More on backwardation in Gold from Fekete.....
"In an earlier article Backward Thinking on Backwardation I explained that backwardation in gold is the flipside of the phenomenon of a drastic contraction of world trade and employment. This brings out the danger in denying the fact of gold backwardation or to belittle its significance, as most observers seem to be doing. I am reminded of the saying of the Swiss educator F.W. Foerster: "if you don't use your eyes for seeing, later you will use them for weeping." In this article I want to enumerate the reasons why I believe that permanent backwardation in gold would bring about the descent of our civilization into lawlessness similar to that following the collapse of the Western Roman Empire.
The consensus seems to be that, even if backwardation in gold occurred at one point, it would not be a significant event given the zero-interest environment. Forward thinking on backwardation shows that this is wrong.
Tom Szabo observes (see References below): "If somehow short-term interest rates were to go into significant backwardation, it should be no surprise that gold and silver may go into significant backwardation. THIS WOULD NOT BE A SIGN OF IMMINENT MONETARY COLLAPSE [his emphasis]. In fact, a pretty strong argument could be made for the opposite - that the negative interest rate is a sign of excessive monetary demand (in relation to demand for capital goods and investments). I've looked but have been unsuccessful in finding an historical example of a monetary collapse that occurred while money was actually in high demand. Of course, high demand for money could be extremely deflationary and the only known cure for this is to create a high supply of money, otherwise known as hyperinflation."
While I would disagree with the use of the word "imminent" in describing the coming monetary collapse, I must maintain my stand that a durable backwardation, such as we have experienced for two weeks earlier this month, is a premonition that there will be repeated episodes of the same kind, ever more frequent, ever deeper, ever longer, each episode significantly weakening the monetary system - regardless of the zero or negative short term interest rate. (Let us leave the question aside that zero or negative interest rates in and of themselves show an alarming pathology of the monetary system!)
I have argued that we must carefully distinguish between a fiat money regime with an undisturbed flow of gold to the futures market; and a fiat money regime where the flow of gold to the futures market has been blocked by an unprecedented surge in the demand for cash gold. In the first case confidence in fiat money is high; in the second, it is low and waning fast. In the first case paper gold is an effective substitute for physical gold in most applications; in the second, paper gold has been unmasked as a fraud, and discredited beyond repair. In the first case the economy works pretty well the same way as under a gold standard; in the second, all hell is turned loose as the exchange of goods and services is on the decline and autarky on the rise.
Tom says that "it is incorrect to claim that gold and silver could be in true backwardation without at least some inversion of the futures price curve where the nearer contracts are trading at a higher price than the further out contracts. Well, exactly that's what has happened at Tocom during the first two weeks of this month and is happening still. Tocom publishes its trading summary at the close of trading every day on the Internet: www.tocom.or.jp/souba/gold/index.html. I don't understand how Tom could miss it. Backwardation is jumping off the Internet page covering the standard kilobar contract, even as I write this, on December 19.
Tom is complaining that the spot price for gold is difficult to ascertain: "the spot price for gold is elusive... because they are third-party quotes that suffer from a variety of problems that can make them unreliable and imprecise." I disagree. I have asked my student, Mr. Sandeep Jaitly of Soditic, Ltd., London, U.K., who is tracking the gold basis for me, to explain. Here is what he had to say on December 15: "Tom Szabo comments that spot prices are difficult to obtain. Not true! They are not. You just have to be plugged into the right feeds. My spot price quotes include all the five price fixers at the LBMA, plus everybody else worthy of quoting... The spot gold price I use is the best or highest bid (and the best or lowest offer) from 300 banks world-wide [list attached, not reproduced here]. The data I use is directly from the exchange, and the prints I see for the carry available are super precise. I can get 90¢ per oz profit on the December contract versus my spot quotes that come from every bank on earth..." Sandeep goes on, dateline December 18: "Everybody of note is inferring that gold is in backwardation because of the zero interest. Let us explore that a little further. One can achieve 0.25% annualized by carrying gold for 190 days till June 26, 2009. 190 days in maturity is about equivalent to a 6-month T-bill with a current yield of 0.18%. The cost of carry for 190 days is 0.25 - 0.18 = 0.07%. If we compare this with the cost of carry for 11 days till December 27, 2008, and, again, for 69 days till February 27, 2009, [calculation included, not reproduced here], then we get that the cost of carrying gold is as follows (all percentages are annualized)
for 11 days:
1.005%
for 69 days:
0.9%
for 190 days:
0.07%
That is pathological without any need of further explanation! It costs more to carry gold for shorter periods of time than for a longer period - according to the futures market. That puts a hole in the zero interest-rate argument, and explodes the explanation that the extra-low contango or outright backwardation in gold is nothing more than "normal backwardation" of a non-monetary commodity!"
