing its large position in FTX helped spark the run that eventually killed the firm.
The problem, apart from Binance’s impending withdrawal, was the signal it sent to the market. Selling its FTT holdings, the digital token underlying the FTX network, worth billions of dollars at the time, would tank the price. If you know a whale is selling, it’s best to be out first, and that logic prompted huge withdrawals. For its part, meeting these calls for customer cash became increasingly difficult for FTX. Even if it had been able to access the FTT it had lent to Alameda, which was being used as collateral to trading counterparties, selling it for cash at distressed prices would have likely blown up both firms. On the one hand, selling so much FTT would have tanked the price, putting FTX in dire financial straits; while on the other, the fall in the asset’s value would have triggered a cascade of margin calls on Alameda’s outstanding positions.
Just like Bear and Lehman, whose houses of mortgage-backed collateral collapsed when a sudden panic over their quality meant the positions were effectively unsaleable and would not be taken as collateral, FTX and its related companies had no assets they could sell quickly to raise cash and no collateral any counterparty wanted to take.
From being worth billions to being bankrupt in less than a week, given the similarities between the implosion of FTX and the financial crises faced by other firms in the past, several recurring lessons seem worth pointing out:
First, hold a diverse balance sheet. Much of the panic that results in the variations between asset classes going to one is caused by firms realizing the instability large un-diversified counterparties pose to the system. From Long Term Capital Management’s short equity volatility position to the investment banks that bet it all on their subprime securitization businesses, a lack of high-grade liquid assets will always leave a firm on knife’s edge.
Second, when credit conditions begin to tighten firms need to either deleverage or else carefully manage their liquidity. Neither of those things happened.
Third, when depositing money at an institution, one is in effect making a loan. The interest rate, therefore, should be seen as an indicator of the level of risk a depositor is taking on. In the case of crypto lenders, operating without the Federal Reserve’s safety net, the interest rate offered to attract lenders is generally several times higher than one could get at a legacy deposit taking institution. The reason, as just evidenced, is that these firms are paying buyers for taking on the risk of a complete loss of capital.
Fourth, beware obvious conflicts of interest. Just as it should have been a red flag that the ratings agencies were being paid by the banks for their ratings and had to compete with one another to retain the lucrative business of the big banks, SBF’s role as unencumbered head of both FTX and Alameda deserved much more scrutiny than it got.
Finally, it isn’t just “dumb” retail investors that are on the hook for huge losses. Several large institutional investors face a combined billion dollars in potential write downs. Such “smart” money made all the classic mistakes that have seen banks from UBS and Credit Suisse to Merrill Lynch get themselves into loads of trouble before. Related hedge funds or special investment vehicles that could potentially expose a lender to losses need to be carefully supervised, and by at least two different people.
Taken in by a story told by a charismatic young entrepreneur, these investors all chased yield at their peril, whether they knew it or not.
One can only hope the inevitable calls for more regulation of the crypto space and an expansion of the powers of the Consumer Protection Bureau will be deterred by cooler heads, who recognize there was nothing so special in the death of FTX at all.
Washington State Supreme Court Gives Black Plaintiffs a Racial Advantage
The progressive Washington State Supreme Court has issued a ruling that effectively gives black plaintiffs a racial advantage in lawsuits against whites.
I have called opposing litigants and counsel confrontational and combative in the past, because in those cases, they were. Race had nothing to do with it — most of those combative people were white!
But in a truly bizarre ruling, the Washington State Supreme Court has unanimously ruled that it is presumptively racist to characterize litigants as “combative” or “confrontational,” if the litigants happen to be black. Based on this strange conclusion, it ruled that a $9,000 verdict for a black plaintiff was likely inadequate, and had to be overturned at the plaintiff’s request, unless the white woman who was sued could somehow prove the judgment would not have been larger absent its counsel calling the black plaintiff combative. It also ruled by a 7-to-2 vote that it was presumptively racist to point out that three witnesses all used the exact same phrase, as if they were coached, suggesting collusion, because the witnesses happened to be black.
Lawyer Ted Frank calls it an example of “a state Supreme Court applying critical race theory for the purpose of discriminating against whites in civil litigation” and how “pseudoscientific nonsense is infecting our institutions.” The ruling does indeed rely on Critical Race Theory books, such as “Racial Microaggressions: Using Critical Race Theory to Respond to Everyday Racism,” and critical race theorists, such as a founder of Critical Race Theory, Derrick Bell. The ruling also contains all sorts of bizarre unnecessary claims unrelated to its holding, like suggesting that welfare fraud doesn’t exist (it routinely occurs) and that its existence is just a racist trope invented by Republicans.
The case involved a black woman asking for a new trial because of opposing counsel’s successful attack on her credibility and calling her “combative” in cross-examination. The black woman sued for $3.5 million after a white motorist had a rear-end collision with her. Video showed the black motorist was faking the extent of her injuries. After defense counsel called into question her credibility, based on the video, the jury awarded the black woman only $9200.
