Let me draw on an example first, so that a basis for the explanation can be seen clearly: take the original Rolls Royce company just prior to Thatcher's England. The econo-politics of Thatcherism – a set of concepts that is one of the marker sources of the entire present-day economic reality – is about extending supply-side theory into every sector of life. And by supply-side, it is meant supply of finance and money. Thatcherism could well be critiqued as also placing the finance industry at the peak of a pyramid of priorities and privilege, ahead of anything and everything else including human rights, historically evolved principles of law and justice, god and the crown.
What this right wing idealism in practice translates into, is the theory that financial asset growth can pull the domestic economy ‘forward' even while the means and mechanisms by which growth occurs, focuses on the yearly average liquefiable MARKET price of a capital asset, not its underlying component individual values.
Mature public listed companies' values, are treated differently by common practice, from private assets, and principally are based on year-to-year back earnings records and comparisons of these results with the idea that you can draw certain conclusions about current and future performance from any divergences.
There are two problems with this, one stems from the fact that financial industry corporates are quantitatively dependent on money supply and hence monetary and central bank policy – not internal management quality and practice – and the second is that output/product price is often dependent on high stockpile levels, workforce skill and craft levels, and many other supposedly intangible things. The value of a brand, for instance, is based on the marketplace of real people expecting certain things that the brand traditionally has delivered.
In the case of Rolls Royce, the market that bought these cars, expected 22 years of stocks of spare parts held by the parent company so that there was virtually never, or a virtual lifetime guarantee on parts and serviceability. The price of the cars themselves reflected these expectations, but accounting practices did not reflect the capital asset value of such high levels of stockpiles – they wrote these down as depreciated assets. They were not, in truth, depreciated assets.
During the Thatcher years, Rolls Royce was put on the block and eventually sold. The process by which this happened was the induction of growth by selling off its spare parts stockpile, and the cutting back of the design and craft division. The market was still expected to pay the same price for the same vehicle, but the expectation of what service and spare parts were available was no longer deliverable. The company's balance sheet however, held greater short-term cash, and less depreciability. Year-on-year financial asset growth was the superficial result. The company and the cars have been ill-served though.
…Now let's take this example and filter today's banks and financial industry sector through its lessons. If you remove the internal staffing levels, quality, and evolved operating procedures that expert bankers would have automatically EXPECTED, in banks – thereby lowering radically the year-on-year operating costs – and push through ever higher amounts of cash via ever more bizarre capital inflows (as Bulldog as recently pointed out) and bizarre monetary policies, it then superficially appears that there is ‘growth' occurring. Provided that debt default insurance can cover sufficient percentages of cash write-offs, this picture can go on for quite some time.
In the end, the banks become husks, totally incapable of delivering anything to anyone except to their accountants who are permanently living in a lagging and unreal past. So long as fees can be paid to ratings agencies, accountants, and re-insurance companies, the façade may go on unchecked by any negative ‘authoritative'financial analysis.
Mortgages are concerned with long term assets and therefore capital, and yet huge immediate cash write-offs are seen to occur in what has been termed subprime mortgage lending. No such thing! What is occurring are losses having to be booked caused by the total lack of genuine earnings from THE COST OF REAL CAPITAL. Unlike Rolls Royce, the real market in banking has already discovered that banks do not have money to lend anyone who can genuinely employ debt, and the market does not therefore borrow from mainstream banks. There are some exceptions that still are banks, but their sources of capital and their client base is relatively unique. Everywhere else, all that happens is that a public constituency that is a political necessity, is ‘lent' some houses to live in but which must remain on banks' books as bank-owned capital stock. Some equities are held as bank capital stock, and some government securities too. None of these things earn sufficient real revenues to support the market valuations of banks. And that is why the Federal Reserve must do anything and everything to continue the façade. Underneath the façade lies the reality of a global economy of money and capital assets that are totally outside of the control of the US in particular and of Western banks: oil, industrial and scientific technology, gold, and most food production.
Daytraders often wonder whether their individual stops are met by sophisticated computerization that is designed to steal cash from them even though they have correctly positioned their bets in the major trend. Nobody can prove or disprove such a proposition. But it is far more prudent to assume that it IS the case.
There is a vast amount of inside-banking-circles anecdotal evidence concerning staff theft, ludicrous custodian practices that invite theft of safety deposits of cash and jewelry, and grossly inadequate systems that are exploited to siphon huge amounts of cash out of the bank by unethical and criminal employees and even management. This is the number one problem inside banks today. There has been no media attention given to it and rumours of it are scoffed at. But this is where the problem is.
Anyone who has valuable collector coins, gems, and bullion, is best advised to steer well away from any kind of bank custodial and safekeeping service – if one wants to avoid the tears of losing something truly prized and having sentimental value. Some things of monetary value are also irreplaceable if lost or stolen. The temptation that sees long dormant estate safe packages pillaged from, will soon enough visit itself on some truly valuable and physically small item such as a very rare old coin.
Front counter service standard declines are a sign of much worse internal decline.
Federal Reserve Chairman Bernanke is using outdated concepts about economics and assuming far too much about the power of government and the way societies behave when they are lied to on a sustained basis by their politicians, bankers and bureaucrats and when these try to take a moral high ground whilst scandalously promoting establishment theft.
Recently German banks and the German government has criticized Liechtenstein for inviting tax evading wealthy people to bank there. The German government even bribed one individual $6 million to have them hand over a list of names of tax evading clients.
However anyone who has a finer understanding of money and tax matters comprehends that banks are not the places for ‘offshore' accounts – they may act as short term clearing houses for remittances and monetary transactions, but they are not places for HOLDING money and capital.
As governments increase their ability and awareness of tax schemes and related matters, the upper end of what financial people know is also raised. As governments increase their bizarre impositions of sanctimony about law and justice, education and freedom of speech – whilst evading plain speaking at every turn – they enter into a new type of historical era. The only reason a Democracy can exist, is when neighbours can fight shoulder-to-shoulder risking their own lives and doubting nothing about each other's motives, and when there is a leader as clever about timing and with as good a judgement of critical forces as Miltiades.
There is no such leader anywhere and there has not been one for decades.
All revolutions spring from extraordinary innovations in technology. And constituencies line up behind those leaders who possess the secrets – Portuguese mapmakers, Chinese bamboo rocketry, Venetian gunpowder, Greenwich latitude know-how; there are many examples.
Money and banking just follows power.
Unless the US can make war against Iran and prevail quickly, and do so virtually now, it has already moved into an era beyond its peak moment in world history. Following the decline, discrediting of the ideas, economics and philosophies of the previous power that was, always occurs. Islam is the other side of the same coin – and it too is past its real prime. Places like Dubai are only reinforcing the lack of imagination present in all passing ruling elites.
What it will take to research and develop the new technology needed to resolve the current energy crisis, is beyond what façade economics can invest.
And that is why it is necessary to quickly take control of the oil wealth of Iran immediately. Otherwise, we are on the verge of a kind of Dark Ages. In reality, the current price of gold may be well short of a premium on stable capital. And it may well be true, that the means of locating it safely and using it as a form of real money has not yet been achieved. But it will be and it is inevitable.
28 February 2008
18 February 2008
Indicting the UK ---
Indictment One: the UK current account deficit reached 5.7pc of GDP in the third quarter of last year, the worst of any major country in the world, bar Spain. "This is approaching Banana Republic status," said Albert Edwards from Société Générale. "Years of macro-mismanagement have dragged the UK economy to the edge of a precipice. The household sector is borrowing at a cyclically unprecedented 4pc of GDP. Basing economic growth on unsustainable asset price bubbles was always a recipe for disaster," he said.
Indictment Two: we are a budget basket case as well, with a deficit of 3pc of GDP at the top the cycle. We enter slump without a fiscal shield. Even America is doing better. This deficit is beyond the legal limit of the Maastricht Treaty, not that Downing Street cares. Gordon Brown may have to care more about the bond vigilantes and currency traders who have sharper claws.
They may yet force him to raise taxes into a downturn, as Labour's Philip Snowden had to do in 1931, or as Latin America's big spenders have had to do with an IMF gun to their head. A hard landing will have a "catastrophic impact on UK public finances" as tax revenues dry up and dole costs soar, says Capital Economics. "A recession as deep as that in the early 1990s could push borrowing up to £150bn per annum," it said. In the ERM smash-up, Britain swung from a 2pc surplus to an 8pc deficit. That was the result of subcontracting monetary policy to the Bundesbank. This time we have our own bank, bruised though it may be. It can cut interest rates a long way.
Indictment Three: the state share of the economy has risen from 37pc to 45pc in eight years, on OECD figures. We have risen above Germany for the first time since the Schmidt-Callaghan era. Berlin has been trimming as we bloat fatter. So have the Swedes, Danes, Dutch, Belgians, Austrians, Italians, Spanish and Eastern Europeans. It is a matter of political taste whether you think Brown's largesse on doctors, nurses, schools, and roads has been well used, but there is no denying that we are now one of the most socialist/collectivist states in the world.
Indictment Four: household debt has reached 103pc of GDP, pushing the frontiers of irresponsibility into uncharted terrain. The Americans buckled at around 85pc. UK home equity withdrawals have reached £50bn a year. We are spending unrealised paper profits at a rate of 4pc of GDP per annum. Some 58pc of all home loans issued in Britain in 2006 were either sub-prime, buy-to-let, or other forms of "specialist lending". The effective cash and liquid assets ratio of the banks has fallen to zero.
Is it not disturbing that Northern Rock should have collapsed even before the housing market turned, and defaults had begun to soar? What happens now if UK house prices fall 5pc in 2008 as forecast by Merrill Lynch, or indeed further?
The most pernicious effect of this sorry tale is the impression that Britain might be better off in EMU, under the tutelage of the European Central Bank, which has handled the credit crunch with skill. It carried out a pre-emptive "rescue" of the euro-zone banks by showering the system with liquidity and accepting rubbish as collateral, but it had to do so because there is no clear-cut lender of last resort in EMU. It cannot risk a Northern Rock. Who bails out whom? That must never be tested.
Yes, Mervyn King's hair-shirt austerity was quixotic, and ill-judged, but at least he tried to fight moral hazard. Europe capitulated immediately. It did so because EMU is a dysfunctional monetary union, where the Latin and Germanic halves are moving further apart and so are the spreads on sovereign bonds. The gloss will come off Euroland in due course.
In Britain we must rebuild our smashed credibility. We face a decade of grinding debt deflation, like Japan. Thank you Mr Brown.
Indictment Two: we are a budget basket case as well, with a deficit of 3pc of GDP at the top the cycle. We enter slump without a fiscal shield. Even America is doing better. This deficit is beyond the legal limit of the Maastricht Treaty, not that Downing Street cares. Gordon Brown may have to care more about the bond vigilantes and currency traders who have sharper claws.
They may yet force him to raise taxes into a downturn, as Labour's Philip Snowden had to do in 1931, or as Latin America's big spenders have had to do with an IMF gun to their head. A hard landing will have a "catastrophic impact on UK public finances" as tax revenues dry up and dole costs soar, says Capital Economics. "A recession as deep as that in the early 1990s could push borrowing up to £150bn per annum," it said. In the ERM smash-up, Britain swung from a 2pc surplus to an 8pc deficit. That was the result of subcontracting monetary policy to the Bundesbank. This time we have our own bank, bruised though it may be. It can cut interest rates a long way.
Indictment Three: the state share of the economy has risen from 37pc to 45pc in eight years, on OECD figures. We have risen above Germany for the first time since the Schmidt-Callaghan era. Berlin has been trimming as we bloat fatter. So have the Swedes, Danes, Dutch, Belgians, Austrians, Italians, Spanish and Eastern Europeans. It is a matter of political taste whether you think Brown's largesse on doctors, nurses, schools, and roads has been well used, but there is no denying that we are now one of the most socialist/collectivist states in the world.
Indictment Four: household debt has reached 103pc of GDP, pushing the frontiers of irresponsibility into uncharted terrain. The Americans buckled at around 85pc. UK home equity withdrawals have reached £50bn a year. We are spending unrealised paper profits at a rate of 4pc of GDP per annum. Some 58pc of all home loans issued in Britain in 2006 were either sub-prime, buy-to-let, or other forms of "specialist lending". The effective cash and liquid assets ratio of the banks has fallen to zero.
Is it not disturbing that Northern Rock should have collapsed even before the housing market turned, and defaults had begun to soar? What happens now if UK house prices fall 5pc in 2008 as forecast by Merrill Lynch, or indeed further?
The most pernicious effect of this sorry tale is the impression that Britain might be better off in EMU, under the tutelage of the European Central Bank, which has handled the credit crunch with skill. It carried out a pre-emptive "rescue" of the euro-zone banks by showering the system with liquidity and accepting rubbish as collateral, but it had to do so because there is no clear-cut lender of last resort in EMU. It cannot risk a Northern Rock. Who bails out whom? That must never be tested.
Yes, Mervyn King's hair-shirt austerity was quixotic, and ill-judged, but at least he tried to fight moral hazard. Europe capitulated immediately. It did so because EMU is a dysfunctional monetary union, where the Latin and Germanic halves are moving further apart and so are the spreads on sovereign bonds. The gloss will come off Euroland in due course.
In Britain we must rebuild our smashed credibility. We face a decade of grinding debt deflation, like Japan. Thank you Mr Brown.
The Worst May Keep Getting Worse
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
2007 may come to associated with the start of the "big" credit crunch. 2008 has begun with a number of "unresolved" items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
The total level of sub-prime losses is still far from clear. Based on current trading levels of ABS indices, estimates of losses range between US$ 150 and 400 billion, not all of which has been written off to date.
Interest rates on large volumes of sub-prime mortgages – estimated at around US$ 900 billion are due to reset by end 2008. Interest rates and repayments will rise significantly. The impact on delinquencies and losses are unknown. The rate reset freeze plan (which has not been in the news since being announced) and its impact are also still unclear.
As America’s mortgage markets began unravelling, economists initially pointed to sub-prime mortgages issued to low-income, minority and urban borrowers. Closer analysis reveals risky mortgages in nearly every corner of the USA. Analysis by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined US$1.5 trillion in high-interest-rate, high risk loans. The potential losses on these loans are unknown.
There are also emerging concerns in the US$915 billion credit card debt markets. Credit card providers are all boosting loan loss provisions. There is anecdotal evidence that cash strapped mortgagors are using credit cards to make mortgage payments. Analysts expect credit card delinquencies to increase if consumers unable to use home-equity lines of credit to pay off their credit card debt start running up higher card debt. A number of banks have begun to boost reserves against anticipated losses.
Financial institutions have already incurred losses of over US$100 billion. A substantial volume of assets is likely to return onto bank balance sheets as off-balance sheet structures and hedge funds are forced to sell. The total amount to be re-intermediated by banks may be in the range of US$1 to 2 trillion. This will make substantial depends on bank liquidity and capital.
There are already signs that the major banks are hoarding liquidity in anticipation of the return of assets. They will also inevitably have to raise substantial amounts of capital. In the second half of 2007 commercial and investment banks raised US$83 billion in equity. This was an increase of more than 20% on the corresponding period in 2006.
Asset backed conduit vehicles and SIVs ("Structured Investment Vehicles") may need to sell assets as they breach their rules. Hedge funds face substantial redemption requests in the coming months. This will exacerbate the demands on bank capital and liquidity.
The credit issues have widened beyond banks, investors and hedge funds active in structured credit.
In the conventional mortgage market, Fannie Mae (Federal National Mortgage Association) and Ginnie Mae (Government National Mortgage Association) have recorded losses and been forced to raise capital. This suggests that the problems in the housing market are deep seated.
Mortgage insurers and monoline insurers have suffered serious collateral damage. A significant downgrade in the rating of insurers will be particularly damaging. It will affect around US$ 2.5 trillion of municipal bonds guaranteed by the insurers. It will also affect other bonds wrapped by the insurers. This may trigger further selling pressure and contribute to decline in prices as well as absorbing increasingly scarce liquidity.
There is already talk of a plan to re-capitalise the insurers. The sum being talked about is between US$15 and US$200 billion. It is not clear where the substantial amount of capital needed to recapitalise the banks and financial guarantors is going to come from.
The US$ 2 trillion of European pfandbrief or covered bond markets have also experienced liquidity problems.
The sub-prime model is also used for leveraged funding in private equity, infrastructure and commercial property financing.
US$300 billion of leveraged finance loans made by banks is still effectively "orphaned" - they can’t be sold off. In late 2007, there were signs that the loan logjam was easing. Underwriters pointed to some sales of risky assets.
Caution is needed in interpreting these developments. Firstly, the sales only related to the less risky tranches and loans. The more risky exposures remain with underwriters for the moment. There are also concerns that some of the sales were not "genuine". The banks had provided the buyers with a variety of favourable terms including the ability to sell the loans back to them at a future date at a guaranteed price. Alternatively, MFN ("most favoured nation") clauses mean that the selling bank will need to compensate buyers if loans are sold at lower prices during an agreed time from the initial sale. Current prices indicate steep discounts will be needed to shift the paper to investors.
The crisis shows signs of spilling over into other markets. In Great Britain, Ireland, Spain, Australia and other markets strong house price appreciation similar to the US led to similar growth in mortgage and real estate lending. If economic growth slows and housing prices fall then similar problem may emerge in those economies as well.
