Overnight, stocks were up… a lot.
And gold was down… a lot.
Why? Has the world changed? Have central bankers figured out the perfect solution to fixing the global economy and financial system?
Er, no. The Financial Times (FT) reports:
“The world’s main central banks took bold concerted action to pre-empt a looming dollar funding crisis in Europe, sparking a rally in Eurozone bank shares and the euro.”
If we didn’t know better we’d say the FT has turned into the Central Bankers’ press office.
But that wasn’t the only big news to hit the market. In fact, in terms of column inches across the two biggest financial newspapers – the FT and Wall Street Journal (WSJ) – another story made a bigger splash.
It was news that Mr. Kweku Adoboli, a trader at Swiss banking giant, UBS, had racked up a USD$2 billion “rogue trading” loss for the bank.
Forget five central banks bailing out Europe (again). Instead, the financial press decided to devote most of their journalistic talent on… finding out what Mr. Adoboli had written on his Facebook page!
But to us, the bigger story is the coincidence of Mr. Adoboli’s alleged crime and the central bank intervention occurring on the same day. OK, let’s just say it: it’s not a coincidence…
The market needs any diversionary tactics it can get. But diversions from what? Well, let’s check out the deal struck by the five central banks? The WSJ notes:
“The action addresses an acute shortage of dollar availability as U.S. lenders withhold funds out of concern that the European banking system is overexposed to the region’s government-debt crisis.”
In other words, even the corrupt U.S. banks have more sense than to lend money to Europe’s zombie banks. It proves that things must be bad.
And why should they lend to Europe. They know there’s no need to risk their own capital when central banks have shown they’ll bail out any bank at the drop of a hat.
Proof of that is in the following quote from the WSJ:
“On Wednesday, the ECB [European Central Bank] said two banks had tapped it for $575 million, only the second time in six months that the ECB had doled out dollar funding. The names of banks that tap the ECB are kept confidential.”
So, three years after the financial world almost collapsed… the financial world is still almost collapsing.
As Slipstream Trader, Murray Dawes wrote in a note to your editor this morning:
“It looks like the world’s financial system was closer to the edge of oblivion than even I thought. In the end this is another case of ‘kicking the can down the road’. But the fact is you can’t solve a solvency crisis with liquidity. If Greece brought Europe this close to the edge I hate to think what’s coming next. My advice: use this rally to get out of risk assets. If you don’t there’s a chance you’ll regret it!”
We can always rely on Murray to get to the point on these things.
The banks are in trouble. But the authorities don’t want you focusing on it. So, on queue comes the diversion… Mr. Adoboli.
But that’s not the only coincidence. When looking for a fall guy, it’s important they pick on a guy based in Europe. This is because white collar fraud typically attracts softer sentences than U.S. white collar fraud.
For instance, Société Généralé “rogue trader”, Jerome Kerviel lost USD$7 billion for his bank from the Paris office. Last year he was sentenced to five years jail.
Now compare that to Lance Poulsen, CEO of National Century Financial Enterprises. His firm collapsed in 2002. Here’s the judgement from the United States Court of Appeals for the Sixth Circuit:
“The district court sentenced Poulsen to 360 months [30 years] in prison to run concurrently with the sentence in the Obstruction Case [sentenced to 10 years prison].”
Mr. Poulsen was accused – and convicted – of a USD$2.8 billion fraud… and is off to jail for 30 years.
Or how about recently convicted insider trader, Raj Rajaratnum.
He’s due for sentencing next week. His hedge fund made over USD$60 million from insider trading. Odds are he’ll get a sizeable sentence – a recent case involving a USD$10 million insider trading profit, saw the accused get a five-and-a-half year jail sentence.
Prosecutors in the Rajaratnum case are gunning for a 20-year plus sentence!
What we’re saying is, if the banks are going to offer up a sacrificial trader… make sure he or she works in Europe. Because odds are they’ll get a soft sentence and be out before the next Rugby World Cup comes round.
And that way, the banks’ top brass can sleep a bit easier knowing their fall guy only has a couple of years of playing dodge in the showers.
But really, what this coordinated central banker/rogue trader story is about is the masking of more banking bailouts… more taxpayer dollars going on the line… and the continued devaluation of paper currencies.
Think about it. Who really understands what the central banks have done… not the average man in the street… and we’ll guess the hot-shots on Wall Street or Collins Street don’t get it either.
All the market needs to know is the central banks are doing something. But they don’t want the market knowing too much. Hence the convenient appearance of a rogue trading “beard”.
The fact is we can’t get a claim paid for a $2 newspaper without our office manager boxing us about the ears asking for a receipt!
So to expect us to believe that a trader at one of the world’s biggest financial institutions could trade billions of losses without the deficit appearing on a profit and loss, or position statement somewhere… well, put it this way, it’s not likely.
We’re right with Murray Dawes on this one. The market is on the edge. And ironically, we also agree with Geoffrey Yu, director of foreign exchange at… UBS. He told the WSJ:
“This [central bank intervention] doesn’t change anything. It helps the banks for the next couple of months, but that’s it.”
In short: stocks have rallied, gold’s been slammed. That means it’s time to sell one and buy the other.
P.S. Slipstream Trader Murray Dawes feels the ASX may be on the verge of a squeeze. In his new free video market update, Murray will take you through what’s happened in our market recently and where he thinks it will head. To view the video, simply click here to visit Slipstream Trader YouTube channel.
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.