In response to the request for a new trial, the trial judge did what trial courts would do in most of the country in this situation: it refused to do so. The Washington State Supreme Court reversed that ruling, saying that the burden was on the defendant — a white woman — to prove the judgment was not affected by racism. If the white woman can’t prove that, the plaintiff can have a new trial, and sue her all over again. The black plaintiff had sued for a whopping $3.5 million after her car was hit from behind in a car accident. The jury awarded her $9,000, which the black plaintiff said was due to racism. But it is rare for juries to award $3.5 million for a traffic accident. $9000 is a much more typical amount for a motorist to collect.
By allowing jury verdicts to be overturned based on speculative claims of racism, this ruling will result in more extortionate settlements. This ruling will bully some white litigants into not criticizing inappropriate behavior by black litigants and lawyers, and will bully litigants into not vigorously challenging questionable claims made by black litigants and lawyers. Thus, it undermines due process.
As Ted Frank observes, the ruling effectively gives black lawyers and witnesses an advantage. He says that if he were a Washington plaintiff’s “lawyer in state court, I’d be sure that my critical expert witness was Black. Free roll! Either I win, or [I argue that the opposing side’s] “rebuttal of the expert was a microaggression of some sort and I get a new trial — or threaten one, to induce better settlement up front.”
The Washington Supreme Court’s ruling was issued on October 20 in a case known as Henderson v. Thompson. It reinforces an earlier ruling overturning a conviction because of a criminal’s race, in State v. Sum. In that June 2022 ruling, state supreme court overturned a man’s conviction for lying to police, because he is non-white. If he were white, his conviction for making a false statement would have been upheld, because there was no dispute that he lied, and the questions he was asked by a police officer were typical attempts to gather information.
But the court ruled that the police officer’s questions to him effectively detained him, because his non-white race, in the court’s view, made the cop’s questions (such as what his name was) more coercive to him than if he were white. It ruled that the criminal was detained by these questions, regardless of whether he felt detained. The defendant in that case, Palla Sum, was not black, but rather an “Asian/Pacific Islander,” a racial group that is not arrested or incarcerated at a higher rate than white people.
By making it harder to question people of color about crimes, that Washington Supreme Court ruling made it harder to solve crimes in communities of color, such as predominantly-black areas. Murders are less likely to be solved in predominantly-black areas than predominantly white areas, fueling a much higher crime rate. And the victims of this high crime rate are disproportionately black, because most crime is committed against people of the perpetrator’s own race.
The Washington Supreme Court’s more recent decision, in Henderson v. Thompson, violates the equal protection clause of the Constitution by giving black litigants an unjustified advantage. The courts are bound by the equal protection clause, as the Supreme Court has made clear in many cases such as Strauder v. West Virginia (1880). Race-based relief violates the equal protection clause, if there is not a “strong basis in evidence” that there is racial discrimination to remedy, as the Supreme Court has made clear in decisions such as Shaw v. Hunt (1996). In the Henderson case, there was only baseless speculation that the verdict was tainted by racism, and the actual motive of the Washington Supreme Court was likely to stack the deck in favor of black litigants, as a way of compensating for societal discrimination — something the U.S. Supreme Court’s Croson decision says is not a valid justification for using race. If a government official has the wrong “purpose” for taking race-based action in favor of minorities, that taints the action, even if it would otherwise be constitutional, under the Supreme Court’s decision in Shaw v. Hunt, 517 U.S. 899, 908 n.4, 910 (1996).
The desire for such unconstitutional compensatory discrimination is explicitly stated in works by Critical Race Theorists. The “key concept” in the book How to Be an Antiracist is that discrimination against whites is the only way to achieve equality: “The only remedy to past discrimination is present discrimination. The only remedy to present discrimination is future discrimination,” says that book, a New York Times bestseller. That book is a “comprehensive introduction to critical race theory,” notes the leading progressive media organ Slate. Its author, Ibram Kendi, says he was “inspired by critical race theory,” and he has been described as a leading “critical race theorist.” Kendi said that he cannot “imagine a pathway to” his teachings “that does not engage CRT.”
However, even if the state supreme court’s decision violates the Constitution, that does not mean it will be corrected by the U.S. Supreme Court anytime soon. To obtain review from the U.S. Supreme Court, a litigant must file a petition for certiorari with the U.S. Supreme Court, and the Supreme Court must then grant the petition to hear the case. The U.S. Supreme Court turns down 99% of all cert. petitions without comment. It does not hear appeals of even most erroneous lower court decisions, and it tends to hear appeals only when there is a split among the lower courts, and not even in most such cases. It is generally “not a court of error correction,” and it can take decades before the U.S. Supreme Court gets around to abrogating a lower court’s unconstitutional doctrine.
What Did the Democrat Say to the Republican?
If cringeworthy were a letter, read what Ohio Senator Sherrod Brown (D) wrote to Federal Reserve Chair Jerome Powell (R). In my opinion, everything contained in the letter comes from a place of selfishness, entitlement, and employs little use of reason. The demagogue thrives on appeals to emotions and the use of ill defined or hollow economic verbiage, regardless of political party.