Tom says that he does not see things evolving in the same catastrophic manner as I do. For example, he believes that "there will always be willing buyers and sellers of gold in some quantity if the price is right." Buyers - si, sellers - no! That's just the whole point. The lack of credibility of irredeemable currency will be such that no one in his right mind will accept it in exchange for gold, the ultimate liquidator of debt. Previously, people were willing to trade their gold because they could always replenish their supply from Comex warehouses. That means, in other words, that the irredeemable dollar could still be used as a liquidator of debt (i.e., gold still has a competitor). But let them close the Comex gold warehouses. This is a quantum jump; it means that the irredeemable dollar can no longer be used to liquidate debt, e.g., debt incurred by those holding short positions in gold futures. It is essential not to belittle the import of this observation.
Tom thinks that I am an alarmist in believing that the permanent closing of the gold window at the Comex will mean a cessation in gold mining, loss of segregated metal deposits, and institutionalized theft of ETF holdings.
To answer this I have to go back to the collapse of the Western Roman Empire after the abdication of the emperor Romulus Augustus on September 4, 476 A.D. It was followed by the Dark Ages when the rule of law, personal security, trade of goods against payment in gold and silver could no longer be taken for granted. Gold and silver went into hiding, never to re-emerge during the lifetime of the original holders. It is plausible to see a causal relationship between the fading of the rule of law and the complete disappearance of gold and silver from trade. Virtually all observers say that the first event caused the second.
I may be in a minority of one to say that causation goes in the opposite direction. The disappearance of gold and silver coins as a means of exchange was a long-drawn-out, cumulative event. In the end, no one was willing to exchange gold and silver coins for the debased coinage of the empire. At that point the empire was bankrupt; it could no longer pay the troops that defended its boundaries against the barbarians threatening with invasion. This is not to say that the empire did not have other weaknesses. It did, plenty of it. But the overriding weakness was the monetary weakness. Centuries after centuries the Mint of the empire could attract less and less gold and silver. Because of this, the empire was forced to debase its coinage and the deterioration continued until the bitter end, when the gold flow to the Mint completely dried up.
Compare this with the Eastern Roman Empire that lasted until the fall of Constantinople to the Ottoman Turks in 1453 A.D., or almost one thousand years longer than the Western half, and during most of this time it could keep its Mint open to gold, producing the gold bezant, which also became the coin of the Muslim world. Is this difference between the two empires trying to tell us something about the importance, from the point of view of political and economic survival, of keeping the Mint open to gold?
The history of the monetary system of the United States shows an ominous parallel to that of the Western Roman Empire. As long as gold and silver was still used in trade at least to some extent, the Western Roman Empire was limping along. The modern equivalent of the disappearance of gold and silver is epitomized by the progressive vanishing of the gold basis.
There is simply no continuous transition from the paper dollar cum contango to the paper dollar cum gold backwardation, Tom's prayer notwithstanding. The transition will necessarily involve a sudden and fatal weakening of the legal system. Remember, the legal system works only as long as most citizens are law-abiding. It breaks down as soon as the majority of the citizens find that the law protects thieves in high places, but offers next to no protection for the honest hard-working middle class. I am not going to elaborate here on the proposition that irredeemable currency is a system that protects thieves in high places, but robs the little guy by plundering his savings.
Tom notes that it may be technically possible to delay the collapse of the fiat money system by "allowing" gold to appreciate in a hyperinflationary scenario. That is precisely the phase that will end with the entrenchment of backwardation in gold. Thereafter one can no longer talk about an "appreciating gold price", or any gold price for that matter, as the pricing mechanism will have self-destructed, at least as far as the price of gold is concerned. As Tom himself observes in the same article, local prices in India, China, and in the jungles of Papua are not relevant. Only gold prices in New York and London are, and the arbitrage between the two.
I have nowhere said that the end of the fiat money system will follow the closing of the gold window at the Comex in a matter of days. Sure, finance ministers and central bankers will try to "muddle through". It is not possible to predict how long the death throes of fiat money will continue. Tom may be right in suggesting that it will take many years, and claims of an imminent monetary and economic collapse will again turn out to be wrong.
But where Tom is certainly mistaken is his suggestion that all this agony will take place while the Last Contango in Washington is still going on. You can't have contango and backwardation at the same time. Backwardation is like a black hole, once it grabs a currency, it will swallow it, and gold quoted in that currency will never return to contango.
