The Zero-Sum Game of Speculation
Two important headlines this morning, both of them fraudulent:
“Chinese economy bounces back,” says one headline in the International Herald Tribune.
“JPMorgan profit soars despite downturn,” says another.
The average reader or TV viewer will go no further. “Ah,” he says to himself, “good news; the worst is over. China is a green shoot as big as the Amazon. And JPMorgan is a leader in the financial sector. If the financial sector is doing well, the whole world economy must be doing well.”
But here at The Daily Reckoning, we can’t help ourselves. If we see a silver lining, we look for the cloud. We see garbage…we look for the rat…
We begin with the JPMorgan profit announcement, because it is the most intriguing. Let us set the stage:
In the last half century, credit has expanded faster even than dress sizes. Naturally, this has made the business of hawking credit extremely profitable. Profits in the financial sector soared to 40% of the U.S. total. And every momma wanted her baby to grow up to be an investment banker.
But then, in 2007 & 2008, the bubble in the financial sector popped. Many banks and financial institutions went broke…or had to be bailed out by the government. Instead of being the world’s highest-flying industry…finance became the scene of its biggest crash.
And now, from all we’ve been able to detect, a fundamental shift has occurred. People are no longer eager to go deeper and deeper into debt. Instead, they are eager to pay off debt…that is, to rid themselves of finance…and to get as far away from the financial sector as possible. Savings rates, for example, have gone from zero to 7% in just the last 12 months.
But in the midst of this remarkable and historic change, we get news that at least a couple of the biggest firms in the financial sector – JPMorgan and Goldman Sachs – are making billions in profits:
“Even as it weathers the worst economic downturn in decades, JPMorgan Chase said Thursday that it had made a $2.7 billion second-quarter profit as a result of stellar trading and investment banking results.”
This was essentially the same story we got from Goldman. Neither bank made its money the old fashioned way — by lending to worthy projects; they made their dough by “trading” and “investment banking.” In other words, they made billions from speculation.
Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: whom were they trading against?
Speculating is a zero-sum game. No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?
There is also something fishy about the whole thing. Trading is not only a zero-sum game, it’s a game of chance. Traders lose money about as often as they make it. Of course, normally, the traders at the big banks have an advantage; they are not idiots. They make money by taking it away from the amateur traders, who are idiots. But what amateur traders put up $6 billion?
Our guess: the fix is in. They are taking advantage of the feds’ stimulus programs…and trading against the biggest patsy in the world, the U.S. taxpayer. How? We’ll find out how, later…
Meanwhile, there is the news that China is back in business.
“Government spending pushes GDP growth to 7.9% for 2nd quarter,” reports the IHT, “…fueled by a large economic stimulus package and aggressive bank lending…a surprisingly strong showing during the global economic downturn…
“…while most other major economies are contracting and suffering from the worst economic crisis in decades, China appears to have turned a corner…
“Growth in the second quarter was driven by strong auto and property sales, a rebound in manufacturing and huge infrastructure spending, which was propping up global commodity prices.”
Further investigation reveals that bank lending and property speculation have gone wild. (More on this in today’s essay, below…) And stocks in Shanghai are up 75% so far this year.
Now, let’s try to get this straight. The world is in a slump. China sells stuff to the world. And yet, China is booming.
How could it be? Again, there’s something fishy about it…as if the government were jiving the figures…as if the speculators had taken leave of their senses…and as if the whole thing were just the result of the same kind of misguided ‘stimulus’ that got us into trouble in the first place…
The Richebacher Letter’s Rob Parenteau agrees that something isn’t quite right. “Ask anyone who’s done business there. Keeping a double set of books in China isn’t just common, it’s considered ‘good strategy.’ You’ve also got under-regulated Chinese banks hiding as much as $500 billion in bad debts — China’s own version of ‘subprime’ loans to small businesses and Asian property speculators.
“On top of that, you’ve got a $40 billion tab left over from the Beijing Olympics… and a $140 billion tab for rebuilding Sichuan after their 2008 earthquake.”