Written on the letterhead of the United States Senate Committee on Banking, Housing, and Urban Affairs, he begins by reminding Powell of the Fed’s dual mandate:
As you know, the Federal Reserve is charged with the dual mandate of promoting maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.
Titled dual mandate, yet at some point became tri-part, where the Fed is additionally tasked with “moderating” interest rates. Senator Brown follows:
It is your job to combat inflation, but at the same time, you must not lose sight of your responsibility to ensure that we have full employment.
On one hand, Jerome Powell is supposed to create (money and price) inflation. On the other, he must aim to control prices once they exceed a metric in which he deems unacceptable while also ensuring that “maximum employment,” a bizarre negative right, is reached.
Their method to lower prices is explained:
The Federal Reserve’s tools work to lower inflation by reducing demand for economic activities sensitive to interest rates.
What exactly these sensitive economic activities are, or how they are measured, is not detailed. There is also a noticeable tactic of acknowledging problems, then looking past rational solutions in favor of something less sophisticated, per below:
Upper-income households are better able to protect their wealth during economic downturns … lower income families have fewer resources to mitigate unemployment and less wealth to accumulate assets and realize gains during an economic recovery. Due to this disparity, inflation and recessionary job losses increase the gap between upper- and lower-income households…
It is true that wealthier individuals are better insulated from currency debasement. They have more assets. Artificial booms created by the Fed benefit those with a higher net worth since, traditionally, they have cheaper and easier access to the new monetary inflation. The ability to access credit for the purpose of business loans or placing leveraged stock market bets is much easier for those in the “upper-income” bracket than for “lower-income” households. Yet the Senator doesn’t seem to fathom the idea that it is the Fed’s monetary creation causing widespread price increases, recessions, and economic booms.
At last, it’s declared:
We must stay focused on addressing the root causes of inflation without putting workers’ livelihoods at risk.
…the United States and the world are still feeling the effects of a supply and demand imbalance from the pandemic. Russia’s illegal invasion of Ukraine has driven energy costs up, affecting food, transportation, and other sectors. Big corporations in concentrated industries have exploited this inflationary environment, increasing consumer costs and earning higher profit margins than before.
He mentions the Inflation Reduction Act, which in his own words “initiates fiscal action to strengthen the economy,” by way of various market interventions including new tax credits. Then he concludes by reminding Powell to continue following the dual mandate.
Reading a letter like this illustrates how far from reason, dignity, and honesty society has strayed. In this case, we find a senator seemingly not embracing any capitalism writing a letter to the head of an organization whose sole existence is anti-capitalistic. When everything goes predictably wrong, expect more socialist policies. They will never arrive at the answers society needs. Only a free and unhampered market can offer the best and most fair solutions to our economic woes.
Wholesale Prices in September Rise 8.5 Percent, Pointing to Continued Price Hikes
The US Bureau of Labor Statistics released new Producer Price Index (PPI) data today, and it’s more bad news for both business owners and consumers.
The PPI is a measure of prices at the production phase of goods and services, and is often an indicator of where consumer prices are headed. Prior to 1978, the index was known as the Wholesale Price Index.
This September, year-over-year PPI growth came in at over 8 percent for the fourteenth month in a row, reaching 8.5 percent. This was a small drop from August’s year-over-year rate of 8.6 percent, but continues to suggest ongoing upward pressure in prices. The month-over-month change for September was 0.4 percent, which was up from August's month-over-month change of -0.2 percent. Movement remains upward, and from a very elevated base.
Once again, wholesale price growth was higher than "expected," since economists can now virtually always be expected to paint a rosier picture of the economy than the data ends up supporting. Instead, the data points toward continued uncomfortably high CPI inflation. According to Kiplinger:
A reading of inflation at the wholesale level surprised to the upside Wednesday, stoking fears that tomorrow's report on consumer prices will likewise show that inflation remains out of the Federal Reserve's control.
The producer price index (PPI) rose 0.4% in September, well ahead of economists' estimate for a gain of 0.2%. Year-over-year, PPI rose 8.5%, or a slight deceleration from August's increase of 8.7%.
Excluding food, energy and trade services, PPI increased 0.4% month-over-month, the largest rise since May, the Bureau of Labor Statistics said. Year-over-year, the index rose 5.6%.
As with the Consumer Price Index, the narrative among optimistic analysists was that PPI measures would moderate in September and signal a downward turn. That does not appear to be the case so far. Indeed, consumer prices showed few signs of any significant moderation in August, as CPI inflation continued to surge near a forty-year highs. Continued growth in the PPI points toward ongoing growth in consumer prices in September as well.
Essentially, this PPI report suggests that there's still little relief in sight when it comes to rising prices. This is more bad news for Wall Street which is now desperate for a Fed pivot back to active quantitative easing and interest-rate suppression. Wall Street has become addicted to the Greenspan Put and QE in recent decades, with the extent of monetary expansion becoming one of the largest drivers of stock prices.
The S&P closed lower today for the sixth day in a row since the continued growth in jobs—reported last week—coupled with this PPI report sends the signal that the Fed is unlikely to reverse course on rate hikes in the short term.
New CPI numbers come Thursday morning.