I think Tom's greatest mistake is to interpret the move into backwardation, or gold to enter the 'fever phase', as "gold's regaining fully-recognized monetary status". Unfortunately, just the opposite is the case. Whether officially recognized or not, gold's monetary status was never in doubt. Gold has always been the monetary commodity par excellence, due to the fact that it has constant marginal utility (or, if you will, the fact that the marginal utility of no other commodity declines at a rate slower than that of gold).
What we are witnessing is a transition that deprives gold of its monetary qualities. Gold in hiding cannot and will not act as money. More to the point, absent gold, nothing else can or will. The disappearance of money, that can be trusted, fatally undermines the legal system, the sanctity of contracts, habeas corpus, any and all provisions of law and order that we take for granted. Under these conditions nobody can operate a gold mine, nobody can run a gold refinery, nobody can guarantee segregated gold deposits, and nobody can prevent the institutionalized theft of ETF holdings. Welcome to the Madoff economy! (See References below: Paul Krugman's column in The New York Times). Jail one Madoff, two others will jump into his shoes.
As a consequence of the permanent backwardation in gold, we shall have a world gone Madoff.
References:
Tainted Research: Lysenkoism -- American Style, June 4, 2003
Monetary versus Non-monetary Commodities, April 25, 2006
The Last Contango in Washington, June 30, 2006
Red Alert: Gold Backwardation!!! December 4, 2008
Has the Curtain Fallen on the Last Contango in Washington? December 8, 2008
There Is No Fever Like Gold Fever, December 10, 2008
Backwardation That Shook the World, December 14, 2008
Backward Thinking on Backwardation, December 18, 2008
These and other articles of the author can be accessed at the website: www.professorfekete.com.
Backwardation Update - Still No in Gold, but Maybe in Silver! by Tom Szabo, www.silveraxis.com, December 12, 2008
The Madoff Economy by Paul Krugman, www.nytimes.com, December 19, 2008"
Time will tell..
22 December 2008
21 December 2008
Continued Monetary Disorder assured ~ Nolan
The Fed and other G7 monetary authorities have kept the system alive via massive hits to the balance sheets of their central banks as they absorb collateral.
"As I have highlighted in the past, Total Non-Financial Credit (NFC) expanded $578bn in 1994. By 1998, annual NFC growth exceeded $1.0 TN for the first time. After year 2000’s pullback, by 2002 NFC growth was up to a record $1.412 TN, followed by 2003’s $1.677 TN, 2004’s $1.991 TN, 2005’s $2.322 TN, 2006’s $2.422 TN, and 2007’s $2.523 TN. From my analytical perspective, it has always been a case of the inevitable predicament of an impaired (post-Bubble) Credit system not having the capacity to create sufficient new Credit to stem financial and economic implosion.
To this point, a barrage of unprecedented monetary and fiscal policy responses has restrained the forces of systemic collapse. On a quarterly basis the Federal Reserves Z.1 “Flow of Funds” report will help us better appreciate the profound effects the bursting of the Credit Bubble and resulting policymaking are exerting upon the underlying functioning of the Credit system and real economy.
Total Non-Financial Credit expanded at a surprising 7.2% rate during Q3, up sharply from Q2’s 3.1% pace to the most robust Credit growth since Q4 2007. By sector, Household Debt actually contracted at a 0.8% rate, down from Q2’s 0.6% growth and compared to 2007’s annual increase of 6.8%. Household Mortgage Debt contracted at an unprecedented 2.4% rate. Corporate borrowings slowed to a 3.7% pace from Q2’s 5.6%. This was a marked slowdown from the 13.2% surge in Corporate debt growth for all of 2007. State & Local Governments increased borrowings at a 2.9% pace. This was up from Q2’s 0.8%, but was much slower than 2007’s 9.3%. With private sector Credit growth struggling mightily, public finance really took up the slack. Federal Government debt expanded at a 39.2% pace, playing a decisive role in generating sufficient system-wide Credit expansion.
On a Seasonally-Adjusted and Annualized Rate (SAAR), Total Non-Financial Credit expanded $2.348 TN during the quarter – a quantity of new finance that would be in the analytical ballpark (down only marginally from $2007’s $2.5 TN growth) to restrain the forces of systemic collapse. But of this amount, Federal Government borrowings accounted for SAAR $2.079 TN, or almost 90% of Q3’s Credit expansion.