There are already signs that there will be significant litigation against the banks. There may also be regulatory investigations and potentially prosecutions. State Street recently provided over US$250 million against future litigation claims. The total cost of all this is still unknown.
The financial elements of the credit crunch are becoming clearer - higher credit costs; lower availability of debt; forced de-leveraging of hedge funds and conduits/ SIVs; significant capital losses for financial institutions. The real economy effects will be slower to emerge. Higher credit costs and tighter credit standards will affect all business.
The US housing industry is badly affected with no immediate prospect of a quick recovery. The outlook for US house prices is poor. Growth forecasts for the US have already been lowered. The dreaded "R" word – recession – is now being talked about.
The fall in asset prices has "wealth" effects. Then there are employment and income effects. Wall Street has already issued "pink slips" by the thousands as banks and mortgage lenders shed staff. More will be issued in 2008 as the slowdown in the financial services business continues.
A slowdown in economic activity will affect many financial transactions. Corporations with significant debt face refinancing challenges. The shares of an Australian real estate firm – Centro – fell over 80 % as a result of difficulties in refinancing its short-term debt secured over commercial property, some of it in the US. Commercial property financing has slowed, the cost has risen significantly and terms have tightened affecting commercial property prices.
Private equity deals in recent years were predicated on a combination of a growing economy, cheap debt and a buoyant stock market allowing the quick resale of the company. Weaker earnings and more expensive debt could lead to losses and distressed sales over time. Recent private equity deals also face re-financing risk. Some US$ 150 billion of leveraged loans come due in 2008. Financial engineering techniques – toggles, pay-in-kind securities and covenant-lite (lack of maintenance covenants) structures – will delay the problem but probably cannot forestall the inevitable rise in defaults.
Non-investment grade bond issuance over the last few years was concentrated in the weaker credit categories and is vulnerable to deterioration in economic conditions. Since 2003, 42% of bonds of high yield bonds issues were rated B- or below. In the first 6 months of the year that percentage rose to around 50%. Some commentators believe that the losses of corporate bonds will peak between 10% and 20% leading to significant losses.
Warren Buffet once observed that: "it’s the weak link that snaps you…in financial markets, the weak link is borrowed money." In the present credit crisis, all companies and business models reliant on debt – especially cheap and abundant debt - look vulnerable.
The real economy effects will feedback into the financial markets. A weaker economy are likely to see higher levels of actual defaults. This may set off new phases of the crisis.
CDS contracts used to hedge credit risk have significant documentation and operational problems. If actual defaults in markets increase and the contracts do not function as intended then there would be additional complexity. A significant volume of CDS contracts is with hedge funds and other investors secured by collateral agreements. The counterparty and performance risk of enforcing the contracts may be challenging. It is important to note that the structured credit market in its current form is substantially untested. If defaults rise and the CDS contracts prove to be difficult to enforce then bank exposures to losses may well much higher than anticipated.
Credit markets remain gloomy. Unlike their equity and emerging market cousins, they are waiting anxiously for "the shoes to fall", except it seems that the shoes are from Imelda Marcos’ collection.
At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article although he may be an owner indirectly as an investor in a fund.
© 2008 Satyajit Das All Rights reserved.
2007 may come to associated with the start of the "big" credit crunch. 2008 has begun with a number of "unresolved" items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
The total level of sub-prime losses is still far from clear. Based on current trading levels of ABS indices, estimates of losses range between US$ 150 and 400 billion, not all of which has been written off to date.
Interest rates on large volumes of sub-prime mortgages – estimated at around US$ 900 billion are due to reset by end 2008. Interest rates and repayments will rise significantly. The impact on delinquencies and losses are unknown. The rate reset freeze plan (which has not been in the news since being announced) and its impact are also still unclear.
As America’s mortgage markets began unravelling, economists initially pointed to sub-prime mortgages issued to low-income, minority and urban borrowers. Closer analysis reveals risky mortgages in nearly every corner of the USA. Analysis by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined US$1.5 trillion in high-interest-rate, high risk loans. The potential losses on these loans are unknown.
There are also emerging concerns in the US$915 billion credit card debt markets. Credit card providers are all boosting loan loss provisions. There is anecdotal evidence that cash strapped mortgagors are using credit cards to make mortgage payments. Analysts expect credit card delinquencies to increase if consumers unable to use home-equity lines of credit to pay off their credit card debt start running up higher card debt. A number of banks have begun to boost reserves against anticipated losses.
Financial institutions have already incurred losses of over US$100 billion. A substantial volume of assets is likely to return onto bank balance sheets as off-balance sheet structures and hedge funds are forced to sell. The total amount to be re-intermediated by banks may be in the range of US$1 to 2 trillion. This will make substantial depends on bank liquidity and capital.
There are already signs that the major banks are hoarding liquidity in anticipation of the return of assets. They will also inevitably have to raise substantial amounts of capital. In the second half of 2007 commercial and investment banks raised US$83 billion in equity. This was an increase of more than 20% on the corresponding period in 2006.
Asset backed conduit vehicles and SIVs ("Structured Investment Vehicles") may need to sell assets as they breach their rules. Hedge funds face substantial redemption requests in the coming months. This will exacerbate the demands on bank capital and liquidity.
The credit issues have widened beyond banks, investors and hedge funds active in structured credit.
In the conventional mortgage market, Fannie Mae (Federal National Mortgage Association) and Ginnie Mae (Government National Mortgage Association) have recorded losses and been forced to raise capital. This suggests that the problems in the housing market are deep seated.
Mortgage insurers and monoline insurers have suffered serious collateral damage. A significant downgrade in the rating of insurers will be particularly damaging. It will affect around US$ 2.5 trillion of municipal bonds guaranteed by the insurers. It will also affect other bonds wrapped by the insurers. This may trigger further selling pressure and contribute to decline in prices as well as absorbing increasingly scarce liquidity.
There is already talk of a plan to re-capitalise the insurers. The sum being talked about is between US$15 and US$200 billion. It is not clear where the substantial amount of capital needed to recapitalise the banks and financial guarantors is going to come from.
The US$ 2 trillion of European pfandbrief or covered bond markets have also experienced liquidity problems.
The sub-prime model is also used for leveraged funding in private equity, infrastructure and commercial property financing.
US$300 billion of leveraged finance loans made by banks is still effectively "orphaned" - they can’t be sold off. In late 2007, there were signs that the loan logjam was easing. Underwriters pointed to some sales of risky assets.
Caution is needed in interpreting these developments. Firstly, the sales only related to the less risky tranches and loans. The more risky exposures remain with underwriters for the moment. There are also concerns that some of the sales were not "genuine". The banks had provided the buyers with a variety of favourable terms including the ability to sell the loans back to them at a future date at a guaranteed price. Alternatively, MFN ("most favoured nation") clauses mean that the selling bank will need to compensate buyers if loans are sold at lower prices during an agreed time from the initial sale. Current prices indicate steep discounts will be needed to shift the paper to investors.
The crisis shows signs of spilling over into other markets. In Great Britain, Ireland, Spain, Australia and other markets strong house price appreciation similar to the US led to similar growth in mortgage and real estate lending. If economic growth slows and housing prices fall then similar problem may emerge in those economies as well.
There are already signs that there will be significant litigation against the banks. There may also be regulatory investigations and potentially prosecutions. State Street recently provided over US$250 million against future litigation claims. The total cost of all this is still unknown.
The financial elements of the credit crunch are becoming clearer - higher credit costs; lower availability of debt; forced de-leveraging of hedge funds and conduits/ SIVs; significant capital losses for financial institutions. The real economy effects will be slower to emerge. Higher credit costs and tighter credit standards will affect all business.
The US housing industry is badly affected with no immediate prospect of a quick recovery. The outlook for US house prices is poor. Growth forecasts for the US have already been lowered. The dreaded "R" word – recession – is now being talked about.
The fall in asset prices has "wealth" effects. Then there are employment and income effects. Wall Street has already issued "pink slips" by the thousands as banks and mortgage lenders shed staff. More will be issued in 2008 as the slowdown in the financial services business continues.
A slowdown in economic activity will affect many financial transactions. Corporations with significant debt face refinancing challenges. The shares of an Australian real estate firm – Centro – fell over 80 % as a result of difficulties in refinancing its short-term debt secured over commercial property, some of it in the US. Commercial property financing has slowed, the cost has risen significantly and terms have tightened affecting commercial property prices.
Private equity deals in recent years were predicated on a combination of a growing economy, cheap debt and a buoyant stock market allowing the quick resale of the company. Weaker earnings and more expensive debt could lead to losses and distressed sales over time. Recent private equity deals also face re-financing risk. Some US$ 150 billion of leveraged loans come due in 2008. Financial engineering techniques – toggles, pay-in-kind securities and covenant-lite (lack of maintenance covenants) structures – will delay the problem but probably cannot forestall the inevitable rise in defaults.
Non-investment grade bond issuance over the last few years was concentrated in the weaker credit categories and is vulnerable to deterioration in economic conditions. Since 2003, 42% of bonds of high yield bonds issues were rated B- or below. In the first 6 months of the year that percentage rose to around 50%. Some commentators believe that the losses of corporate bonds will peak between 10% and 20% leading to significant losses.
Warren Buffet once observed that: "it’s the weak link that snaps you…in financial markets, the weak link is borrowed money." In the present credit crisis, all companies and business models reliant on debt – especially cheap and abundant debt - look vulnerable.
The real economy effects will feedback into the financial markets. A weaker economy are likely to see higher levels of actual defaults. This may set off new phases of the crisis.
CDS contracts used to hedge credit risk have significant documentation and operational problems. If actual defaults in markets increase and the contracts do not function as intended then there would be additional complexity. A significant volume of CDS contracts is with hedge funds and other investors secured by collateral agreements. The counterparty and performance risk of enforcing the contracts may be challenging. It is important to note that the structured credit market in its current form is substantially untested. If defaults rise and the CDS contracts prove to be difficult to enforce then bank exposures to losses may well much higher than anticipated.
Credit markets remain gloomy. Unlike their equity and emerging market cousins, they are waiting anxiously for "the shoes to fall", except it seems that the shoes are from Imelda Marcos’ collection.
At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article although he may be an owner indirectly as an investor in a fund.
© 2008 Satyajit Das All Rights reserved.
Trends for Downsizing the US: The Bright Side of the Panic of ‘08
Written by Christopher Ketcham
Sunday, 27 January 2008
by Christopher Ketcham
Futurist and trends forecaster Gerald Celente, director of the Trends Research Institute in Rhinebeck, NY, predicted the 1987 stock market crash, the collapse of the Soviet Union in 1989, the Asian economic implosion of ‘97, the decline of the dollar beginning in 2005, the meteoric rise in gold prices in an age of currency volatility, and the turn of events that may be the blessing of our era, the subprime mortgage crisis. Because of this habit of prescience, Celente has appeared regularly on CNN and Fox and MSNBC, his “Trends Reports” widely quoted in newsprint, on Oprah Winfrey, on Good Morning America.
Now in his Report for 2008, issued in mid-December, he carried the news every thinking American already knows. “The United States of America,” Celente pronounced, “has gone from first class to third rate.” It’s a “nation on the skids and heading down.” Celente projects economic and political crisis in the coming year. “In 2008, Americans will wake up to the worst economic times that anyone alive has ever seen,” he wrote on December 17. “Just as they didn’t see 9/11 coming and were frozen in shock when terror struck, [Americans] will be frozen in shock when terror strikes again.” He predicts “failing banks, busted brokerages, toppled corporate giants, bankrupt cities, states in default, foreign creditors cashing out of US securities…the stage is set, the big one is on its way.”
A similar wake-up call was issued last summer in a report by none other than the chief investigator for the US Government Accountability Office, comptroller general David Walker, who warned that US policy on energy, education, the environment, health care, immigration, Iraq – pretty much the gamut – was on an “unsustainable” course, bound for a maelstrom of insolvency that could threaten to sink the ship. According to the GAO chief, the fall of Rome seemed an apt historical comparison: “[D]eclining moral values and political civility at home, an over-confident and over-extended military in foreign lands, and fiscal irresponsibility by the central government. Sound familiar? I’m trying to sound an alarm.”
When I called up Celente on Jan. 2 to see how the new year was taking shape on the first day of trading, he fired back in an e-mail: “An attack in Nigeria (Africa’s biggest oil producer) by anti-government forces on the port city of Port Harcourt hit the futures markets hard. On the New York Stock Exchange, trading conditions worsened on reports that the Institute for Supply Management's manufacturing index dropped to 47.7, the lowest reading since April 2003. Growth in European and Singapore manufacturing also slowed in November, showing signs for all those that were looking that the slowdown would be global.” By early afternoon, gold had surged $24 an ounce, crude oil climbed $3, the dollar fell against all major currencies, and the Dow was down over 200 points. The next day, Jan. 3, oil hit a record $100 a barrel. And indeed, as Celente warned, world markets were unraveling by the second week of January, the Nikkei on its worse start to a new year since 1970, the MSCI World Index dropping 6.9 percent, a loss of $2.1 trillion from members' market capitalization, while Swiss world banking giant UBS posted a $13 billion loss, and authorities in Britain reported the first run on a British bank in a hundred years.
When on January 14 Celente sent out his weekly e-mail alert to subscribers, the news was no better. The Dow registered its third consecutive week of losses, one of its worst New Year starts in history, losing in just the first week of 2008 half its gains from 2007. “Slumping retail sales, dire housing data, rising unemployment rates, gloomy consumer confidence, spiking oil prices, a ballooning trade gap, eroding wages, mounting credit card debt and delinquencies, mortgage defaults, record foreclosures,” said Celente. “The data floods the wires and spreads the fear.” It’s telling that Tiffany's was off 11 percent in sales, as even the very rich hide their cash under beds.
So is the subprime mortgage mess the catalyst for the Big One, what Celente calls the Panic of ‘08? Stock guru Jim Cramer, host of CNBC’s Mad Money and co-founder of TheStreet.com, seems to think so. “There are a group of insurance companies that insure all these bad mortgages,” he told Chris Matthews on Jan. 18. “And I think they’re all about to go belly up. And that will cause the Dow Jones to decline 2,000 points. They have got to be shut down. This is going to happen in maybe two, three weeks, Chris. It’s going to be on the front of every paper. And no one in Washington is even willing to admit it. I am telling you these companies do not have the capital to make good. And, when they do fall – I believe it is when – if the government doesn’t have a plan in action, you will not be able to open the stock market when they collapse…No one is even talking about it.”
From panic, offers Gerald Celente, will arise almost overnight an era of social and political upheaval and plain awfulness. Self storage will finally “live up to the meaning of its name. Down and out, thrown onto the streets, homeless Americans will empty out storage lockers of useless junk…to store themselves.” He predicts wage riots and anti-government street protests and intensified anti-immigration movements looking to scapegoat the “aliens” among us. Toward the 1 percent of Americans who received 50 percent of all income gains in recent years – those same 1 percenters, roughly 3 million people, who took in 22 percent of all income in 2005 – there will be growing rage. “Kidnappings for ransom will become common, as they were in the Depression and as the poor strike out against the rich,” Celente predicts. Lawlessness will be met, as in most third rate nations, with violence from an increasingly sophisticated and brutal police state. A different type of violence from the ground up, tax revolts, will also develop in strength, targeting a tax-ravenous federal government that Celente charges has failed “to protect food, win wars, clean the environment, upgrade infrastructure, improve living standards, provide health services or advance education.”
Meanwhile, the dollar will bottom out at 10 cents to the euro sometime in the next several years, perhaps by 2010. Newspapers report that even Third World vendors are beginning to refuse payment in greenbacks, while foreign governments and investors, mostly the Chinese, deploy the muscle of their currencies to buy US property and businesses (proxies of the Chinese government late last year snagged a 5 percent stake in Citibank, a 10 percent stake in Morgan Stanley).
Note that this is no fringer veering into conspiracist phantasm: Celente consults for hundreds of large and small corporations, addresses government bodies worldwide. Norway flew him to Europe in 2006 to address a conference on innovation, while the International Council of Shopping Centers hosted him as the key-note speaker at its 2007 convention – the mall builders hoped to glean from Celente “what people want from malls.” It’s notable, in the wake of the prognoses of his 2008 reports, that he is no longer invited onto the TV and cable networks – “the first year in decades,” he says, “that they did not have me on and that USA Today did not cover the Trends Report.” When Celente sent out an e-mail alert to his mailing list in mid-January, Jack Marks, the publisher and CEO of The Wall Street Reporter, one of the oldest investment organs in New York, wrote him back to say “You are a fucking retard motherfucker” and “Remove me from this list, you fucking moron.” The local publishing group near Celente’s home in Rhinebeck is perhaps more typical in its spinelessness: The Taconic Press, which publishes six newspapers in the Hudson Valley and upstate New York, told Celente in December via e-mail that there was “a general uproar about the inclusion of your Trends forecast [in 2007]…reader and advertiser reaction was strong, and they made their feelings known to our publisher.” Celente’s long relationship with Taconic Press is no more. Par for the course in the nation of blinkered denial.
