I have watched in utter amazement as the stock market continues inexorably to climb to new highs nearly on a daily basis. I have wondered aloud and in writing how such an upward march could be justified. I have looked in vain. There is nothing going on in the economy that, in my opinion, justifies this. Smarter people than I have failed to find justification for it either. The markets don’t care, it seems. They just continue to move higher.
But perhaps Wall Street is watching something that is about to happen in Europe and is anticipating the increase in profits that are headed its way as the Tobin Tax wreaks its havoc.
Let’s get a running start. All you need to know about Ambrose Evans-Pritchard is that he writes for England’s Telegraph newspaper and blog, and that he has strongly opposed the European Union for decades. The fact that he blew the whistle on Clinton, the murder of Vince Foster, and the Oklahoma City bombing merely adds to his credibility.
He just blew the whistle on the Tobin tax and its coming negative impact on the European economy and, by implication, the coming wave of profitable business likely headed for Wall Street. The Tobin tax is a financial transactions tax, rather like a sales tax, to be levied on all financial transactions. It’s a tiny tax – just one-tenth of one percent of the value of the sale or purchase of stocks and bonds, and one one-hundredth of a percent on derivatives or repos – but the volume of business is enormous and the impact staggeringly negative. As Evans-Pritchard points out:
The repo market – $8 trillion in the EU and US combined – is a crucial lubricant of global finance … a vast pawn shop that allows banks to raise funds quickly and easily by pledging assets…
I think of the repo market as Craigslist on steroids for banks, conducted at light speed. Assets, including promises to buy or sell assets, are traded for cash instantly. It’s the equivalent of the just-in-time manufacturing process that reduces slippage and inventory costs.
The Tobin tax is like sand in the gears. As Evans-Pritchard says:
It was a failure of the repo system after the Lehman crash that set off the downward spiral in 2008 … Credit Agricole [the eighth largest bank in the world] said it will cost them $22 billion … [it is] an act of idiocy…
Happily the only places left for international bankers to play are in Singapore and, you guessed it, New York.
Evans-Pritchard didn’t make the connection between Wall Street’s seemingly inexorable rise, but someone has figured out that a tsunami of profitable business is headed there as the Tobin tax begins to be implemented across all 11 Eurozone nations next year.