With even an unsustainable $2.0 TN annual pace of federal borrowings failing to reverse the downward economic spiral, the Federal Reserve this week was compelled to signal in no uncertain terms that policymakers “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”
In tandem with Treasury efforts, the Federal Reserve expanded “Fed Credit” SAAR $2.353 TN during Q3. This unprecedented ballooning accommodated deleveraging and helped offset a sharp decline in lending through the financial sector. “Fed Funds and Repos” contracted SAAR $969bn during the quarter, while “Open Market Paper” declined SAAR $580bn. Savings Institutions reduced assets at SAAR $1.281 TN, bank Credit at “Foreign Banking Offices in U.S.” contracted at SAAR $415bn, and lending at Finance Companies dropped SAAR $113bn. The Asset-Backed Securities (ABS) market shrank at SAAR $419bn during Q3. After Q2’s SAAR $913bn contraction, Security Brokers and Dealers expanded SAAR $12.6bn.
Yet the Fed was not all by its lonesome expanding system Credit. Total Bank Credit actually expanded at a robust SAAR $1.365 TN - at least somewhat receptive to the “buyer of last resort” roll for Open Market Paper (SAAR $413bn) and Mortgages (SAAR $688bn). On the Liability side, “Net Interbank Liabilities” expanded at an unprecedented SAAR $897bn, of which SAAR $515bn was borrowed from the Fed. Elsewhere, the GSEs expanded assets SAAR $85bn (about 2.5% annualized), and Agency MBS surged SAAR $508bn (11.2% annualized). Notably, Total Bank Assets were up $1.385 TN, or 12.7%, over the past four quarters.
The dollar was clobbered after Wednesday’s bold “employ all available tools” pronouncement from the Federal Reserve. The way I see it, the Fed Board sent a direct message to the markets that it is resolved to do whatever is necessary to ensure sufficient system Credit will be forthcoming – a quantity that for our purposes is in the, say, $2.0 TN annual range. The dilemma for the Fed (and markets) is that while such an enormous amount of Credit would do little more than steady our maladjusted “Bubble Economy,” it would perpetuate the massive flow of dollar finance out to the global financial system. In short, the Fed’s determination to reflate ensures continued Monetary Disorder. And I would further argue that Ongoing Monetary Disorder – and associated corruption to various market pricing mechanisms – will impede system adjustment and extend the lengths of U.S. and global downturns and restructuring periods.
During Q3, Rest of World (ROW) accumulated U.S. financial assets at SAAR $816bn. Over the past year, ROW holdings increased a staggering $1.224 TN to $16.772 TN. And it is this nearly $17 Trillion number that I use in my mind as a rough proxy for what I refer to as the “Global Pool of Speculative Finance” – the source of unwieldy financial flows that continue to wreak bloody havoc on global markets and market pricing mechanisms. Over just the past 12 quarters, ROW holdings ballooned more than 50%.
It is also worth nothing that ROW Treasury holdings expanded SAAR $819bn during the quarter and were up $674bn, or 30%, over the past year to $2.913 TN. Ominously, ROW reduced holdings of U.S. Credit Market Instruments SAAR $547bn during Q3, with Commercial Paper down SAAR $273bn and Bonds down SAAR $291bn. Holdings of Agency Securities declined SAAR $241bn, reducing the one-year increase to $246bn. ROW holdings of “Security Repurchase Agreements” contracted SAAR $368bn during Q3, with a one-year drop of $254bn (22%). We continue to witness the astounding market extremes fostered by ROW risk aversion (zero T-bill yields vs. hopeless illiquidity in many risk markets).
The currency markets are shaping up as a major issue for the coming year. The dollar rallied sharply during the fourth quarter, although much of this gain was recently wiped away in six tumultuous trading sessions. I view the dollar’s recovery in the context of a bear market rally. The dollar bear had become a crowded trade, and many were caught on the wrong side of various markets this year – certainly including the leveraged players in the currency markets.
There is a school of thought out there that the dollar bear has seen its lows. A consensus view seems to be taking shape that, at the minimum, the dollar wins (by default) the near-term battle against most currencies. Part of this analysis is the reasonable proposition that our currency benefits from the capacity of our policymakers to move earlier and more aggressively than their global counterparts. The euro-zone, in particular, is seen hamstrung by the constraints of its strange political and monetary structure.
My analytical framework takes a different approach. Especially after examining the most recent “Flow of Funds” report, I contemplate the dollar’s prospects from a global flow of funds perspective. At this point I will assume that fiscal and monetary policies will succeed in generating $2.0 TN or so of new Credit in 2009 (Trillion dollar growth each in federal borrowings, the Fed’s balance sheet, and commercial bank Credit would push the system much of the way there). In this scenario, the economy would likely still be mired in recession, short-term rates would remain near zero, and our Current Account Deficit would remain in the $600bn to $650bn range. Including other financial outflows, the Rest of World would be called upon to purchase another Trillion or so of our financial claims next year - and for years on end.