There is apparently an upside to the rottenness to come, according to Celente – if Americans dare to reinvent for the 21st century the free thinking and civic courage of their past. This good cheer as Rome burns is buried somewhat in Celente’s report for 2008, but what it suggests is that, catalyzed by crisis, a fair number of Americans – a minority, likely, but still to watch – will begin this year a transformation of consciousness. Celente predicts that the smaller communities, the smaller groups, the smaller states, the more self-sustaining communities, will “weather the crisis in style” as big cities and hypertrophic suburbias descend into misery and conflict. “Like Katrina’s victims that knew the hurricane was coming but didn’t flee – and looked to Uncle Sam to save the day – those that don’t take action before panic strikes or wait for Washington to lend a hand, will suffer the most from the calamity that follows,” he writes. Economically, the new consciousness will recapture Yankee frugality and reject the lunatic behaviors that have been unsustainable since the Second World War – big houses, big cars, big spending. Those who market and embrace “products and services that focus on compact, smart, functional, efficient, neat, clean, reusable, 'less is more' and 'small is beautiful',” Celente writes, “will handsomely profit.” There will be a downsizing of expectations and perceived needs. There will be a downsizing of giantist institutions to fit to human scale – the center cannot hold, particularly as state’s righters and tax rebels and what Celente calls “the newly flourishing state secessionist movements” begin to repudiate a $9 trillion-in-debt federal government that too often practices the most offensive kind of taxation without representation. Altogether, there will be a downsizing of America.
“This could be the end of something really ignorant and stupid and dark,” Celente told me recently in a phone interview. “The end of a dark age! The end of the age of what I call Bottom-Line Fascism, the ruthless and dictatorial profit-only way of thinking that produces crap over quality in all the major institutions, dopiness and blob-thinking, the manipulations of an idiotic media and political establishment, the Cartoon News Networks, the Greta Van Susterens and the Hillary Clintons uttering the same pablum ad nauseum over and over. All the institutions are coming apart – government, corporations, media, education, health care. They present nothing less than a vacuum! Something has to fill it! The systems that are in place? Things can only get worse if they stay in place. But I’m an optimist. I’m gunning for something better to replace what we got.” He pauses. “A renaissance! I’m gunning for a renaissance: an era where quality beats out the crap of quantity.”
POST-SCRIPT: Alarm bells are also ringing for former CIA consultant Chalmers Johnson, author of the Blowback Trilogy, including most recently the final installment Nemesis: The Last Days of the American Republic. Like Celente, Johnson sees the subprime mess as only the most visible part of a far-reaching debt crisis with lethal implications. “Confronted by the limits of its own vast but nonetheless finite financial resources and lacking the political check on spending provided by a functional democracy,” Johnson wrote in Harper’s last January, “the United States will within a very short time face financial or even political collapse.” The folly of what Chalmers terms “military Keynesianism” – devotion to militarism, weapons, warfare as fiscal stimulus, a policy embraced with equal fervor by both parties in Congress – will speed the country to moral, fiscal and political bankruptcy. To grasp the horror of military Keynesianism, consider this statistic: By 1990, production for the Department of Defense amounted to 83 percent of the value of all manufacturing plants and equipment in the US. Only 17 percent of the US manufacturing base actually made products not meant to kill. In this regard, bankruptcy and collapse is much-deserved, a comeuppance long overdue. On the bright side, Johnson notes that “bankruptcy will not mean the literal end of the United States any more than it did for Germany in 1923, China in 1948, or Argentina in 2001. It might, in fact, open the way for an unexpected restoration of the American system, or for military rule, revolution, or simply some new development we cannot yet imagine.”
Sunday, 27 January 2008
by Christopher Ketcham
Futurist and trends forecaster Gerald Celente, director of the Trends Research Institute in Rhinebeck, NY, predicted the 1987 stock market crash, the collapse of the Soviet Union in 1989, the Asian economic implosion of ‘97, the decline of the dollar beginning in 2005, the meteoric rise in gold prices in an age of currency volatility, and the turn of events that may be the blessing of our era, the subprime mortgage crisis. Because of this habit of prescience, Celente has appeared regularly on CNN and Fox and MSNBC, his “Trends Reports” widely quoted in newsprint, on Oprah Winfrey, on Good Morning America.
Now in his Report for 2008, issued in mid-December, he carried the news every thinking American already knows. “The United States of America,” Celente pronounced, “has gone from first class to third rate.” It’s a “nation on the skids and heading down.” Celente projects economic and political crisis in the coming year. “In 2008, Americans will wake up to the worst economic times that anyone alive has ever seen,” he wrote on December 17. “Just as they didn’t see 9/11 coming and were frozen in shock when terror struck, [Americans] will be frozen in shock when terror strikes again.” He predicts “failing banks, busted brokerages, toppled corporate giants, bankrupt cities, states in default, foreign creditors cashing out of US securities…the stage is set, the big one is on its way.”
A similar wake-up call was issued last summer in a report by none other than the chief investigator for the US Government Accountability Office, comptroller general David Walker, who warned that US policy on energy, education, the environment, health care, immigration, Iraq – pretty much the gamut – was on an “unsustainable” course, bound for a maelstrom of insolvency that could threaten to sink the ship. According to the GAO chief, the fall of Rome seemed an apt historical comparison: “[D]eclining moral values and political civility at home, an over-confident and over-extended military in foreign lands, and fiscal irresponsibility by the central government. Sound familiar? I’m trying to sound an alarm.”
When I called up Celente on Jan. 2 to see how the new year was taking shape on the first day of trading, he fired back in an e-mail: “An attack in Nigeria (Africa’s biggest oil producer) by anti-government forces on the port city of Port Harcourt hit the futures markets hard. On the New York Stock Exchange, trading conditions worsened on reports that the Institute for Supply Management's manufacturing index dropped to 47.7, the lowest reading since April 2003. Growth in European and Singapore manufacturing also slowed in November, showing signs for all those that were looking that the slowdown would be global.” By early afternoon, gold had surged $24 an ounce, crude oil climbed $3, the dollar fell against all major currencies, and the Dow was down over 200 points. The next day, Jan. 3, oil hit a record $100 a barrel. And indeed, as Celente warned, world markets were unraveling by the second week of January, the Nikkei on its worse start to a new year since 1970, the MSCI World Index dropping 6.9 percent, a loss of $2.1 trillion from members' market capitalization, while Swiss world banking giant UBS posted a $13 billion loss, and authorities in Britain reported the first run on a British bank in a hundred years.
When on January 14 Celente sent out his weekly e-mail alert to subscribers, the news was no better. The Dow registered its third consecutive week of losses, one of its worst New Year starts in history, losing in just the first week of 2008 half its gains from 2007. “Slumping retail sales, dire housing data, rising unemployment rates, gloomy consumer confidence, spiking oil prices, a ballooning trade gap, eroding wages, mounting credit card debt and delinquencies, mortgage defaults, record foreclosures,” said Celente. “The data floods the wires and spreads the fear.” It’s telling that Tiffany's was off 11 percent in sales, as even the very rich hide their cash under beds.
So is the subprime mortgage mess the catalyst for the Big One, what Celente calls the Panic of ‘08? Stock guru Jim Cramer, host of CNBC’s Mad Money and co-founder of TheStreet.com, seems to think so. “There are a group of insurance companies that insure all these bad mortgages,” he told Chris Matthews on Jan. 18. “And I think they’re all about to go belly up. And that will cause the Dow Jones to decline 2,000 points. They have got to be shut down. This is going to happen in maybe two, three weeks, Chris. It’s going to be on the front of every paper. And no one in Washington is even willing to admit it. I am telling you these companies do not have the capital to make good. And, when they do fall – I believe it is when – if the government doesn’t have a plan in action, you will not be able to open the stock market when they collapse…No one is even talking about it.”
From panic, offers Gerald Celente, will arise almost overnight an era of social and political upheaval and plain awfulness. Self storage will finally “live up to the meaning of its name. Down and out, thrown onto the streets, homeless Americans will empty out storage lockers of useless junk…to store themselves.” He predicts wage riots and anti-government street protests and intensified anti-immigration movements looking to scapegoat the “aliens” among us. Toward the 1 percent of Americans who received 50 percent of all income gains in recent years – those same 1 percenters, roughly 3 million people, who took in 22 percent of all income in 2005 – there will be growing rage. “Kidnappings for ransom will become common, as they were in the Depression and as the poor strike out against the rich,” Celente predicts. Lawlessness will be met, as in most third rate nations, with violence from an increasingly sophisticated and brutal police state. A different type of violence from the ground up, tax revolts, will also develop in strength, targeting a tax-ravenous federal government that Celente charges has failed “to protect food, win wars, clean the environment, upgrade infrastructure, improve living standards, provide health services or advance education.”
Meanwhile, the dollar will bottom out at 10 cents to the euro sometime in the next several years, perhaps by 2010. Newspapers report that even Third World vendors are beginning to refuse payment in greenbacks, while foreign governments and investors, mostly the Chinese, deploy the muscle of their currencies to buy US property and businesses (proxies of the Chinese government late last year snagged a 5 percent stake in Citibank, a 10 percent stake in Morgan Stanley).
Note that this is no fringer veering into conspiracist phantasm: Celente consults for hundreds of large and small corporations, addresses government bodies worldwide. Norway flew him to Europe in 2006 to address a conference on innovation, while the International Council of Shopping Centers hosted him as the key-note speaker at its 2007 convention – the mall builders hoped to glean from Celente “what people want from malls.” It’s notable, in the wake of the prognoses of his 2008 reports, that he is no longer invited onto the TV and cable networks – “the first year in decades,” he says, “that they did not have me on and that USA Today did not cover the Trends Report.” When Celente sent out an e-mail alert to his mailing list in mid-January, Jack Marks, the publisher and CEO of The Wall Street Reporter, one of the oldest investment organs in New York, wrote him back to say “You are a fucking retard motherfucker” and “Remove me from this list, you fucking moron.” The local publishing group near Celente’s home in Rhinebeck is perhaps more typical in its spinelessness: The Taconic Press, which publishes six newspapers in the Hudson Valley and upstate New York, told Celente in December via e-mail that there was “a general uproar about the inclusion of your Trends forecast [in 2007]…reader and advertiser reaction was strong, and they made their feelings known to our publisher.” Celente’s long relationship with Taconic Press is no more. Par for the course in the nation of blinkered denial.
There is apparently an upside to the rottenness to come, according to Celente – if Americans dare to reinvent for the 21st century the free thinking and civic courage of their past. This good cheer as Rome burns is buried somewhat in Celente’s report for 2008, but what it suggests is that, catalyzed by crisis, a fair number of Americans – a minority, likely, but still to watch – will begin this year a transformation of consciousness. Celente predicts that the smaller communities, the smaller groups, the smaller states, the more self-sustaining communities, will “weather the crisis in style” as big cities and hypertrophic suburbias descend into misery and conflict. “Like Katrina’s victims that knew the hurricane was coming but didn’t flee – and looked to Uncle Sam to save the day – those that don’t take action before panic strikes or wait for Washington to lend a hand, will suffer the most from the calamity that follows,” he writes. Economically, the new consciousness will recapture Yankee frugality and reject the lunatic behaviors that have been unsustainable since the Second World War – big houses, big cars, big spending. Those who market and embrace “products and services that focus on compact, smart, functional, efficient, neat, clean, reusable, 'less is more' and 'small is beautiful',” Celente writes, “will handsomely profit.” There will be a downsizing of expectations and perceived needs. There will be a downsizing of giantist institutions to fit to human scale – the center cannot hold, particularly as state’s righters and tax rebels and what Celente calls “the newly flourishing state secessionist movements” begin to repudiate a $9 trillion-in-debt federal government that too often practices the most offensive kind of taxation without representation. Altogether, there will be a downsizing of America.
“This could be the end of something really ignorant and stupid and dark,” Celente told me recently in a phone interview. “The end of a dark age! The end of the age of what I call Bottom-Line Fascism, the ruthless and dictatorial profit-only way of thinking that produces crap over quality in all the major institutions, dopiness and blob-thinking, the manipulations of an idiotic media and political establishment, the Cartoon News Networks, the Greta Van Susterens and the Hillary Clintons uttering the same pablum ad nauseum over and over. All the institutions are coming apart – government, corporations, media, education, health care. They present nothing less than a vacuum! Something has to fill it! The systems that are in place? Things can only get worse if they stay in place. But I’m an optimist. I’m gunning for something better to replace what we got.” He pauses. “A renaissance! I’m gunning for a renaissance: an era where quality beats out the crap of quantity.”
POST-SCRIPT: Alarm bells are also ringing for former CIA consultant Chalmers Johnson, author of the Blowback Trilogy, including most recently the final installment Nemesis: The Last Days of the American Republic. Like Celente, Johnson sees the subprime mess as only the most visible part of a far-reaching debt crisis with lethal implications. “Confronted by the limits of its own vast but nonetheless finite financial resources and lacking the political check on spending provided by a functional democracy,” Johnson wrote in Harper’s last January, “the United States will within a very short time face financial or even political collapse.” The folly of what Chalmers terms “military Keynesianism” – devotion to militarism, weapons, warfare as fiscal stimulus, a policy embraced with equal fervor by both parties in Congress – will speed the country to moral, fiscal and political bankruptcy. To grasp the horror of military Keynesianism, consider this statistic: By 1990, production for the Department of Defense amounted to 83 percent of the value of all manufacturing plants and equipment in the US. Only 17 percent of the US manufacturing base actually made products not meant to kill. In this regard, bankruptcy and collapse is much-deserved, a comeuppance long overdue. On the bright side, Johnson notes that “bankruptcy will not mean the literal end of the United States any more than it did for Germany in 1923, China in 1948, or Argentina in 2001. It might, in fact, open the way for an unexpected restoration of the American system, or for military rule, revolution, or simply some new development we cannot yet imagine.”
Trends Research
Futurist and trends forecaster Gerald Celente, director of the Trends Research Institute in New York, is famous for several successful forecasts, but is hated by the establishment. He predicted the 1987 stock market crash, the collapse of the Soviet Union in 1989, the Asian economic implosion of 1997, the decline of the USDollar after 2005, the gigantic rise in gold prices, the recent tumult with currency volatility, and the disaster triggered by the subprime mortgage failures. Because of this tendency toward insight, Celente has appeared regularly on CNN and Fox and MSNBC. His “Trends Reports” is widely quoted in newsprint. He is guest on many morning network news shows. His recent pronouncements are shocking. Celente projects both an economic and political crisis in the current 2008 year. “The United States of America has gone from first class to third rate. [It is a] nation on the skids and heading down. In 2008, Americans will wake up to the worst economic times that anyone alive has ever seen. Just as they did not see 9/11 coming and were frozen in shock when terror struck, [Americans] will be frozen in shock when terror strikes again.” The terror he refers to is economic disruption, if not chaos. He predicts “failing banks, busted brokerages, toppled corporate giants, bankrupt cities, states in default, foreign creditors cashing out of US securities… The stage is set, the big one is on its way.” Celente points out how the top 1% of Americans raked in over 50% of all income gains in recent years, and those same 1% individuals earned 22% of total national income in 2005. He foresees kidnapping of the wealthy to become common. He anticipates lawlessness to be met with brutal violence from a harsh police state. He expects storage facilities to be overrun by the new homeless, as they forage through possessions and seek shelter. He foresees violent public response from the ground up, in the form of tax revolts, since the people regard the US federal government as having failed in its purpose to protect and serve the population. See his latest public article, eye-opening, and not as outrageous as one might think at first glance. “Trends for Downsizing the US: The Bright Side of the Panic of 2008” (click here).
Celente forecasts the USDollar will bottom out at 10 cents versus the euro, translated to mean the euro rises to 1000, now at 146-148. On the positive side, he forecasts that smaller cities and communities will weather the storm well, as the besieged cities and suburbs descend into misery and conflict. Celente hopes for an end to the current Bottom Line Fascism age to end, one that might give way to a renaissance rebirth where smallness and quality are valued. He has earned the animosity and hatred by Wall Street, who now call him every ugly name in the book, from kook to moron. What is one to think when fraud artists and conmen call a reputable analyst ugly names? His future view offers much more detail attached than mine, but we are consistent.
Celente forecasts the USDollar will bottom out at 10 cents versus the euro, translated to mean the euro rises to 1000, now at 146-148. On the positive side, he forecasts that smaller cities and communities will weather the storm well, as the besieged cities and suburbs descend into misery and conflict. Celente hopes for an end to the current Bottom Line Fascism age to end, one that might give way to a renaissance rebirth where smallness and quality are valued. He has earned the animosity and hatred by Wall Street, who now call him every ugly name in the book, from kook to moron. What is one to think when fraud artists and conmen call a reputable analyst ugly names? His future view offers much more detail attached than mine, but we are consistent.
17 February 2008
GlobalEurope Anticipation Bulletin
In the 2 years of its existence, European think-tank LEAP/Europe 2020 has published a respectable number of thought-provoking reports, mostly in its subscription monthly newsletter GEAB:
The GlobalEurope Anticipation Bulletin is the confidential letter of think-tank LEAP/Europe 2020. As such, our aim is to provide our readers with state-of-the-art analyses of geo-political anticipation centered around the study and follow-up of the global systemic crisis, itself focussed on the evolution of the dollar and of the US economy, and their impact on international economy and financial markets, all that seen from a European perspective.
