Financial Manipulation: Not the Exception, but the Rule

It is the task of today’s Weekend Markets and Money to speculate on a profitable trade for 2014. But before we get there it helps not to forget that the whole financial system is rigged.

One of the US Federal Reserve’s former traders, Andrew Huszar, said so himself this week in an op-ed for the Wall Street Journal. He gave his take on the torrent of cheap money that is still spewing five years after it began: ‘The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

As The Denning Report editor Dan Denning pointed out here in our Albert Park headquarters, Huszar even used the words ‘banking cartel’ in this CNBC interview as the panel squirmed. If you check out the clip Huszar looks as uneasy as they do. We don’t know if it’s from appearing on television or wondering if someone from the US government will knock on his door.

You might recall the case of Michael Burry, the gun investor who predicted the subprime collapse long before 2007 and got rich trading the fallout. He took a crack at the Federal Reserve, Congress and the US administration in public in the New York Times in 2010. He asked how the Fed could’ve missed it when it was so obvious (to him).

He told UCLA graduates in a speech later that as a response his by-then-closed funds were audited, Congress demanded his phone and email records, and the FBI investigated. The whole debacle cost him a million in legal and accounting fees. So much for the US First Amendment!

Going from one banking cartel to another, what about this from the Financial Times?’The global probe into foreign exchange manipulation has widened to include 15 of the world’s biggest banks and some of the most actively traded currencies, as lenders scramble to help authorities in exchange for leniency…The rapidly accelerating probe is looking at whether traders manipulated markets by sharing information and trading ahead of their clients.

Take a look at the names, or list of usual suspects: Barclays, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Royal Bank of Scotland, Standard Chartered and UBS. Remember, all this is following on from the LIBOR scandal. From one rigging to another.

The FT reports Joaquín Almunia, the European Union competition commissioner, saying, ‘Before Libor, people thought benchmarks could be trusted. Now there’s a presumption that there’s a risk of manipulation. Perhaps manipulation is not the exception but the rule.

We’re sure this will prove a fruitful area of discussion next year at World War D. That’s the Port Phillip Publishing conference to be held here in Melbourne in April. Keynote speakers include Jim Rickards, John Robb and Satyajit Das, not to mention one global name we’re keeping mum for now. If you’d like to receive an early bird email on the details, which will include a discount and with no obligation, sign up here.

The European Central Bank has just fired the latest shot in the currency war, according to Dan Denning. The ECB is the latest central bank to cut its cash rate. It’s now at 0.25%. Like Japan and the US, the ECB is just about out of firepower on that front unless it goes to a further ‘unconventional’ policy.

That’s why Dan flagged the ECB making noises about asset purchases to free up bank credit. One of its board members told the Wall Street Journal: ‘If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That’s a very clear signal.’

Dan argues in his latest report that the ECB is about to use the same gambit as Japan and the US to generate growth: extra liquidity and possible asset purchases. The Nikkei is up 70% since Japan went the way of ‘Abenomics’. If we see a repeat of what’s happened in Japan and the US, certain stocks could get a lift on a wave of bank capital set free by the ECB. That’s a wave you can ride as a speculation.

Dan’s track record for picking these kinds of shifts in the market is second to none. Back in 2011, he was the first we knew of who called the coming rally in dividend stocks after he concluded that the Australian Reserve Bank would cut the cash rate and drive yield hungry investors into stocks. The ETF he recommended on that analysis is up 33%.

As Dan wrote in Scoops Lane, The ECB will pay lip service to boosting exports, lowering unemployment, and increasing lending. But once the investment banks get in the game, it’s all about using QE to speculate on stock prices. If the ECB intends to lead the charge into more folly, speculators ought to look at how to profit. In my latest report, I’ve suggested an Aussie-listed exchange traded fund that could profit if the ECB begins blowing up its balance sheet with asset purchases in 2014.


Callum Newman+

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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