I will posit that the 2002-2007 dollar bear market did not manifest into a full-fledged currency crisis simply because of the massive purchases of U.S. securities by the Chinese (and to a lesser extent the OPEC, Russia, and India). At this point, I would not want to count on the Chinese (or others) accumulating another Trillion of our IOUs anytime soon. I don’t expect the return of their appetite for U.S. securitizations, corporate bonds, and “repos” anytime soon. Indeed, these IOUs have lost their acceptability as a means of global payment remuneration. It also seems reasonable that this year’s market dislocations have reduced the appeal of the strategy of holding U.S. securities while hedging underlying currency exposure in the derivatives market. And, at today’s pitiful yields, there is little ongoing incentive to continue hording Treasuries.
It is impossible to know how much remains of the Crowded Dollar Bear Unwind. But if this dollar buying hasn’t yet about run its course, when it eventually does global markets will again face the specter of massive and seemingly unending dollar liquidity flows. At the end of the day, I expect the dollar to suffer from its relative dismal position with respect to both financial flows and our economy’s deep structural maladjustment. Years of egregious Credit and spending excesses have left an economic structure uniquely dependent upon, on the one hand, huge ongoing public sector Credit injunctions and, on the other, huge unending imports. This is a terrible predicament for a currency."
nolan
"As I have highlighted in the past, Total Non-Financial Credit (NFC) expanded $578bn in 1994. By 1998, annual NFC growth exceeded $1.0 TN for the first time. After year 2000’s pullback, by 2002 NFC growth was up to a record $1.412 TN, followed by 2003’s $1.677 TN, 2004’s $1.991 TN, 2005’s $2.322 TN, 2006’s $2.422 TN, and 2007’s $2.523 TN. From my analytical perspective, it has always been a case of the inevitable predicament of an impaired (post-Bubble) Credit system not having the capacity to create sufficient new Credit to stem financial and economic implosion.
To this point, a barrage of unprecedented monetary and fiscal policy responses has restrained the forces of systemic collapse. On a quarterly basis the Federal Reserves Z.1 “Flow of Funds” report will help us better appreciate the profound effects the bursting of the Credit Bubble and resulting policymaking are exerting upon the underlying functioning of the Credit system and real economy.
Total Non-Financial Credit expanded at a surprising 7.2% rate during Q3, up sharply from Q2’s 3.1% pace to the most robust Credit growth since Q4 2007. By sector, Household Debt actually contracted at a 0.8% rate, down from Q2’s 0.6% growth and compared to 2007’s annual increase of 6.8%. Household Mortgage Debt contracted at an unprecedented 2.4% rate. Corporate borrowings slowed to a 3.7% pace from Q2’s 5.6%. This was a marked slowdown from the 13.2% surge in Corporate debt growth for all of 2007. State & Local Governments increased borrowings at a 2.9% pace. This was up from Q2’s 0.8%, but was much slower than 2007’s 9.3%. With private sector Credit growth struggling mightily, public finance really took up the slack. Federal Government debt expanded at a 39.2% pace, playing a decisive role in generating sufficient system-wide Credit expansion.
On a Seasonally-Adjusted and Annualized Rate (SAAR), Total Non-Financial Credit expanded $2.348 TN during the quarter – a quantity of new finance that would be in the analytical ballpark (down only marginally from $2007’s $2.5 TN growth) to restrain the forces of systemic collapse. But of this amount, Federal Government borrowings accounted for SAAR $2.079 TN, or almost 90% of Q3’s Credit expansion.
With even an unsustainable $2.0 TN annual pace of federal borrowings failing to reverse the downward economic spiral, the Federal Reserve this week was compelled to signal in no uncertain terms that policymakers “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”
In tandem with Treasury efforts, the Federal Reserve expanded “Fed Credit” SAAR $2.353 TN during Q3. This unprecedented ballooning accommodated deleveraging and helped offset a sharp decline in lending through the financial sector. “Fed Funds and Repos” contracted SAAR $969bn during the quarter, while “Open Market Paper” declined SAAR $580bn. Savings Institutions reduced assets at SAAR $1.281 TN, bank Credit at “Foreign Banking Offices in U.S.” contracted at SAAR $415bn, and lending at Finance Companies dropped SAAR $113bn. The Asset-Backed Securities (ABS) market shrank at SAAR $419bn during Q3. After Q2’s SAAR $913bn contraction, Security Brokers and Dealers expanded SAAR $12.6bn.