On Friday, 15, 2008, the latest GEAB saw the light, and parts were published on the LEAP website. It will likely take a while before an English version is available; therefore we at The Automatic Earth took it upon ourselves to translate the French version; the statements in the report certainly merit a little extra work, as well as attention.
Since the conclusions that LEAP/E2020's analysts reach in the report are, to put it mildly, more outspoken than just about any other publication, we feel they provide substantial food for thought and discussion. Are these guys nothing but a platoon of senile doomers, or are they? For more LEAP reports, go to their website.
Global systemic crisis/ September 2008 - Collapse phase of the real economy in the US
Public announcement GEAB no 22 (February 15 2008)
According to LEAP/E2020, the end of the third trimester will mark a new inflection point in the development of the systemic global crisis. By this time, the cumulative impact of the different strands of the crisis (see table below) will reach maximum strength and affect the heart of the systems involved in a decisive manner, led by the United States as the epicenter of the crisis.
In the US, this new inflection point will translate into the collapse of the real economy, the final socio-economic stage of the bursting of the series of the housing and financial bubbles (1) and the continuation of the fall in the value of the Dollar. The collapse of the real US economy represents simply the almost complete halt of the American economic machinery: private and public bankruptcies in great number, wide ranging closures of enterprises and public services (2),...
As a forewarning of events to follow, it is interesting to note that from March 2008, the US government will cease publication of its economic indices for reasons of budgetary constraints (3). The articles of GEAB N 2 and related alarms, remind us of the correlation between our anticipation of the fall to come in the Dollar with the end of the publication of M3 by the US federal Reserve. Here we see a new clear signal that the American leaders henceforth expect profoundly dark economic outlooks for their country.
Temporal perspective of the seven strands of the impact phase of the systemic global crisis anticipated since mid-2007 - Source LEAP/E2020, GEAB N°18 (10/2007) Click to enlarge
In this GEAB N 22, the experts of LEAP/E2020 anticipate the concrete consequences of this meltdown in the real American economy on the United States itself, and on other regions of the planet. In parallel, our team develops a series of five strategic and practical recommendations to protect oneself from the worsening of the systemic crisis of the coming months.
On the occasion of the second anniversary of the publication of its famous "Systemic global crisis warning" that circled the globe in February 2006, LEAP/E2020 wishes nothing less than to remind us that from now on we are entering a period without historic precedent. Repeatedly for two years, our team of researchers has stressed that comparisons with previous economic crises are fallacious.
It will not be in its effects a "remake" of the crisis of 1929, nor a repeat of the oil shocks of the 1970s or the stock market crash of 1987. It will be a systemic global crisis, that is to say affecting the integration of the planet and directly touching the foundations of the international system which has been the means of global organization for decades.
For LEAP/E2020, it is also edifying to note that two years after the publication of its famous "Systemic global crisis warning" which had simultaneously aroused the interest of millions of readers over the whole world and the condescending irony of the majority of the "experts" and "leaders" of the economic and financial world, everyone is now convinced that there is a crisis, that it is global and that it could well be systemic. Our team is constantly amazed at the incapacity of these experts and leaders to comprehend the nature of the phenomenon that we are living through.
To read them, this systemic global crisis would be only a sort of "classical" crisis, but "larger". This is how the financial media reflects the dominant interpretations of the on-going crisis. For our team, this approach is not only intellectually lazy but morally culpable, as it has as a principal consequence the denial of the opportunity for readers (whether they are simple citizens, individual investors or responsible private or public institutions) to prepare themselves for the shocks to come.
Thus, as opposed to what one could read these last weeks in the dominant media, always quick to try to camouflage reality in order to serve the interests which dominate them, LEAP/E2020 wishes to recall that it is above all in the United States that this global systemic crisis takes an unprecedented form (the "Very Great US Depression" as our team called it in January 2007 (7)), since it is around them, and them only, that the world which emerged from the second world war was gradually organized.
The various numbers of the GEAB largely explained this situation. To summarize, we consider it useful to stress that it is neither Europe nor Asia which has a negative rate of saving, a generalized housing crisis throwing millions of citizens on to the street, a currency in free fall, abysmal public and commercial deficits, an economy in recession and, to crown the whole, expensive wars to finance.
It will therefore be neither Asia nor Europe (more exactly ` the euro' zone) that will undergo the most brutal consequences, the most long lasting and most negative aspects of the crisis in progress; but the United States and countries or economies strongly tied to the United States (what our experts call "American risk") (8). There is indeed a "decoupling" between the US economy and those of the other great areas of the world.
But "decoupling" does not mean "independence". It is quite obvious, as LEAP/E2020 anticipated many months ago, that Asia and Europe will be affected by the crisis. "Decoupling" means that the evolution of the US economy and those of the other great areas of the world are no longer synchronized, that Asia and Europe will move henceforth according to trajectories no longer determined by that of the US economy.
The global systemic crisis marks in fact the beginning of "decoupling" between the US economy and those of the remainder of planet. The economies not "uncoupled" will be those which will be dragged into the American downward spiral.
Steep fall in the number of self-employed in the United States - Source Office of Labor Statistics/Merril Lynch (the shaded zones represent periods of recession). Click to enlarge
Concerning the stock markets, our team anticipated as of October 2007 that the world's bourses would lose between 20% and 60% by region during the year 2008. Today, we must revise our prediction in the direction of an even larger fall since, on the one hand, the stock exchanges have in general already lost between 10% and 20% since the beginning of the year (1°), and that, on the other hand, the meltdown of the real economy in the United States by the end of the summer 2008 will precipitate a downward spiral in all the world's bourses. For LEAP/E2020, we now predict a fall of 50% on average compared to 2007 (including in the emerging markets) (11).
In this number 22 of Global Europe Anticipation Bulletin, notably with our alert to the meltdown of the real economy in the United States from September 2008, we again try to warn those who are concerned by the consequences of this major event which will generate very serious socio-political disorder in the United States (13) as the economy is collapsing (14), which will of course have very heavy repercussions throughout all of the financial and monetary markets and for the world economy. We still have not reached the heart of the crisis. According to LEAP/E2020, it will be reached in the second half of 2008.
Posted by Ilargi at 11:40 AM
12 comments:
Anonymous said...
That's the news I've been waiting for. Celebrations all round. Bye Bye Yankees, Everyones had enough of your hegemony by violence, vainglorious delusions of grandeur, arrogantly blessing your nation as synonymous with God's name. Go forth and collapse into anarchy, make the best possible use of all those handguns you've got laying around - buy hollow point rounds.
February 16, 2008 3:49 PM
Burgundy said...
Wow, what an article. Thanks very much for bringing this to light.
I posted an article at Tod regarding Putin's threat of retaliation if Kosovo declared independence (which they are due to do tomorrow). Might be something to keep an eye on IMO.
Here's the link to the newspaper article:
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/02/15/wputin115.xml
February 16, 2008 4:05 PM
Anonymous said...
Thanks for this article and the link to the website.
I've gone back through the English language section of Abstracts& stories and read several of the articles listed there. There are about 3 pages of them from early 2006. After I read several of these articles, I read a lot more of them!
It's like reading a history of economic and some political things that have happened in the past two years! Yikes--this is an eye opening website. Actually, YOUR website is pretty eye opening, too.
thanks so much for your website and the work you're doing here.
A reader from TOD,
Shamba
February 16, 2008 4:19 PM
In The Shit said...
Thank you for the translation. I don't find LEAP's overall prognostications far-fetched, but I do find them rather vague. I wonder where they are getting their "currency in free fall" idea from. Seems like in a deflationary environment the currency would strengthen? Maybe just not relative to an also strengthening euro.
Also re the decoupling, it's interesting that the article makes such a strong effort to emphasize that the U.S. is the epicenter of the crisis, and that decoupling will spare some other parts of the world, which will only be "affected" (no further explanation) by the crisis. I must beg to differ... The UK is probably in deeper shit than we are. I think it's just not PC for French intellectuals to not try to blame whatever the problem is on the U.S. We didn't inflate Spain's housing bubble, or Greece's. Europe is going to get rocked. The only decoupling happening in Europe will be between bank depositors and their money...
I think the excess of the past few years was so massive that it's easy to cut a lot of it out and still live a comfortable life. Unemployment will definitely skyrocket and banks will fail and so on, but what it ultimately all leads to is an economy more in line with reality. The transition will be more painful for the spoiled, less so for the lean. Yes a lot of turmoil is on the way, but we are already so massively socially fucked up as a nation that it will be nothing new for us. We will stagger through like the drunken deaf idiots we are.
February 16, 2008 4:27 PM
Anonymous said...
Anything more on this; "In parallel, our team develops a series of five strategic and practical recommendations to protect oneself from the worsening of the systemic crisis of the coming months."
February 16, 2008 5:59 PM
ric said...
Anon,
Their recommendations start on page 15 of their (for subscribers) report:
"Five strategic and operational recommendations to be protected from the aggravation of the crisis
Stocks or bonds?
The recognition of a new « American risk
The new safe heaven currencies
Real estate: Selling, keeping or buying ?
Risking less for losing less (page 15)"
GEAB-N-22
February 16, 2008 7:43 PM
OuttaControl said...
Burgundy
Wow, what an article. Thanks very much for bringing this to light.
I'm not trying to be a jerk but what did you find particularly intresting in the article?
February 16, 2008 7:57 PM
Anonymous said...
Some of their predictions made a year ago:
In April 2007, nine practical consequences of the unfolding crisis will converge:
1. Acceleration of the pace and size of bankruptcies among US financial organisations: from one per week today to one per day in April
2. Spectacular rise of US home foreclosures: 10 million Americans out on the street
3. Accelerating collapse of housing prices in the US: - 25%
4. Entry into recession of the US economy in April 2007
5. Precipitous rate cut by the US Federal Reserve
6. Growing importance of China-USA trade conflicts
7. China's shift out of US dollars / Yen carry trade reversal
8. Sudden drop of US dollar value against Euro, Yuan and Yen
9. Tumble of Sterling Pound
No. 12
February 16, 2008 8:57 PM
doctorbob said...
I think the lesson from this is that changes happen rather more gradually than some would expect. There is a lot of inertia in the economic system and it takes a long time to turn around in either direction. Changes to "boom" are relatively slow and the coming "bust" will happen over years rather than months - but happen nonetheless.
February 17, 2008 5:08 AM
FB said...
Hello,
I tend to agree with ITS above.
Interesting but rather vague article.
A few points.
Concerning the free fall of the dollar, they did say currency, not money, meaning with respect to other (foreign) monies.
I agree that though the U.S. is certainly the epicenter and significantly responsible (e.g. the subprimes), it is not alone. A good part of Europe and Asia followed suit and so will suffer. But I am not sure why everyone thinks the U.K. will suffer so terribly.
Concerning turmoil, if this article is at all accurate, the situation will exceed turmoil. I am not sure how to qualify it, but it will be a shock.
Ciao,
FB
February 17, 2008 5:13 AM
doctorbob said...
I was going to add (in relation to points listed by "Anonymous" above):
1. Acceleration of the pace and size of bankruptcies among US financial organisations: from one per week today to one per day in April - NOT TO THIS EXTENT YET.
2. Spectacular rise of US home foreclosures: 10 million Americans out on the street - STEADY RATHER THAN SPECTACULAR.
3. Accelerating collapse of housing prices in the US: - 25% - SOME RECENT DATA ON THIS SITE SHOWS DROPS OF UP TO HALF THAT SO FAR, VARYING FROM STATE TO STATE.
4. Entry into recession of the US economy in April 2007 - DE FACTO RECESSION NOW, PROBABLY OFFICIAL BY SUMMER '08.
5. Precipitous rate cut by the US Federal Reserve - PARTLY SO NOW, PROBABLY APPLY BY SUMMER '08.
6. Growing importance of China-USA trade conflicts - JUST A FEW MINOR SPATS SO FAR.
7. China's shift out of US dollars / Yen carry trade reversal - MINOR AS YET.
8. Sudden drop of US dollar value against Euro, Yuan and Yen - SIGNIFICANT BUT NOT HUGE DROP.
9. Tumble of Sterling Pound - STERLING DOWN ABOUT 8% AGAINST EURO IN LAST 6 MONTHS, COULD WELL DROP FURTHER 10% BY YEAR END.
Overall, I'd expect "trauma months" like January '08 to happen every 3-6 months for rest of this year and expect the real crisis to hit in the second half of '09.
February 17, 2008 5:16 AM
The GlobalEurope Anticipation Bulletin is the confidential letter of think-tank LEAP/Europe 2020. As such, our aim is to provide our readers with state-of-the-art analyses of geo-political anticipation centered around the study and follow-up of the global systemic crisis, itself focussed on the evolution of the dollar and of the US economy, and their impact on international economy and financial markets, all that seen from a European perspective.
On Friday, 15, 2008, the latest GEAB saw the light, and parts were published on the LEAP website. It will likely take a while before an English version is available; therefore we at The Automatic Earth took it upon ourselves to translate the French version; the statements in the report certainly merit a little extra work, as well as attention.
Since the conclusions that LEAP/E2020's analysts reach in the report are, to put it mildly, more outspoken than just about any other publication, we feel they provide substantial food for thought and discussion. Are these guys nothing but a platoon of senile doomers, or are they? For more LEAP reports, go to their website.
Global systemic crisis/ September 2008 - Collapse phase of the real economy in the US
Public announcement GEAB no 22 (February 15 2008)
According to LEAP/E2020, the end of the third trimester will mark a new inflection point in the development of the systemic global crisis. By this time, the cumulative impact of the different strands of the crisis (see table below) will reach maximum strength and affect the heart of the systems involved in a decisive manner, led by the United States as the epicenter of the crisis.
In the US, this new inflection point will translate into the collapse of the real economy, the final socio-economic stage of the bursting of the series of the housing and financial bubbles (1) and the continuation of the fall in the value of the Dollar. The collapse of the real US economy represents simply the almost complete halt of the American economic machinery: private and public bankruptcies in great number, wide ranging closures of enterprises and public services (2),...
As a forewarning of events to follow, it is interesting to note that from March 2008, the US government will cease publication of its economic indices for reasons of budgetary constraints (3). The articles of GEAB N 2 and related alarms, remind us of the correlation between our anticipation of the fall to come in the Dollar with the end of the publication of M3 by the US federal Reserve. Here we see a new clear signal that the American leaders henceforth expect profoundly dark economic outlooks for their country.
Temporal perspective of the seven strands of the impact phase of the systemic global crisis anticipated since mid-2007 - Source LEAP/E2020, GEAB N°18 (10/2007) Click to enlarge
In this GEAB N 22, the experts of LEAP/E2020 anticipate the concrete consequences of this meltdown in the real American economy on the United States itself, and on other regions of the planet. In parallel, our team develops a series of five strategic and practical recommendations to protect oneself from the worsening of the systemic crisis of the coming months.
On the occasion of the second anniversary of the publication of its famous "Systemic global crisis warning" that circled the globe in February 2006, LEAP/E2020 wishes nothing less than to remind us that from now on we are entering a period without historic precedent. Repeatedly for two years, our team of researchers has stressed that comparisons with previous economic crises are fallacious.
It will not be in its effects a "remake" of the crisis of 1929, nor a repeat of the oil shocks of the 1970s or the stock market crash of 1987. It will be a systemic global crisis, that is to say affecting the integration of the planet and directly touching the foundations of the international system which has been the means of global organization for decades.
For LEAP/E2020, it is also edifying to note that two years after the publication of its famous "Systemic global crisis warning" which had simultaneously aroused the interest of millions of readers over the whole world and the condescending irony of the majority of the "experts" and "leaders" of the economic and financial world, everyone is now convinced that there is a crisis, that it is global and that it could well be systemic. Our team is constantly amazed at the incapacity of these experts and leaders to comprehend the nature of the phenomenon that we are living through.
To read them, this systemic global crisis would be only a sort of "classical" crisis, but "larger". This is how the financial media reflects the dominant interpretations of the on-going crisis. For our team, this approach is not only intellectually lazy but morally culpable, as it has as a principal consequence the denial of the opportunity for readers (whether they are simple citizens, individual investors or responsible private or public institutions) to prepare themselves for the shocks to come.
Thus, as opposed to what one could read these last weeks in the dominant media, always quick to try to camouflage reality in order to serve the interests which dominate them, LEAP/E2020 wishes to recall that it is above all in the United States that this global systemic crisis takes an unprecedented form (the "Very Great US Depression" as our team called it in January 2007 (7)), since it is around them, and them only, that the world which emerged from the second world war was gradually organized.
The various numbers of the GEAB largely explained this situation. To summarize, we consider it useful to stress that it is neither Europe nor Asia which has a negative rate of saving, a generalized housing crisis throwing millions of citizens on to the street, a currency in free fall, abysmal public and commercial deficits, an economy in recession and, to crown the whole, expensive wars to finance.
It will therefore be neither Asia nor Europe (more exactly ` the euro' zone) that will undergo the most brutal consequences, the most long lasting and most negative aspects of the crisis in progress; but the United States and countries or economies strongly tied to the United States (what our experts call "American risk") (8). There is indeed a "decoupling" between the US economy and those of the other great areas of the world.
But "decoupling" does not mean "independence". It is quite obvious, as LEAP/E2020 anticipated many months ago, that Asia and Europe will be affected by the crisis. "Decoupling" means that the evolution of the US economy and those of the other great areas of the world are no longer synchronized, that Asia and Europe will move henceforth according to trajectories no longer determined by that of the US economy.
The global systemic crisis marks in fact the beginning of "decoupling" between the US economy and those of the remainder of planet. The economies not "uncoupled" will be those which will be dragged into the American downward spiral.
Steep fall in the number of self-employed in the United States - Source Office of Labor Statistics/Merril Lynch (the shaded zones represent periods of recession). Click to enlarge
Concerning the stock markets, our team anticipated as of October 2007 that the world's bourses would lose between 20% and 60% by region during the year 2008. Today, we must revise our prediction in the direction of an even larger fall since, on the one hand, the stock exchanges have in general already lost between 10% and 20% since the beginning of the year (1°), and that, on the other hand, the meltdown of the real economy in the United States by the end of the summer 2008 will precipitate a downward spiral in all the world's bourses. For LEAP/E2020, we now predict a fall of 50% on average compared to 2007 (including in the emerging markets) (11).
In this number 22 of Global Europe Anticipation Bulletin, notably with our alert to the meltdown of the real economy in the United States from September 2008, we again try to warn those who are concerned by the consequences of this major event which will generate very serious socio-political disorder in the United States (13) as the economy is collapsing (14), which will of course have very heavy repercussions throughout all of the financial and monetary markets and for the world economy. We still have not reached the heart of the crisis. According to LEAP/E2020, it will be reached in the second half of 2008.
Posted by Ilargi at 11:40 AM
12 comments:
Anonymous said...
That's the news I've been waiting for. Celebrations all round. Bye Bye Yankees, Everyones had enough of your hegemony by violence, vainglorious delusions of grandeur, arrogantly blessing your nation as synonymous with God's name. Go forth and collapse into anarchy, make the best possible use of all those handguns you've got laying around - buy hollow point rounds.
February 16, 2008 3:49 PM
Burgundy said...
Wow, what an article. Thanks very much for bringing this to light.
I posted an article at Tod regarding Putin's threat of retaliation if Kosovo declared independence (which they are due to do tomorrow). Might be something to keep an eye on IMO.
Here's the link to the newspaper article:
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/02/15/wputin115.xml
February 16, 2008 4:05 PM
Anonymous said...
Thanks for this article and the link to the website.
I've gone back through the English language section of Abstracts& stories and read several of the articles listed there. There are about 3 pages of them from early 2006. After I read several of these articles, I read a lot more of them!
It's like reading a history of economic and some political things that have happened in the past two years! Yikes--this is an eye opening website. Actually, YOUR website is pretty eye opening, too.
thanks so much for your website and the work you're doing here.
A reader from TOD,
Shamba
February 16, 2008 4:19 PM
In The Shit said...
Thank you for the translation. I don't find LEAP's overall prognostications far-fetched, but I do find them rather vague. I wonder where they are getting their "currency in free fall" idea from. Seems like in a deflationary environment the currency would strengthen? Maybe just not relative to an also strengthening euro.
Also re the decoupling, it's interesting that the article makes such a strong effort to emphasize that the U.S. is the epicenter of the crisis, and that decoupling will spare some other parts of the world, which will only be "affected" (no further explanation) by the crisis. I must beg to differ... The UK is probably in deeper shit than we are. I think it's just not PC for French intellectuals to not try to blame whatever the problem is on the U.S. We didn't inflate Spain's housing bubble, or Greece's. Europe is going to get rocked. The only decoupling happening in Europe will be between bank depositors and their money...
I think the excess of the past few years was so massive that it's easy to cut a lot of it out and still live a comfortable life. Unemployment will definitely skyrocket and banks will fail and so on, but what it ultimately all leads to is an economy more in line with reality. The transition will be more painful for the spoiled, less so for the lean. Yes a lot of turmoil is on the way, but we are already so massively socially fucked up as a nation that it will be nothing new for us. We will stagger through like the drunken deaf idiots we are.
February 16, 2008 4:27 PM
Anonymous said...
Anything more on this; "In parallel, our team develops a series of five strategic and practical recommendations to protect oneself from the worsening of the systemic crisis of the coming months."
February 16, 2008 5:59 PM
ric said...
Anon,
Their recommendations start on page 15 of their (for subscribers) report:
"Five strategic and operational recommendations to be protected from the aggravation of the crisis
Stocks or bonds?
The recognition of a new « American risk
The new safe heaven currencies
Real estate: Selling, keeping or buying ?
Risking less for losing less (page 15)"
GEAB-N-22
February 16, 2008 7:43 PM
OuttaControl said...
Burgundy
Wow, what an article. Thanks very much for bringing this to light.
I'm not trying to be a jerk but what did you find particularly intresting in the article?
February 16, 2008 7:57 PM
Anonymous said...
Some of their predictions made a year ago:
In April 2007, nine practical consequences of the unfolding crisis will converge:
1. Acceleration of the pace and size of bankruptcies among US financial organisations: from one per week today to one per day in April
2. Spectacular rise of US home foreclosures: 10 million Americans out on the street
3. Accelerating collapse of housing prices in the US: - 25%
4. Entry into recession of the US economy in April 2007
5. Precipitous rate cut by the US Federal Reserve
6. Growing importance of China-USA trade conflicts
7. China's shift out of US dollars / Yen carry trade reversal
8. Sudden drop of US dollar value against Euro, Yuan and Yen
9. Tumble of Sterling Pound
No. 12
February 16, 2008 8:57 PM
doctorbob said...
I think the lesson from this is that changes happen rather more gradually than some would expect. There is a lot of inertia in the economic system and it takes a long time to turn around in either direction. Changes to "boom" are relatively slow and the coming "bust" will happen over years rather than months - but happen nonetheless.
February 17, 2008 5:08 AM
FB said...
Hello,
I tend to agree with ITS above.
Interesting but rather vague article.
A few points.
Concerning the free fall of the dollar, they did say currency, not money, meaning with respect to other (foreign) monies.
I agree that though the U.S. is certainly the epicenter and significantly responsible (e.g. the subprimes), it is not alone. A good part of Europe and Asia followed suit and so will suffer. But I am not sure why everyone thinks the U.K. will suffer so terribly.
Concerning turmoil, if this article is at all accurate, the situation will exceed turmoil. I am not sure how to qualify it, but it will be a shock.
Ciao,
FB
February 17, 2008 5:13 AM
doctorbob said...
I was going to add (in relation to points listed by "Anonymous" above):
1. Acceleration of the pace and size of bankruptcies among US financial organisations: from one per week today to one per day in April - NOT TO THIS EXTENT YET.
2. Spectacular rise of US home foreclosures: 10 million Americans out on the street - STEADY RATHER THAN SPECTACULAR.
3. Accelerating collapse of housing prices in the US: - 25% - SOME RECENT DATA ON THIS SITE SHOWS DROPS OF UP TO HALF THAT SO FAR, VARYING FROM STATE TO STATE.
4. Entry into recession of the US economy in April 2007 - DE FACTO RECESSION NOW, PROBABLY OFFICIAL BY SUMMER '08.
5. Precipitous rate cut by the US Federal Reserve - PARTLY SO NOW, PROBABLY APPLY BY SUMMER '08.
6. Growing importance of China-USA trade conflicts - JUST A FEW MINOR SPATS SO FAR.
7. China's shift out of US dollars / Yen carry trade reversal - MINOR AS YET.
8. Sudden drop of US dollar value against Euro, Yuan and Yen - SIGNIFICANT BUT NOT HUGE DROP.
9. Tumble of Sterling Pound - STERLING DOWN ABOUT 8% AGAINST EURO IN LAST 6 MONTHS, COULD WELL DROP FURTHER 10% BY YEAR END.
Overall, I'd expect "trauma months" like January '08 to happen every 3-6 months for rest of this year and expect the real crisis to hit in the second half of '09.
February 17, 2008 5:16 AM
Cholesterol control is pretty much a scam.
Cholesterol control is pretty much a scam. The cholesterol total is not as important as the ratio. Each HDL molecule can gather up to 6 LDL molecules and return them to the liver for processing. If the HDL is low in an individual then the LDL can add to the plaque building process in the arteries. Just as many people with low cholesterol have heart attacks as those with high numbers. A longevity factor is link to high HDL numbers. The secret is to boost HDL and it will take care of the LDL for you.
Omega 3 will boost the HDL significantly. Walnuts, Cod liver Oil, Almonds etc should be introduced into the diet and substituted for other fatty foods/calories that may be routinely found in the diet. I had cholesterol that totaled close to 300. My HDL was only 42 or so at the time. I learned how to eat correctly and exercise routinely. My cholesterol total is now 195 and my HDL is 85. My blood pressure was 120-130 ish. It's now between 95-105. It's not rocket science, and statin drugs never prevented anyone from having a heart attack. It's just a money making gimmic with deadly consequences imho. I tried a statin drug (Vytorin) early on, and after a couple months on 10mg/day the muscles in my lower back and thighs were giving out with terrible pain. I took myself off of the statin and researched the problem and corrected it myself. I happen to be a biologist and studied the cholesterol issue for a couple of years. Just make sure you intake plenty of:
(1) Soluble Fiber--retains bile (stored in the gallbladder and used in digestion for fat metabolism) and forces your liver to borrow cholesterol from the blood stream to produce more bile.
(2) Omega 3---HDL production
(3) Magnesium- for insulin transfer across cellular membranes
(4) Cinnamon---for glucose control
(5) Plenty of endurance exercising i.e. Long brisk walks etc.
(6) Substitute cooking oils with virgin coconut oil. Use olive oil cold for salads. Olive oil is a good oil but oxidizes easily under low heat and should not be used much in cooking.
(7) Use plenty of garlic in cooking and drink green tea
(8) Stay hydrated---plenty of water during the course of the day especially if you're a coffee drinker or consume alcohol.
(9) Hope that helps.
Omega 3 will boost the HDL significantly. Walnuts, Cod liver Oil, Almonds etc should be introduced into the diet and substituted for other fatty foods/calories that may be routinely found in the diet. I had cholesterol that totaled close to 300. My HDL was only 42 or so at the time. I learned how to eat correctly and exercise routinely. My cholesterol total is now 195 and my HDL is 85. My blood pressure was 120-130 ish. It's now between 95-105. It's not rocket science, and statin drugs never prevented anyone from having a heart attack. It's just a money making gimmic with deadly consequences imho. I tried a statin drug (Vytorin) early on, and after a couple months on 10mg/day the muscles in my lower back and thighs were giving out with terrible pain. I took myself off of the statin and researched the problem and corrected it myself. I happen to be a biologist and studied the cholesterol issue for a couple of years. Just make sure you intake plenty of:
(1) Soluble Fiber--retains bile (stored in the gallbladder and used in digestion for fat metabolism) and forces your liver to borrow cholesterol from the blood stream to produce more bile.
(2) Omega 3---HDL production
(3) Magnesium- for insulin transfer across cellular membranes
(4) Cinnamon---for glucose control
(5) Plenty of endurance exercising i.e. Long brisk walks etc.
(6) Substitute cooking oils with virgin coconut oil. Use olive oil cold for salads. Olive oil is a good oil but oxidizes easily under low heat and should not be used much in cooking.
(7) Use plenty of garlic in cooking and drink green tea
(8) Stay hydrated---plenty of water during the course of the day especially if you're a coffee drinker or consume alcohol.
(9) Hope that helps.
16 February 2008
Burning down the house
Behind all the blather and bullshit about the Federal Reserve's rescue gambits and the machinations of the ratings agencies, and the wiles of foreign sovereign wealth, and the incomprehensible mysteries of markets, and the various weather forecasts of a gathering "recession" is the simple fact that the USA is a way poorer nation than we imagined ourselves to be six months ago. The American economy has been running on the fumes of "creatively engineered" finance (i.e. new-and-improved swindling) for years, and now these swindles are unraveling. In their aftermath, they leave empty wallets, drained bank accounts, plundered retirements funds, boiled away capital reserves, worthless stocks, bankrupt companies, vandalized housing tracts, ruined families, and Wall Street executives who are still pulling down multimillion-dollar pay packages despite running their companies into the ground.
We're burning down the house and kidding ourselves that there is a remedy for it. All the rate cuts and loans to big banks and bank-like corporate organisms, and "monoline" bond insurers, and mortgage mills amount to little more than a final desperate shell game to conceal the radioactive pea of aggregate loss. The losses are everywhere, and when you add up seven billion here and eleven billion there they probably amount to something like a trillion dollars in sheer capital evaporation -- not counting the abstract "positions" that the capital was leveraged onto by the playerz and boyz who mistook algorithms for productive activity.
The shell game may run a few more weeks but personally I believe the timbers are burning. The losses are no longer "contained" or concealable. A consensus has now formed that we're in for a "recession." The idea is that, yes, this seems to be the low arc of the business cycle. Fewer Hamptons villas will be redecorated in the interim. We'll gird our loins and get through the bad weather and when the sun shines again, we'll be ready with new algorithms for new sport-with-capital.
Uh-uh. Think again. This is not so much financial bad weather as financial climate change. Something is happenin' Mr Jones, and you don't know what it is, do ya? There has been too much misbehavior and it can no longer be mitigated. We're not heading into a recession but a major depression, worse than the fabled trauma of the 1930s. That one occurred against the background of a society that had plenty of everything except money. Back then, we had plenty of mineral resources, lots of trained-and-regimented manpower, millions of productive family farms, factories that were practically new, and more than 90 percent left of the greatest petroleum reserve anywhere in the world. It took a world war to get all that stuff humming cooperatively again, and once it did, we devoted its productive capacity to building an empire of happy motoring leisure. (Tragic choice there.)
This new depression, which I call The Long Emergency, will play out against the background of a society that has pissed away its oil endowment, bulldozed its factories, arbitraged its productive labor, destroyed both family farms and the commercial infrastructure of main street, and trained its population to become overfed diabetic TV zombie "consumers" of other peoples' productivity, paid for by "money" they haven't earned.
There is a theory (see Nouriel Roubini's blog) that a reform process will now ensue in the financial realm, new regulation and oversight of the same old familiar activities. This too, I'm afraid, will prove to be wishful thinking. The financial system will not be reformed until it lies in smoking wreckage, and when that "re-form" happens the armature of the re-organizing society will barely resemble the one that the previous burnt-down-house was designed to dwell in. Among other things, it will not support capital enterprise at anything like the scale that we became accustomed to lately. Globalism will be over. The great nations of the world will be scrambling desperately for the world's remaining oil supplies. It will not be a friendly contest, and anyone who thinks that current trade relations and capital flows will continue despite that is liable to be disappointed. (Are you reading this Tom Friedman?)
Long before the mathematical projections of oil depletion play out, the oil markets themselves -- and all the complex operations that they comprise, such as drilling and exploration, and the movement of tankers around the planet -- will destabilize and seize up. We will no longer be any oil exporter's "favored customer." Many of the exporters will enjoy watching us suffer. Contrary to the political platitude-du-jour, the USA will never become "energy independent" in the way we currently imagine. Rather we'll become energy independent by being deprived of imported oil, and we'll be thrown back on our own dwindling supplies -- which means that we're not going to run our system of daily life the way it has been set up to run. When Americans can no longer run their cars on a whim, they will simply go apeshit and you can kiss normal politics goodbye.
The financial system that emerges from this cataclysm, and the economy it serves (which is supposed to be the master of its capital deployment "arm," not its servant) will likely be modest to a degree that will shock and embarrass everyone currently connected with what we have lately called finance. If it even trades in paper, that paper will have to stand for something based in reality, either a productive activity or a genuine asset. It may take decades for this society to even regain the confidence necessary to operate such an elementary system -- or it may not come back at all, at least as far as the horizon lies before us. That's how bad the mischief and the damage has been.
It's not hard to understand why the Bernankes, Paulsons, Lawrence Kudlows and other public representatives of capital keep pretending that everything is under control. On the other side of their pretenses lies disorder and hardship. One wonders, of course, what they really see in their private minds' eyes. Do they actually believe that the statistics issued by their serveling agencies amount to a plausible picture of reality? Are they so lost in their fantasies of "management" that they think they're controlling events?
My guess is that their credibility is spent. In the weeks ahead, nobody will know who or what to believe. We may even run out of questions to ask as we just all collectively stand there in a thrall of wonder and nausea, watching the nation's financial house burn down.
We're burning down the house and kidding ourselves that there is a remedy for it. All the rate cuts and loans to big banks and bank-like corporate organisms, and "monoline" bond insurers, and mortgage mills amount to little more than a final desperate shell game to conceal the radioactive pea of aggregate loss. The losses are everywhere, and when you add up seven billion here and eleven billion there they probably amount to something like a trillion dollars in sheer capital evaporation -- not counting the abstract "positions" that the capital was leveraged onto by the playerz and boyz who mistook algorithms for productive activity.