Yet the Fed was not all by its lonesome expanding system Credit. Total Bank Credit actually expanded at a robust SAAR $1.365 TN - at least somewhat receptive to the “buyer of last resort” roll for Open Market Paper (SAAR $413bn) and Mortgages (SAAR $688bn). On the Liability side, “Net Interbank Liabilities” expanded at an unprecedented SAAR $897bn, of which SAAR $515bn was borrowed from the Fed. Elsewhere, the GSEs expanded assets SAAR $85bn (about 2.5% annualized), and Agency MBS surged SAAR $508bn (11.2% annualized). Notably, Total Bank Assets were up $1.385 TN, or 12.7%, over the past four quarters.
The dollar was clobbered after Wednesday’s bold “employ all available tools” pronouncement from the Federal Reserve. The way I see it, the Fed Board sent a direct message to the markets that it is resolved to do whatever is necessary to ensure sufficient system Credit will be forthcoming – a quantity that for our purposes is in the, say, $2.0 TN annual range. The dilemma for the Fed (and markets) is that while such an enormous amount of Credit would do little more than steady our maladjusted “Bubble Economy,” it would perpetuate the massive flow of dollar finance out to the global financial system. In short, the Fed’s determination to reflate ensures continued Monetary Disorder. And I would further argue that Ongoing Monetary Disorder – and associated corruption to various market pricing mechanisms – will impede system adjustment and extend the lengths of U.S. and global downturns and restructuring periods.
During Q3, Rest of World (ROW) accumulated U.S. financial assets at SAAR $816bn. Over the past year, ROW holdings increased a staggering $1.224 TN to $16.772 TN. And it is this nearly $17 Trillion number that I use in my mind as a rough proxy for what I refer to as the “Global Pool of Speculative Finance” – the source of unwieldy financial flows that continue to wreak bloody havoc on global markets and market pricing mechanisms. Over just the past 12 quarters, ROW holdings ballooned more than 50%.
It is also worth nothing that ROW Treasury holdings expanded SAAR $819bn during the quarter and were up $674bn, or 30%, over the past year to $2.913 TN. Ominously, ROW reduced holdings of U.S. Credit Market Instruments SAAR $547bn during Q3, with Commercial Paper down SAAR $273bn and Bonds down SAAR $291bn. Holdings of Agency Securities declined SAAR $241bn, reducing the one-year increase to $246bn. ROW holdings of “Security Repurchase Agreements” contracted SAAR $368bn during Q3, with a one-year drop of $254bn (22%). We continue to witness the astounding market extremes fostered by ROW risk aversion (zero T-bill yields vs. hopeless illiquidity in many risk markets).
The currency markets are shaping up as a major issue for the coming year. The dollar rallied sharply during the fourth quarter, although much of this gain was recently wiped away in six tumultuous trading sessions. I view the dollar’s recovery in the context of a bear market rally. The dollar bear had become a crowded trade, and many were caught on the wrong side of various markets this year – certainly including the leveraged players in the currency markets.
There is a school of thought out there that the dollar bear has seen its lows. A consensus view seems to be taking shape that, at the minimum, the dollar wins (by default) the near-term battle against most currencies. Part of this analysis is the reasonable proposition that our currency benefits from the capacity of our policymakers to move earlier and more aggressively than their global counterparts. The euro-zone, in particular, is seen hamstrung by the constraints of its strange political and monetary structure.
My analytical framework takes a different approach. Especially after examining the most recent “Flow of Funds” report, I contemplate the dollar’s prospects from a global flow of funds perspective. At this point I will assume that fiscal and monetary policies will succeed in generating $2.0 TN or so of new Credit in 2009 (Trillion dollar growth each in federal borrowings, the Fed’s balance sheet, and commercial bank Credit would push the system much of the way there). In this scenario, the economy would likely still be mired in recession, short-term rates would remain near zero, and our Current Account Deficit would remain in the $600bn to $650bn range. Including other financial outflows, the Rest of World would be called upon to purchase another Trillion or so of our financial claims next year - and for years on end.