The shell game may run a few more weeks but personally I believe the timbers are burning. The losses are no longer "contained" or concealable. A consensus has now formed that we're in for a "recession." The idea is that, yes, this seems to be the low arc of the business cycle. Fewer Hamptons villas will be redecorated in the interim. We'll gird our loins and get through the bad weather and when the sun shines again, we'll be ready with new algorithms for new sport-with-capital.
Uh-uh. Think again. This is not so much financial bad weather as financial climate change. Something is happenin' Mr Jones, and you don't know what it is, do ya? There has been too much misbehavior and it can no longer be mitigated. We're not heading into a recession but a major depression, worse than the fabled trauma of the 1930s. That one occurred against the background of a society that had plenty of everything except money. Back then, we had plenty of mineral resources, lots of trained-and-regimented manpower, millions of productive family farms, factories that were practically new, and more than 90 percent left of the greatest petroleum reserve anywhere in the world. It took a world war to get all that stuff humming cooperatively again, and once it did, we devoted its productive capacity to building an empire of happy motoring leisure. (Tragic choice there.)
This new depression, which I call The Long Emergency, will play out against the background of a society that has pissed away its oil endowment, bulldozed its factories, arbitraged its productive labor, destroyed both family farms and the commercial infrastructure of main street, and trained its population to become overfed diabetic TV zombie "consumers" of other peoples' productivity, paid for by "money" they haven't earned.
There is a theory (see Nouriel Roubini's blog) that a reform process will now ensue in the financial realm, new regulation and oversight of the same old familiar activities. This too, I'm afraid, will prove to be wishful thinking. The financial system will not be reformed until it lies in smoking wreckage, and when that "re-form" happens the armature of the re-organizing society will barely resemble the one that the previous burnt-down-house was designed to dwell in. Among other things, it will not support capital enterprise at anything like the scale that we became accustomed to lately. Globalism will be over. The great nations of the world will be scrambling desperately for the world's remaining oil supplies. It will not be a friendly contest, and anyone who thinks that current trade relations and capital flows will continue despite that is liable to be disappointed. (Are you reading this Tom Friedman?)
Long before the mathematical projections of oil depletion play out, the oil markets themselves -- and all the complex operations that they comprise, such as drilling and exploration, and the movement of tankers around the planet -- will destabilize and seize up. We will no longer be any oil exporter's "favored customer." Many of the exporters will enjoy watching us suffer. Contrary to the political platitude-du-jour, the USA will never become "energy independent" in the way we currently imagine. Rather we'll become energy independent by being deprived of imported oil, and we'll be thrown back on our own dwindling supplies -- which means that we're not going to run our system of daily life the way it has been set up to run. When Americans can no longer run their cars on a whim, they will simply go apeshit and you can kiss normal politics goodbye.
The financial system that emerges from this cataclysm, and the economy it serves (which is supposed to be the master of its capital deployment "arm," not its servant) will likely be modest to a degree that will shock and embarrass everyone currently connected with what we have lately called finance. If it even trades in paper, that paper will have to stand for something based in reality, either a productive activity or a genuine asset. It may take decades for this society to even regain the confidence necessary to operate such an elementary system -- or it may not come back at all, at least as far as the horizon lies before us. That's how bad the mischief and the damage has been.
It's not hard to understand why the Bernankes, Paulsons, Lawrence Kudlows and other public representatives of capital keep pretending that everything is under control. On the other side of their pretenses lies disorder and hardship. One wonders, of course, what they really see in their private minds' eyes. Do they actually believe that the statistics issued by their serveling agencies amount to a plausible picture of reality? Are they so lost in their fantasies of "management" that they think they're controlling events?
My guess is that their credibility is spent. In the weeks ahead, nobody will know who or what to believe. We may even run out of questions to ask as we just all collectively stand there in a thrall of wonder and nausea, watching the nation's financial house burn down.
15 February 2008
What you don’t know can hurt us
The Bush administration has a long and comical history of going to great lengths to hide bad news from the public. Today, Amanda at TP reports on the latest gem:
The U.S. economy is faltering. Family debt is on the rise, benefits are disappearing, the deficit is skyrocketing, and the mortgage crisis has worsened. Conservatives have attempted to deflect attention from the crisis, by blaming the media’s negative coverage and insisting the United States is not headed toward a recession, despite what economists are predicting.
The Bush administration’s latest move is to simply hide the data. Forbes has awarded EconomicIndicators.gov one of its “Best of the Web” awards. As Forbes explains, the government site provides an invaluable service to the public for accessing U.S. economic data:
“This site is maintained by the Economics and Statistics Administration and combines data collected by the Bureau of Economic Analysis, like GDP and net imports and exports, and the Census Bureau, like retail sales and durable goods shipments. The site simply links to the relevant department’s Web site. This might not seem like a big deal, but doing it yourself–say, trying to find retail sales data on the Census Bureau’s site — is such an exercise in futility that it will convince you why this portal is necessary.”
Alas, as the economic conditions worsen, the administration decided to shut down this “necessary” website, citing “budgetary constraints.”
How expensive could it be for the Economics and Statistics Administration to keep a website online? Probably not much, but the political costs of making embarrassing data easily accessible to the public is probably quite high.
As long-time readers may recall, I started keeping track of instances in which the Bush administration would hide inconvenient data quite a while ago. Some of my favorite examples include:
* In March, the administration announced it would no longer produce the Census Bureau’s Survey of Income and Program Participation, which identifies which programs best assist low-income families, while also tracking health insurance coverage and child support.
* In 2005, after a government report showed an increase in terrorism around the world, the administration announced it would stop publishing its annual report on international terrorism.
* After the Bureau of Labor Statistics uncovered discouraging data about factory closings in the U.S., the administration announced it would stop publishing information about factory closings.
* When an annual report called “Budget Information for States” showed the federal government shortchanging states in the midst of fiscal crises, Bush’s Office of Management and Budget announced it was discontinuing the report, which some said was the only source for comprehensive data on state funding from the federal government.
* When Bush’s Department of Education found that charter schools were underperforming, the administration said it would sharply cut back on the information it collects about charter schools.
My friends at TPM took this even further, and compiled a comprehensive list, through a project they called, “What You Don’t Know Can’t Hurt Us.” Paul Kiel published the latest version a couple of months ago, and it’s chuck full of mind-numbing examples like these.
When public information conflict with the White House’s agenda, the Bush gang has a choice — deal with the problem or hide the information. Guess which course they prefer?
The U.S. economy is faltering. Family debt is on the rise, benefits are disappearing, the deficit is skyrocketing, and the mortgage crisis has worsened. Conservatives have attempted to deflect attention from the crisis, by blaming the media’s negative coverage and insisting the United States is not headed toward a recession, despite what economists are predicting.
The Bush administration’s latest move is to simply hide the data. Forbes has awarded EconomicIndicators.gov one of its “Best of the Web” awards. As Forbes explains, the government site provides an invaluable service to the public for accessing U.S. economic data:
“This site is maintained by the Economics and Statistics Administration and combines data collected by the Bureau of Economic Analysis, like GDP and net imports and exports, and the Census Bureau, like retail sales and durable goods shipments. The site simply links to the relevant department’s Web site. This might not seem like a big deal, but doing it yourself–say, trying to find retail sales data on the Census Bureau’s site — is such an exercise in futility that it will convince you why this portal is necessary.”
Alas, as the economic conditions worsen, the administration decided to shut down this “necessary” website, citing “budgetary constraints.”
How expensive could it be for the Economics and Statistics Administration to keep a website online? Probably not much, but the political costs of making embarrassing data easily accessible to the public is probably quite high.
As long-time readers may recall, I started keeping track of instances in which the Bush administration would hide inconvenient data quite a while ago. Some of my favorite examples include:
* In March, the administration announced it would no longer produce the Census Bureau’s Survey of Income and Program Participation, which identifies which programs best assist low-income families, while also tracking health insurance coverage and child support.
* In 2005, after a government report showed an increase in terrorism around the world, the administration announced it would stop publishing its annual report on international terrorism.
* After the Bureau of Labor Statistics uncovered discouraging data about factory closings in the U.S., the administration announced it would stop publishing information about factory closings.
* When an annual report called “Budget Information for States” showed the federal government shortchanging states in the midst of fiscal crises, Bush’s Office of Management and Budget announced it was discontinuing the report, which some said was the only source for comprehensive data on state funding from the federal government.
* When Bush’s Department of Education found that charter schools were underperforming, the administration said it would sharply cut back on the information it collects about charter schools.
My friends at TPM took this even further, and compiled a comprehensive list, through a project they called, “What You Don’t Know Can’t Hurt Us.” Paul Kiel published the latest version a couple of months ago, and it’s chuck full of mind-numbing examples like these.
When public information conflict with the White House’s agenda, the Bush gang has a choice — deal with the problem or hide the information. Guess which course they prefer?
13 February 2008
Utter Global collapse
In a recent interview on CNBC with Ron Insana, one of the “old-timer”funds manager, Julian Robertson, predicted “utter global collapse” as a consequence of the bursting of the world-wide property bubble.
Often called “Never Been Wrong Robertson”, the former head of Tiger Management (once the largest hedge fund in the world), is extremely worried about the speculative bubble in real estate.
Specifically, he is very worried about a world that is sustained by American consumer spending which is in turn 1/4 sustained by a property bubble. He predicts that 20 million people could lose their homes once the property bubble bursts.
Even more worrisome, he thinks central banks around the globe out of desperation will try to re-inflate the world economy with more liquidity that will create an inflationary spiral unseen in the economic history of mankind. “Where does it end?”, Insana asked Robertson. “Utter global collapse,” he answered. But not just economic collapse … collapse of epic proportions. Collapse and disintegration of all infrastructure, including government. Inflation will run into the double and triple digits. “Food production will fall. People will be carrying around U.S .
dollars in wheelbarrows like Germany,” he said.
There will be “total collapse of public infrastructure. Total collapse of medical care systems. All public pension plans, Social Security will collapse. All corporate pension plans will collapse.”
“The American consumer is effectively now supporting the rest of the planet,” he continued. “Consumption rates in all other nations are falling, have fallen to the point that the tax revenues to governments, that the business and industries those nation states are providing is now a net negative number relative to total debt service and public cost, that this exists in virtually every nation state on the planet now.”
And for much of this “doom”, interestingly, he blames the Bush-Cheney “regime”. “They have now consolidated power and money on the planet to the maximum extent possible. The planet’s net liquidity, that is its, net free cash flow. Is now a negative number. The planet is not simply sinking into a sea of red ink; it is already sunk. The people just don’t realize it yet,” he said.
According to Robertson, “the Bush-Cheney regime is preparing the nation for transition from democracy into dictatorship because a dictatorship will be necessary to control, in 5 years time, food and water riots.” He said “the federal government, that part of Patriot II Act, the internal exile, that the government is going to have to build now huge detention compounds on federal lands, probably in the West where the land is available, to potentially house 50 million or more citizens that will be in financial ruin.”
In 10 years time, whoever is left will be effectively starting again, he said. “More importantly, and I’m trying to think how we imply this or how we express this to the people, what extraordinary times we are living in and how the destruction of the planet has been engineered by the Bushonian Cabal from 1980 to 1992, and then from 2001 to present, which has effectively destroyed the economic liquidity of the planet,”
he said.
Robertson ended the interview by saying that he hopes he is not alive to see this. “The lucky ones are the ones who are my age now,” he said.
Often called “Never Been Wrong Robertson”, the former head of Tiger Management (once the largest hedge fund in the world), is extremely worried about the speculative bubble in real estate.
Specifically, he is very worried about a world that is sustained by American consumer spending which is in turn 1/4 sustained by a property bubble. He predicts that 20 million people could lose their homes once the property bubble bursts.
Even more worrisome, he thinks central banks around the globe out of desperation will try to re-inflate the world economy with more liquidity that will create an inflationary spiral unseen in the economic history of mankind. “Where does it end?”, Insana asked Robertson. “Utter global collapse,” he answered. But not just economic collapse … collapse of epic proportions. Collapse and disintegration of all infrastructure, including government. Inflation will run into the double and triple digits. “Food production will fall. People will be carrying around U.S .
dollars in wheelbarrows like Germany,” he said.
There will be “total collapse of public infrastructure. Total collapse of medical care systems. All public pension plans, Social Security will collapse. All corporate pension plans will collapse.”
“The American consumer is effectively now supporting the rest of the planet,” he continued. “Consumption rates in all other nations are falling, have fallen to the point that the tax revenues to governments, that the business and industries those nation states are providing is now a net negative number relative to total debt service and public cost, that this exists in virtually every nation state on the planet now.”
And for much of this “doom”, interestingly, he blames the Bush-Cheney “regime”. “They have now consolidated power and money on the planet to the maximum extent possible. The planet’s net liquidity, that is its, net free cash flow. Is now a negative number. The planet is not simply sinking into a sea of red ink; it is already sunk. The people just don’t realize it yet,” he said.
According to Robertson, “the Bush-Cheney regime is preparing the nation for transition from democracy into dictatorship because a dictatorship will be necessary to control, in 5 years time, food and water riots.” He said “the federal government, that part of Patriot II Act, the internal exile, that the government is going to have to build now huge detention compounds on federal lands, probably in the West where the land is available, to potentially house 50 million or more citizens that will be in financial ruin.”
In 10 years time, whoever is left will be effectively starting again, he said. “More importantly, and I’m trying to think how we imply this or how we express this to the people, what extraordinary times we are living in and how the destruction of the planet has been engineered by the Bushonian Cabal from 1980 to 1992, and then from 2001 to present, which has effectively destroyed the economic liquidity of the planet,”
he said.
Robertson ended the interview by saying that he hopes he is not alive to see this. “The lucky ones are the ones who are my age now,” he said.
10 February 2008
At the Heart of Deepening Monetary Disorder: Nolan
It was an eventful week for indications of the real economy’s (waning) soundness. At 15.2 million annualized, January vehicle sales were the weakest since October 2005 (that followed more than a year of very strong sales). A larger-than-expected increase in weekly initial unemployment claims (356k) pushed continuing unemployment claims rose to the highest level (2.785 million) since late 2005. The ABC/Washington Post weekly Consumer Comfort index sank a notable 6 points this week to negative 33, the lowest reading since the early nineties.
Importantly, this week’s Federal Reserve survey of senior bank-loan officers provided confirmation both that bankers have become much more cautious in lending and that borrowers have lost enthusiasm for taking on more debt. Moreover, any indication of general tightening of bank Credit takes on major significance today due to the seizing up and breakdown of Wall Street finance. Inarguably, what erupted last year in subprime has now evolved into a broad-based and severe Credit tightening. Notably, 80% of banks tightened Credit for commercial real estate lending and better than a third tightened commercial and industrial (C&I) Credit. It is worthwhile excerpting directly from the Fed’s survey:
“In the January survey, significant numbers of domestic respondents reported that they had tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the past three months; the remaining respondents noted that their lending standards had remained basically unchanged. About 55% of domestic respondents indicated that they had tightened their lending standards on prime mortgages, up from about 40% in the October survey. Of the thirty-nine banks that originated nontraditional residential mortgage loans, about 85% reported a tightening of their lending standards… compared with about 60% in October…”
“About 60% of domestic respondents…indicated that demand for prime residential mortgages had weakened over the past three months, and 70% of respondents…noted weaker demand for nontraditional and subprime mortgage loans over the same period… About 60% of domestic respondents indicated that they had tightened their lending standards for approving applications for revolving home equity lines… Regarding demand, about 35% of domestic banks…reported that demand for revolving home equity lines of credit had weakened over the past three months.”
“About 10% of respondents -- up from about 5% in…October -- reported that they had tightened their lending standards on credit card loans… About 30% of respondents noted that they had reduced the extent to which such loans were granted to customers who did not meet credit-scoring thresholds… About 15% of domestic banks -- up from about 5% in…October -- indicated a diminished willingness to make consumer installment loans… About one-third of domestic banks -- up from about one fourth… -- reported that they had tightened their lending standards on consumer loans other than credit card loans… Regarding loan demand, about 35% of domestic institutions, on net, indicated that they had experienced weaker demand for consumer loans of all types…”
“About 80% of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months, a notable increase from the October survey. The net fraction of domestic banks reporting tighter lending standards on these loans was the highest since this question was introduced in 1990…”
“In the January survey, one-third of domestic institutions…reported having tightened their lending standards on C&I loans to small as well as to large and middle-market firms over the past three months. Significant net fractions of respondents also noted that they had tightened price terms on C&I loans to all types of firms… Compared with domestic institutions, larger net fractions of U.S. branches and agencies of foreign banks reported having tightened lending standards and terms on C&I loans…”
With Wall Street’s securitization markets basically closed for business and even bank Credit Availability now tightening meaningfully, January’s collapse in the ISM Non-Manufacturing index should have been less of shock to the markets. After all, the services-based U.S. economy is primarily finance-driven, and our financial system is floundering.
The ISM Non-Manufacturing index unexpectedly sank 12.5 points to 41.9 (below 50 indicates contraction), the lowest level since October 2001. Expectations had the index slipping only a point or so to a still expansionary 53. Instead, New Orders dropped more than 10 points to 43.5, while the Prices component dipped ever so slightly to a disconcerting 70.7. Alarmingly, the Non-Manufacturing Employment index sank to 43.9, the lowest reading since the 43.9 registered in the month subsequent to the 9/11 terrorist attacks. This report corroborates the recent dismal jobs report, where “Service-Producing” job growth collapsed from December’s 143,000 (5-month average growth of 138,000) to January’s 34,000.