I will posit that the 2002-2007 dollar bear market did not manifest into a full-fledged currency crisis simply because of the massive purchases of U.S. securities by the Chinese (and to a lesser extent the OPEC, Russia, and India). At this point, I would not want to count on the Chinese (or others) accumulating another Trillion of our IOUs anytime soon. I don’t expect the return of their appetite for U.S. securitizations, corporate bonds, and “repos” anytime soon. Indeed, these IOUs have lost their acceptability as a means of global payment remuneration. It also seems reasonable that this year’s market dislocations have reduced the appeal of the strategy of holding U.S. securities while hedging underlying currency exposure in the derivatives market. And, at today’s pitiful yields, there is little ongoing incentive to continue hording Treasuries.
It is impossible to know how much remains of the Crowded Dollar Bear Unwind. But if this dollar buying hasn’t yet about run its course, when it eventually does global markets will again face the specter of massive and seemingly unending dollar liquidity flows. At the end of the day, I expect the dollar to suffer from its relative dismal position with respect to both financial flows and our economy’s deep structural maladjustment. Years of egregious Credit and spending excesses have left an economic structure uniquely dependent upon, on the one hand, huge ongoing public sector Credit injunctions and, on the other, huge unending imports. This is a terrible predicament for a currency."
nolan
India suffers massive internet disruption after undersea cables break
More cables pulled by dragging anchors....when it comes to infastructure breakdowns it doesn't rain, it pours, apparently.
"(Monica M. Davey)
... or not, as it happens. India and Egypt have nothing to celebrate after huge internet disruption
Murad Ahmed, Technology Reporter
Tech Central: er, something's happening
Millions of people across the Middle East and Asia have lost access to the internet after two undersea cables in the Mediterranean suffered severe damage.
Huge numbers in Egypt and India were left struggling to get online as a result of the outage, when the major internet pipeline between Egypt and Italy was cut.
Internet Service Providers (ISPs) throughout the region, including those in United Arab Emirates, Kuwait and Saudi Arabia, also reported problems. International telephone calls, which have also been affected, are being rerouted to work around the problem.
Industry experts told The Times that two sub-sea cables went down just off Alexandra, causing the mass disruption. It happens to a single cable typically once a year, and companies have developed the fail-safe of redirecting traffic to a second cable should this occur.
“It is incredibly rare to experience a dual-break where both cables are down simultaneously,” said a spokesperson for Interoute, the internet networks company.
The Egyptian ministry said it will take “several days” for cables to be repaired and is trying to reroute Egypt’s internet connections.
Indian ISPs said their problems were due to the cable damage off Egypt. Speaking to reporters, Rajesh Chharia, president of the Internet Service Providers’ Association of India, said: "Information technology companies, software companies and call centres that provide online services to the UK or the US east coast are the worst affected."
Rafaat Hindy, from the Egyptian ministry, said: "Despite this being an international cable affecting many Gulf and Arab countries, we are closest to it and so we have a lot of responsibility.
"We are working as fast as we can."
It is thought that up to 70 per cent of web services in Egypt, and 60 per cent in India, were disrupted yesterday. There were reports that phone and internet difficults had spread to Yemen, Sudan, Bangladesh and Sri Lanka.
The shut down will take several days to fix, and could have a major impact on the region and across the world. It is likely to hit businesses who will struggle to communicate in the affected countires. Call-centres who work for British companies are likely to be offline or hard to contact in the coming days. Others warned that bank and stock market trading could be affected.
The digital blackout highlighted the vulnerability of global communications. Hundreds of millions of people access the web, but the vast majority of international traffic runs through a a small amount of cables submerged below the sea.
Industry insiders warned that a domino effect was occuring today, causing the disruption to spread across the globe. As companies’ private internet services went down, workers were forced to use the public internet and mobile phones to communicate. This has resulted in a heavy strain on phone and internet networks, meaning calls could go down and cause the internet to become slower or blackout completely."
link
"(Monica M. Davey)
... or not, as it happens. India and Egypt have nothing to celebrate after huge internet disruption
Murad Ahmed, Technology Reporter
Tech Central: er, something's happening
Millions of people across the Middle East and Asia have lost access to the internet after two undersea cables in the Mediterranean suffered severe damage.
Huge numbers in Egypt and India were left struggling to get online as a result of the outage, when the major internet pipeline between Egypt and Italy was cut.
Internet Service Providers (ISPs) throughout the region, including those in United Arab Emirates, Kuwait and Saudi Arabia, also reported problems. International telephone calls, which have also been affected, are being rerouted to work around the problem.
Industry experts told The Times that two sub-sea cables went down just off Alexandra, causing the mass disruption. It happens to a single cable typically once a year, and companies have developed the fail-safe of redirecting traffic to a second cable should this occur.
“It is incredibly rare to experience a dual-break where both cables are down simultaneously,” said a spokesperson for Interoute, the internet networks company.