It is worth noting that, despite the bursting of the technology Bubble, the Non-Manufacturing index remained above 50 (at 50.7) through February 2001. But as Credit problems engulfed the corporate debt market, the Employment component proceeded to drop 6.4 points in 11 months to fall to 44.3 by early 2002. Remarkably – and indicative of breadth and severity of the unfolding Credit Crises – the Non-Manufacturing Employment index sank 7.9 points just last month. Meanwhile, the ISM Manufacturing Employment index declined 4.7 points in two months to its lowest level since September 2003. The Bubble Economy is now clearly suffocating from insufficient Credit. In particular, the unfolding Corporate Credit Crisis has begun to impact jobs, incomes and the overall economy.
It was, as well, an eventful week for indications of the soundness of the U.S. and global financial systems. On the inflation front, major commodities indices (including the CRB and the UBS/Bloomberg Constant Maturity) surged to record highs. Platinum jumped 7% this week to a record on tight supplies and power shortages in South Africa. Lead gained 5%. Copper jumped 7.5% (biggest gain in almost a year), increasing y-t-d gains to almost 16%. Palladium rose to the highest price since 2002. Sugar rose 5% on Friday, and I’d be remiss not to note crude’s 4% one-day surge.
But when it comes to spectacular moves, wheat takes the cake. Prices surged to yet another record high (up 30% y-t-d), as forecasts have U.S. stockpiles falling to the lowest level since 1948. Global supplies are said to be the lowest since 1978. Alarmingly, wheat increased the 30 cent daily limit in Chicago trading for five straight sessions, with Bloomberg reporting this week’s 16% gain as the “biggest in history.” Prices are now up 140% y-o-y. Along for the ride, soybeans rose 4% this week to a near-record ( U.S. inventories at 4-yr low), increasing one-year gains to 80%. Corn prices gained 2% (having doubled in the past two years), also trading at record highs. Production and inventory concerns saw coffee prices rise 5.8% this week to the highest level since 1999. Cocoa gained 3.8% this week (37% 1-yr gain).
The question remains: How much will the Chinese, Indians, Russians, American consumers and others be willing to pay for wheat and other vital commodities? For energy? For stores of value such as gold, silver and the other (increasingly) precious metals in an age of unregulated, unrestrained, unanchored, electronic-based, securities-based, and market-driven global “money” and Credit. With trillions of dollar liquidity sloshing vagariously around the global financial “system”, there is clearly more than ample high-octane inflationary fuel to destabilize markets for myriad essential things of limited supply. And, increasingly, there is talk of problematic margin calls and derivative-related issues impacting commodities trading conditions. The talk is of trading dislocations and nervous “bankers” pulling away from the financing of hedging activities in various markets. Or, in short, we are witnessing a precarious ratcheting up of Monetary Disorder – in a multitude of key markets and on a global basis.
At the Heart of Monetary Disorder, we have a leveraged speculating community increasingly on the ropes. January was a tough month for the hedge fund community. In particular, it appears the (over-hyped) “long/short” (holding both long and short positions) and (over-hyped) “quant” funds had an especially tough go of it. To begin the New Year, last year’s favorite stocks (i.e. technology, emerging markets, energy, and utilities) were hammered, while the heavily shorted sectors have significantly outperformed (i.e. homebuilders, banks, retailers, “consumer discretionary,” and transports). The yen and Swiss franc (currencies traders had shorted to finance higher yielding “carry trades”) have rallied. Even the dollar has rallied somewhat. Many speculators have been (caught) short commodities, having expected negative ramifications from the bursting of the U.S. Credit Bubble. Others have been caught over-exposed to emerging equities and debt markets. And, increasingly, it appears various trades throughout the complex corporate Credit arena have run amuck.
Friday, various indices of corporate credit risk moved to record highs, including the previously stalwart “investment grade” sector. Leveraged loan prices fell to record lows late in the week, as talk of further bank and hedge fund liquidations captivated the marketplace. While the status of the (“monoline”) Credit insurers is now a central focus, behind the scenes there is increasing angst at the prospect for a disorderly unwind of various leveraged trading strategies in corporate Credits and Credit derivatives. “Synthetic” CDOs (collateralized debt obligations) – pools of Credit default swaps and other derivatives – are especially vulnerable and problematic for the system. In short, the Corporate Credit Crisis took a decided turn for the worse this week. There is, with the economy sinking rapidly and the leveraged speculating community faltering abruptly, little prospect at this point for stabilization. The downside of the Credit Cycle is attaining overwhelming momentum.
The Wall Street punditry seems to go out of its way to get things wrong. The latest talk is that the market will simply look over the “valley” and begin focusing on a recovery from what will be, at worst, a brief and mild recession. The relative strong performance of the banks, retailers, homebuilders, and transports is accepted as confirmation of the bullish view. I’ll instead take the view that the recent major squeeze in the heavily shorted stocks and sectors is only further destabilizing and indicative of dynamics troubling to the leveraged speculating community and the Credit system more generally. “Hedges” have stopped working, creating a backdrop of angst and forced liquidations.
Despite last year’s subprime collapse and mortgage turmoil, the leveraged speculating community overall chalked up another stellar year of performance. Actually, the “community” in total likely boosted returns with bets against subprime and mortgage Credit more generally. Certainly, the hedge funds profited nicely from shorts on the financial and consumer sectors. Ironically, the initial stage of the bursting of the Credit Bubble proved a favorable backdrop for many of the major players and the community in general. The deluge of industry inflows ran unabated through much of the year, a crucial dynamic that masked rapidly developing fragilities and vulnerabilities. These flows were surely critical in supporting speculative trading positions away from the mortgage bust.
In particular, I believe the general backdrop delayed a problematic unwind of leveraged and highly speculative positions in corporate Credits (securities, derivatives and other “structured products”). Shorting mortgage-related Credit last year provided a convenient mechanism for hedging corporate Credit and equity market risk. Meanwhile, the combination of profitable (mortgage bust-related) shorts and hedges – in concert with industry fund inflows – emboldened the speculators to press their (huge) bets on technology, energy, the emerging markets, global equities, and other speculative Bubbles. The relative resiliency of the U.S. corporate Credit market and global markets through 2007 played a critical role in delaying impending economic and stock market adjustment.
Well, I believe the dam broke in January. The leveraged players were hit with losses from all directions. Their long positions were immediately slammed with simultaneous bursting Bubbles round the globe. Meanwhile, a rush to unwind positions led to upward pressure on the heavily shorted sectors, only compounding the leverage speculating community’s predicament. Last year fostered an extraordinary dynamic of ballooning “crowded trades,” and January saw the bursting of this multifaceted Bubble.
The leveraged speculating community has suffered the occasional tough month – last August providing a recent case in point. Each time, however, performance quickly bounced back. In true Bubble fashion, each quick recovery from a setback emboldened all involved; industry fund inflows not only never missed a beat – they accelerated. Yet a strong case can be made today that this (historic) Bubble has now burst – that last year was the “last gasp” before succumbing to New Post-Credit Bubble Realities. I don’t expect performance to bounce back, while I do foresee a flight away from the leveraged speculating now beginning in earnest. With “crowded trades” unraveling virtually across the board, marketplace risk is now escalating significantly for leveraged strategies in general. Systemic liquidity issues and dislocated market conditions have created an environment where there is seemingly no place to hide.
Importantly, a leveraged speculating community “unraveling” would prove a death blow for myriad sophisticated trading strategies and risk models, with enormous ramifications for systemic stability. There are unmistakable “Ponzi Dynamics” involved here worthy of a few Bulletins.
Going forward, I expect a foundering leveraged speculating community to be At The Heart of Deepening Monetary Disorder. The initial victims appear the fragile global equities market Bubbles and the U.S. Corporate Credit market. Forced deleveraging of hedge fund corporate debt and derivatives is in the process of creating a massive overhang of securities to sell, in the process profoundly curtailing Credit Availability and Marketplace Liquidity throughout. The ramifications for our finance-based Bubble Economy are momentous. As an economic and financial analyst (as opposed to “fear-monger”), I feel it is imperative to highlight that it is more “technically” accurate to categorize the unfolding scenario in the historical context of an economic “depression” rather than “recession.” This is certainly not shaping up as a short-term inventory-led economic adjustment or “mid-cycle” slowdown. Instead, we have now entered the very initial stages of what will likely prove a deep, prolonged and arduous adjustment to the underlying structure of our Credit and economic systems.
Importantly, this week’s Federal Reserve survey of senior bank-loan officers provided confirmation both that bankers have become much more cautious in lending and that borrowers have lost enthusiasm for taking on more debt. Moreover, any indication of general tightening of bank Credit takes on major significance today due to the seizing up and breakdown of Wall Street finance. Inarguably, what erupted last year in subprime has now evolved into a broad-based and severe Credit tightening. Notably, 80% of banks tightened Credit for commercial real estate lending and better than a third tightened commercial and industrial (C&I) Credit. It is worthwhile excerpting directly from the Fed’s survey:
“In the January survey, significant numbers of domestic respondents reported that they had tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the past three months; the remaining respondents noted that their lending standards had remained basically unchanged. About 55% of domestic respondents indicated that they had tightened their lending standards on prime mortgages, up from about 40% in the October survey. Of the thirty-nine banks that originated nontraditional residential mortgage loans, about 85% reported a tightening of their lending standards… compared with about 60% in October…”
“About 60% of domestic respondents…indicated that demand for prime residential mortgages had weakened over the past three months, and 70% of respondents…noted weaker demand for nontraditional and subprime mortgage loans over the same period… About 60% of domestic respondents indicated that they had tightened their lending standards for approving applications for revolving home equity lines… Regarding demand, about 35% of domestic banks…reported that demand for revolving home equity lines of credit had weakened over the past three months.”
“About 10% of respondents -- up from about 5% in…October -- reported that they had tightened their lending standards on credit card loans… About 30% of respondents noted that they had reduced the extent to which such loans were granted to customers who did not meet credit-scoring thresholds… About 15% of domestic banks -- up from about 5% in…October -- indicated a diminished willingness to make consumer installment loans… About one-third of domestic banks -- up from about one fourth… -- reported that they had tightened their lending standards on consumer loans other than credit card loans… Regarding loan demand, about 35% of domestic institutions, on net, indicated that they had experienced weaker demand for consumer loans of all types…”
“About 80% of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months, a notable increase from the October survey. The net fraction of domestic banks reporting tighter lending standards on these loans was the highest since this question was introduced in 1990…”
“In the January survey, one-third of domestic institutions…reported having tightened their lending standards on C&I loans to small as well as to large and middle-market firms over the past three months. Significant net fractions of respondents also noted that they had tightened price terms on C&I loans to all types of firms… Compared with domestic institutions, larger net fractions of U.S. branches and agencies of foreign banks reported having tightened lending standards and terms on C&I loans…”
With Wall Street’s securitization markets basically closed for business and even bank Credit Availability now tightening meaningfully, January’s collapse in the ISM Non-Manufacturing index should have been less of shock to the markets. After all, the services-based U.S. economy is primarily finance-driven, and our financial system is floundering.
The ISM Non-Manufacturing index unexpectedly sank 12.5 points to 41.9 (below 50 indicates contraction), the lowest level since October 2001. Expectations had the index slipping only a point or so to a still expansionary 53. Instead, New Orders dropped more than 10 points to 43.5, while the Prices component dipped ever so slightly to a disconcerting 70.7. Alarmingly, the Non-Manufacturing Employment index sank to 43.9, the lowest reading since the 43.9 registered in the month subsequent to the 9/11 terrorist attacks. This report corroborates the recent dismal jobs report, where “Service-Producing” job growth collapsed from December’s 143,000 (5-month average growth of 138,000) to January’s 34,000.
It is worth noting that, despite the bursting of the technology Bubble, the Non-Manufacturing index remained above 50 (at 50.7) through February 2001. But as Credit problems engulfed the corporate debt market, the Employment component proceeded to drop 6.4 points in 11 months to fall to 44.3 by early 2002. Remarkably – and indicative of breadth and severity of the unfolding Credit Crises – the Non-Manufacturing Employment index sank 7.9 points just last month. Meanwhile, the ISM Manufacturing Employment index declined 4.7 points in two months to its lowest level since September 2003. The Bubble Economy is now clearly suffocating from insufficient Credit. In particular, the unfolding Corporate Credit Crisis has begun to impact jobs, incomes and the overall economy.
It was, as well, an eventful week for indications of the soundness of the U.S. and global financial systems. On the inflation front, major commodities indices (including the CRB and the UBS/Bloomberg Constant Maturity) surged to record highs. Platinum jumped 7% this week to a record on tight supplies and power shortages in South Africa. Lead gained 5%. Copper jumped 7.5% (biggest gain in almost a year), increasing y-t-d gains to almost 16%. Palladium rose to the highest price since 2002. Sugar rose 5% on Friday, and I’d be remiss not to note crude’s 4% one-day surge.
But when it comes to spectacular moves, wheat takes the cake. Prices surged to yet another record high (up 30% y-t-d), as forecasts have U.S. stockpiles falling to the lowest level since 1948. Global supplies are said to be the lowest since 1978. Alarmingly, wheat increased the 30 cent daily limit in Chicago trading for five straight sessions, with Bloomberg reporting this week’s 16% gain as the “biggest in history.” Prices are now up 140% y-o-y. Along for the ride, soybeans rose 4% this week to a near-record ( U.S. inventories at 4-yr low), increasing one-year gains to 80%. Corn prices gained 2% (having doubled in the past two years), also trading at record highs. Production and inventory concerns saw coffee prices rise 5.8% this week to the highest level since 1999. Cocoa gained 3.8% this week (37% 1-yr gain).
The question remains: How much will the Chinese, Indians, Russians, American consumers and others be willing to pay for wheat and other vital commodities? For energy? For stores of value such as gold, silver and the other (increasingly) precious metals in an age of unregulated, unrestrained, unanchored, electronic-based, securities-based, and market-driven global “money” and Credit. With trillions of dollar liquidity sloshing vagariously around the global financial “system”, there is clearly more than ample high-octane inflationary fuel to destabilize markets for myriad essential things of limited supply. And, increasingly, there is talk of problematic margin calls and derivative-related issues impacting commodities trading conditions. The talk is of trading dislocations and nervous “bankers” pulling away from the financing of hedging activities in various markets. Or, in short, we are witnessing a precarious ratcheting up of Monetary Disorder – in a multitude of key markets and on a global basis.
At the Heart of Monetary Disorder, we have a leveraged speculating community increasingly on the ropes. January was a tough month for the hedge fund community. In particular, it appears the (over-hyped) “long/short” (holding both long and short positions) and (over-hyped) “quant” funds had an especially tough go of it. To begin the New Year, last year’s favorite stocks (i.e. technology, emerging markets, energy, and utilities) were hammered, while the heavily shorted sectors have significantly outperformed (i.e. homebuilders, banks, retailers, “consumer discretionary,” and transports). The yen and Swiss franc (currencies traders had shorted to finance higher yielding “carry trades”) have rallied. Even the dollar has rallied somewhat. Many speculators have been (caught) short commodities, having expected negative ramifications from the bursting of the U.S. Credit Bubble. Others have been caught over-exposed to emerging equities and debt markets. And, increasingly, it appears various trades throughout the complex corporate Credit arena have run amuck.
Friday, various indices of corporate credit risk moved to record highs, including the previously stalwart “investment grade” sector. Leveraged loan prices fell to record lows late in the week, as talk of further bank and hedge fund liquidations captivated the marketplace. While the status of the (“monoline”) Credit insurers is now a central focus, behind the scenes there is increasing angst at the prospect for a disorderly unwind of various leveraged trading strategies in corporate Credits and Credit derivatives. “Synthetic” CDOs (collateralized debt obligations) – pools of Credit default swaps and other derivatives – are especially vulnerable and problematic for the system. In short, the Corporate Credit Crisis took a decided turn for the worse this week. There is, with the economy sinking rapidly and the leveraged speculating community faltering abruptly, little prospect at this point for stabilization. The downside of the Credit Cycle is attaining overwhelming momentum.
The Wall Street punditry seems to go out of its way to get things wrong. The latest talk is that the market will simply look over the “valley” and begin focusing on a recovery from what will be, at worst, a brief and mild recession. The relative strong performance of the banks, retailers, homebuilders, and transports is accepted as confirmation of the bullish view. I’ll instead take the view that the recent major squeeze in the heavily shorted stocks and sectors is only further destabilizing and indicative of dynamics troubling to the leveraged speculating community and the Credit system more generally. “Hedges” have stopped working, creating a backdrop of angst and forced liquidations.
Despite last year’s subprime collapse and mortgage turmoil, the leveraged speculating community overall chalked up another stellar year of performance. Actually, the “community” in total likely boosted returns with bets against subprime and mortgage Credit more generally. Certainly, the hedge funds profited nicely from shorts on the financial and consumer sectors. Ironically, the initial stage of the bursting of the Credit Bubble proved a favorable backdrop for many of the major players and the community in general. The deluge of industry inflows ran unabated through much of the year, a crucial dynamic that masked rapidly developing fragilities and vulnerabilities. These flows were surely critical in supporting speculative trading positions away from the mortgage bust.
In particular, I believe the general backdrop delayed a problematic unwind of leveraged and highly speculative positions in corporate Credits (securities, derivatives and other “structured products”). Shorting mortgage-related Credit last year provided a convenient mechanism for hedging corporate Credit and equity market risk. Meanwhile, the combination of profitable (mortgage bust-related) shorts and hedges – in concert with industry fund inflows – emboldened the speculators to press their (huge) bets on technology, energy, the emerging markets, global equities, and other speculative Bubbles. The relative resiliency of the U.S. corporate Credit market and global markets through 2007 played a critical role in delaying impending economic and stock market adjustment.
Well, I believe the dam broke in January. The leveraged players were hit with losses from all directions. Their long positions were immediately slammed with simultaneous bursting Bubbles round the globe. Meanwhile, a rush to unwind positions led to upward pressure on the heavily shorted sectors, only compounding the leverage speculating community’s predicament. Last year fostered an extraordinary dynamic of ballooning “crowded trades,” and January saw the bursting of this multifaceted Bubble.
The leveraged speculating community has suffered the occasional tough month – last August providing a recent case in point. Each time, however, performance quickly bounced back. In true Bubble fashion, each quick recovery from a setback emboldened all involved; industry fund inflows not only never missed a beat – they accelerated. Yet a strong case can be made today that this (historic) Bubble has now burst – that last year was the “last gasp” before succumbing to New Post-Credit Bubble Realities. I don’t expect performance to bounce back, while I do foresee a flight away from the leveraged speculating now beginning in earnest. With “crowded trades” unraveling virtually across the board, marketplace risk is now escalating significantly for leveraged strategies in general. Systemic liquidity issues and dislocated market conditions have created an environment where there is seemingly no place to hide.
Importantly, a leveraged speculating community “unraveling” would prove a death blow for myriad sophisticated trading strategies and risk models, with enormous ramifications for systemic stability. There are unmistakable “Ponzi Dynamics” involved here worthy of a few Bulletins.
Going forward, I expect a foundering leveraged speculating community to be At The Heart of Deepening Monetary Disorder. The initial victims appear the fragile global equities market Bubbles and the U.S. Corporate Credit market. Forced deleveraging of hedge fund corporate debt and derivatives is in the process of creating a massive overhang of securities to sell, in the process profoundly curtailing Credit Availability and Marketplace Liquidity throughout. The ramifications for our finance-based Bubble Economy are momentous. As an economic and financial analyst (as opposed to “fear-monger”), I feel it is imperative to highlight that it is more “technically” accurate to categorize the unfolding scenario in the historical context of an economic “depression” rather than “recession.” This is certainly not shaping up as a short-term inventory-led economic adjustment or “mid-cycle” slowdown. Instead, we have now entered the very initial stages of what will likely prove a deep, prolonged and arduous adjustment to the underlying structure of our Credit and economic systems.
8 February 2008
The Credit Crunch – In 2008 The Worst May Keep Getting Worse
By: Satyajit Das
2007 may come to associated with the start of the "big" credit crunch. 2008 has begun with a number of "unresolved" items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
The total level of sub-prime losses is still far from clear. Based on current trading levels of ABS indices, estimates of losses range between US$ 150 and 400 billion, not all of which has been written off to date.
Interest rates on large volumes of sub-prime mortgages – estimated at around US$ 900 billion are due to reset by end 2008. Interest rates and repayments will rise significantly. The impact on delinquencies and losses are unknown. The rate reset freeze plan (which has not been in the news since being announced) and its impact are also still unclear.
As America's mortgage markets began unravelling, economists initially pointed to sub-prime mortgages issued to low-income, minority and urban borrowers. Closer analysis reveals risky mortgages in nearly every corner of the USA. Analysis by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined US$1.5 trillion in high-interest-rate, high risk loans. The potential losses on these loans are unknown.
There are also emerging concerns in the US$915 billion credit card debt markets. Credit card providers are all boosting loan loss provisions. There is anecdotal evidence that cash strapped mortgagors are using credit cards to make mortgage payments. Analysts expect credit card delinquencies to increase if consumers unable to use home-equity lines of credit to pay off their credit card debt start running up higher card debt. A number of banks have begun to boost reserves against anticipated losses.
Financial institutions have already incurred losses of over US$100 billion. A substantial volume of assets is likely to return onto bank balance sheets as off-balance sheet structures and hedge funds are forced to sell. The total amount to be re-intermediated by banks may be in the range of US$1 to 2 trillion. This will make substantial depends on bank liquidity and capital.
There are already signs that the major banks are hoarding liquidity in anticipation of the return of assets. They will also inevitably have to raise substantial amounts of capital. In the second half of 2007 commercial and investment banks raised US$83 billion in equity. This was an increase of more than 20% on the corresponding period in 2006.
Asset backed conduit vehicles and SIVs ("Structured Investment Vehicles") may need to sell assets as they breach their rules. Hedge funds face substantial redemption requests in the coming months. This will exacerbate the demands on bank capital and liquidity.
The credit issues have widened beyond banks, investors and hedge funds active in structured credit.
In the conventional mortgage market, Fannie Mae (Federal National Mortgage Association) and Ginnie Mae (Government National Mortgage Association) have recorded losses and been forced to raise capital. This suggests that the problems in the housing market are deep seated.
Mortgage insurers and monoline insurers have suffered serious collateral damage. A significant downgrade in the rating of insurers will be particularly damaging. It will affect around US$ 2.5 trillion of municipal bonds guaranteed by the insurers. It will also affect other bonds wrapped by the insurers. This may trigger further selling pressure and contribute to decline in prices as well as absorbing increasingly scarce liquidity.
There is already talk of a plan to re-capitalise the insurers. The sum being talked about is between US$15 and US$200 billion. It is not clear where the substantial amount of capital needed to recapitalise the banks and financial guarantors is going to come from.
The US$ 2 trillion of European pfandbrief or covered bond markets have also experienced liquidity problems.
The sub-prime model is also used for leveraged funding in private equity, infrastructure and commercial property financing.
US$300 billion of leveraged finance loans made by banks is still effectively "orphaned" - they can't be sold off. In late 2007, there were signs that the loan logjam was easing. Underwriters pointed to some sales of risky assets.
Caution is needed in interpreting these developments. Firstly, the sales only related to the less risky tranches and loans. The more risky exposures remain with underwriters for the moment. There are also concerns that some of the sales were not "genuine". The banks had provided the buyers with a variety of favourable terms including the ability to sell the loans back to them at a future date at a guaranteed price. Alternatively, MFN ("most favoured nation") clauses mean that the selling bank will need to compensate buyers if loans are sold at lower prices during an agreed time from the initial sale. Current prices indicate steep discounts will be needed to shift the paper to investors.
The crisis shows signs of spilling over into other markets. In Great Britain, Ireland, Spain, Australia and other markets strong house price appreciation similar to the US led to similar growth in mortgage and real estate lending. If economic growth slows and housing prices fall then similar problem may emerge in those economies as well.
There are already signs that there will be significant litigation against the banks. There may also be regulatory investigations and potentially prosecutions. State Street recently provided over US$250 million against future litigation claims. The total cost of all this is still unknown.
The financial elements of the credit crunch are becoming clearer - higher credit costs; lower availability of debt; forced de-leveraging of hedge funds and conduits/ SIVs; significant capital losses for financial institutions. The real economy effects will be slower to emerge. Higher credit costs and tighter credit standards will affect all business.
The US housing industry is badly affected with no immediate prospect of a quick recovery. The outlook for US house prices is poor. Growth forecasts for the US have already been lowered. The dreaded "R" word – recession – is now being talked about.
The fall in asset prices has "wealth" effects. Then there are employment and income effects. Wall Street has already issued "pink slips" by the thousands as banks and mortgage lenders shed staff. More will be issued in 2008 as the slowdown in the financial services business continues.
A slowdown in economic activity will affect many financial transactions. Corporations with significant debt face refinancing challenges. The shares of an Australian real estate firm – Centro – fell over 80 % as a result of difficulties in refinancing its short-term debt secured over commercial property, some of it in the US. Commercial property financing has slowed, the cost has risen significantly and terms have tightened affecting commercial property prices.
Private equity deals in recent years were predicated on a combination of a growing economy, cheap debt and a buoyant stock market allowing the quick resale of the company. Weaker earnings and more expensive debt could lead to losses and distressed sales over time. Recent private equity deals also face re-financing risk. Some US$ 150 billion of leveraged loans come due in 2008. Financial engineering techniques – toggles, pay-in-kind securities and covenant-lite (lack of maintenance covenants) structures – will delay the problem but probably cannot forestall the inevitable rise in defaults.
Non-investment grade bond issuance over the last few years was concentrated in the weaker credit categories and is vulnerable to deterioration in economic conditions. Since 2003, 42% of bonds of high yield bonds issues were rated B- or below. In the first 6 months of the year that percentage rose to around 50%. Some commentators believe that the losses of corporate bonds will peak between 10% and 20% leading to significant losses.
Warren Buffet once observed that: "it's the weak link that snaps you…in financial markets, the weak link is borrowed money." In the present credit crisis, all companies and business models reliant on debt – especially cheap and abundant debt - look vulnerable.
The real economy effects will feedback into the financial markets. A weaker economy are likely to see higher levels of actual defaults. This may set off new phases of the crisis.
CDS contracts used to hedge credit risk have significant documentation and operational problems. If actual defaults in markets increase and the contracts do not function as intended then there would be additional complexity. A significant volume of CDS contracts is with hedge funds and other investors secured by collateral agreements. The counterparty and performance risk of enforcing the contracts may be challenging. It is important to note that the structured credit market in its current form is substantially untested. If defaults rise and the CDS contracts prove to be difficult to enforce then bank exposures to losses may well much higher than anticipated.
Credit markets remain gloomy. Unlike their equity and emerging market cousins, they are waiting anxiously for "the shoes to fall", except it seems that the shoes are from Imelda Marcos' collection.
At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article although he may be an owner indirectly as an investor in a fund.
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
2007 may come to associated with the start of the "big" credit crunch. 2008 has begun with a number of "unresolved" items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
The total level of sub-prime losses is still far from clear. Based on current trading levels of ABS indices, estimates of losses range between US$ 150 and 400 billion, not all of which has been written off to date.
Interest rates on large volumes of sub-prime mortgages – estimated at around US$ 900 billion are due to reset by end 2008. Interest rates and repayments will rise significantly. The impact on delinquencies and losses are unknown. The rate reset freeze plan (which has not been in the news since being announced) and its impact are also still unclear.
As America's mortgage markets began unravelling, economists initially pointed to sub-prime mortgages issued to low-income, minority and urban borrowers. Closer analysis reveals risky mortgages in nearly every corner of the USA. Analysis by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined US$1.5 trillion in high-interest-rate, high risk loans. The potential losses on these loans are unknown.
There are also emerging concerns in the US$915 billion credit card debt markets. Credit card providers are all boosting loan loss provisions. There is anecdotal evidence that cash strapped mortgagors are using credit cards to make mortgage payments. Analysts expect credit card delinquencies to increase if consumers unable to use home-equity lines of credit to pay off their credit card debt start running up higher card debt. A number of banks have begun to boost reserves against anticipated losses.
Financial institutions have already incurred losses of over US$100 billion. A substantial volume of assets is likely to return onto bank balance sheets as off-balance sheet structures and hedge funds are forced to sell. The total amount to be re-intermediated by banks may be in the range of US$1 to 2 trillion. This will make substantial depends on bank liquidity and capital.
There are already signs that the major banks are hoarding liquidity in anticipation of the return of assets. They will also inevitably have to raise substantial amounts of capital. In the second half of 2007 commercial and investment banks raised US$83 billion in equity. This was an increase of more than 20% on the corresponding period in 2006.
Asset backed conduit vehicles and SIVs ("Structured Investment Vehicles") may need to sell assets as they breach their rules. Hedge funds face substantial redemption requests in the coming months. This will exacerbate the demands on bank capital and liquidity.
The credit issues have widened beyond banks, investors and hedge funds active in structured credit.
In the conventional mortgage market, Fannie Mae (Federal National Mortgage Association) and Ginnie Mae (Government National Mortgage Association) have recorded losses and been forced to raise capital. This suggests that the problems in the housing market are deep seated.
Mortgage insurers and monoline insurers have suffered serious collateral damage. A significant downgrade in the rating of insurers will be particularly damaging. It will affect around US$ 2.5 trillion of municipal bonds guaranteed by the insurers. It will also affect other bonds wrapped by the insurers. This may trigger further selling pressure and contribute to decline in prices as well as absorbing increasingly scarce liquidity.
There is already talk of a plan to re-capitalise the insurers. The sum being talked about is between US$15 and US$200 billion. It is not clear where the substantial amount of capital needed to recapitalise the banks and financial guarantors is going to come from.
The US$ 2 trillion of European pfandbrief or covered bond markets have also experienced liquidity problems.
The sub-prime model is also used for leveraged funding in private equity, infrastructure and commercial property financing.
US$300 billion of leveraged finance loans made by banks is still effectively "orphaned" - they can't be sold off. In late 2007, there were signs that the loan logjam was easing. Underwriters pointed to some sales of risky assets.
Caution is needed in interpreting these developments. Firstly, the sales only related to the less risky tranches and loans. The more risky exposures remain with underwriters for the moment. There are also concerns that some of the sales were not "genuine". The banks had provided the buyers with a variety of favourable terms including the ability to sell the loans back to them at a future date at a guaranteed price. Alternatively, MFN ("most favoured nation") clauses mean that the selling bank will need to compensate buyers if loans are sold at lower prices during an agreed time from the initial sale. Current prices indicate steep discounts will be needed to shift the paper to investors.
The crisis shows signs of spilling over into other markets. In Great Britain, Ireland, Spain, Australia and other markets strong house price appreciation similar to the US led to similar growth in mortgage and real estate lending. If economic growth slows and housing prices fall then similar problem may emerge in those economies as well.
There are already signs that there will be significant litigation against the banks. There may also be regulatory investigations and potentially prosecutions. State Street recently provided over US$250 million against future litigation claims. The total cost of all this is still unknown.
The financial elements of the credit crunch are becoming clearer - higher credit costs; lower availability of debt; forced de-leveraging of hedge funds and conduits/ SIVs; significant capital losses for financial institutions. The real economy effects will be slower to emerge. Higher credit costs and tighter credit standards will affect all business.
The US housing industry is badly affected with no immediate prospect of a quick recovery. The outlook for US house prices is poor. Growth forecasts for the US have already been lowered. The dreaded "R" word – recession – is now being talked about.
The fall in asset prices has "wealth" effects. Then there are employment and income effects. Wall Street has already issued "pink slips" by the thousands as banks and mortgage lenders shed staff. More will be issued in 2008 as the slowdown in the financial services business continues.
A slowdown in economic activity will affect many financial transactions. Corporations with significant debt face refinancing challenges. The shares of an Australian real estate firm – Centro – fell over 80 % as a result of difficulties in refinancing its short-term debt secured over commercial property, some of it in the US. Commercial property financing has slowed, the cost has risen significantly and terms have tightened affecting commercial property prices.
Private equity deals in recent years were predicated on a combination of a growing economy, cheap debt and a buoyant stock market allowing the quick resale of the company. Weaker earnings and more expensive debt could lead to losses and distressed sales over time. Recent private equity deals also face re-financing risk. Some US$ 150 billion of leveraged loans come due in 2008. Financial engineering techniques – toggles, pay-in-kind securities and covenant-lite (lack of maintenance covenants) structures – will delay the problem but probably cannot forestall the inevitable rise in defaults.
Non-investment grade bond issuance over the last few years was concentrated in the weaker credit categories and is vulnerable to deterioration in economic conditions. Since 2003, 42% of bonds of high yield bonds issues were rated B- or below. In the first 6 months of the year that percentage rose to around 50%. Some commentators believe that the losses of corporate bonds will peak between 10% and 20% leading to significant losses.
Warren Buffet once observed that: "it's the weak link that snaps you…in financial markets, the weak link is borrowed money." In the present credit crisis, all companies and business models reliant on debt – especially cheap and abundant debt - look vulnerable.
The real economy effects will feedback into the financial markets. A weaker economy are likely to see higher levels of actual defaults. This may set off new phases of the crisis.
CDS contracts used to hedge credit risk have significant documentation and operational problems. If actual defaults in markets increase and the contracts do not function as intended then there would be additional complexity. A significant volume of CDS contracts is with hedge funds and other investors secured by collateral agreements. The counterparty and performance risk of enforcing the contracts may be challenging. It is important to note that the structured credit market in its current form is substantially untested. If defaults rise and the CDS contracts prove to be difficult to enforce then bank exposures to losses may well much higher than anticipated.
Credit markets remain gloomy. Unlike their equity and emerging market cousins, they are waiting anxiously for "the shoes to fall", except it seems that the shoes are from Imelda Marcos' collection.
At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article although he may be an owner indirectly as an investor in a fund.
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
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