The Egyptian ministry said it will take “several days” for cables to be repaired and is trying to reroute Egypt’s internet connections.
Indian ISPs said their problems were due to the cable damage off Egypt. Speaking to reporters, Rajesh Chharia, president of the Internet Service Providers’ Association of India, said: "Information technology companies, software companies and call centres that provide online services to the UK or the US east coast are the worst affected."
Rafaat Hindy, from the Egyptian ministry, said: "Despite this being an international cable affecting many Gulf and Arab countries, we are closest to it and so we have a lot of responsibility.
"We are working as fast as we can."
It is thought that up to 70 per cent of web services in Egypt, and 60 per cent in India, were disrupted yesterday. There were reports that phone and internet difficults had spread to Yemen, Sudan, Bangladesh and Sri Lanka.
The shut down will take several days to fix, and could have a major impact on the region and across the world. It is likely to hit businesses who will struggle to communicate in the affected countires. Call-centres who work for British companies are likely to be offline or hard to contact in the coming days. Others warned that bank and stock market trading could be affected.
The digital blackout highlighted the vulnerability of global communications. Hundreds of millions of people access the web, but the vast majority of international traffic runs through a a small amount of cables submerged below the sea.
Industry insiders warned that a domino effect was occuring today, causing the disruption to spread across the globe. As companies’ private internet services went down, workers were forced to use the public internet and mobile phones to communicate. This has resulted in a heavy strain on phone and internet networks, meaning calls could go down and cause the internet to become slower or blackout completely."
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20 December 2008
So much given without public policy purpose, by so many, to so few.
the Prime Minister is talking the talk but not walking the walk, he doesn't really beleive in the capacity of green jobs and small scale energy systems and efficiency measures and our future role in renewable technology. The treasury models are static, after all. The policy seems to be to provide massive public assistance for the big political players, first and formost. Cars, Coal and Construction are getting free kicks at the expense of the renewable sector....
Even the master of deregulation Garnaut the climate change economist... is pissed.
"THE national climate change adviser, Ross Garnaut, has damned the Rudd Government's carbon policy as a threat to the environment, the national budget and global prosperity.
Professor Garnaut has called on the Government to make urgent changes to the policy that the Prime Minister, Kevin Rudd, announced this week.
Writing in today's Herald, Professor Garnaut urges the Government to keep open the option of a more ambitious cut to carbon emissions to keep alive the prospect of averting dangerous climate change.
While Mr Rudd has limited Australia to a maximum cut to emissions of 15 per cent by 2020, Professor Garnaut writes "the Government should keep the 25 per cent option on the table".
He argues: "Australia cannot play a strongly positive role in encouraging the global community towards the best possible outcomes if it has ruled out in advance its own participation in strong outcomes."
The Government could restore this option without unpicking its overall package, he says.
But Professor Garnaut reserves his toughest criticisms for the Government's plan to compensate the biggest polluters.
"There is no public policy justification for $3.9 billion in unconditional payments to [electricity] generators in relation to hypothetical future 'loss of asset value'.
"Never in the history of Australian public finance has so much been given without public policy purpose, by so many, to so few."
The cost to the taxpayer was likely to blow out further over five years, posing "a large risk to public finances", he writes.
Professor Garnaut is even more alarmed at the dangers posed by the Government's decision to issue free carbon permits to industries exposed to international competition, such as steel, chemicals and paper and pulp.
He writes that this is an act of protectionism that threatened to provoke other countries to follow suit.
He likens the potential to the notorious US protectionism that deepened the Great Depression of the 1930s.
Professor Garnaut was an adviser to the former prime minister Bob Hawke and a key voice in arguing an end to protectionism in the 1980s.
Mr Rudd and the premiers commissioned him to write a report on options for responding to climate change - the Garnaut Review. The final version was delivered at the end of September.
Professor Garnaut says the Government had acknowledged there was a principle involved in compensating trade-exposed companies - levelling the playing field to allow them to compete against firms from countries which had no carbon restraint.
But the Government had failed to apply the principle: "The consequences of not having a principled basis for the issue of payments are profound."
The Government, in a green paper in July, initially proposed giving these industries free carbon permits equal to a maximum of 20 per cent of the value of all permits issued.
He endorses these as "reasonable upper limits to principled initial claims".
"By contrast, the white paper's approach would see the proportion of permit value given free to trade-exposed industries rising to 45 per cent on conservative assumptions."
Under some conditions, the share could rise as high as 75 per cent, he calculates.
Fixing this was "an urgent matter for the restoration of global prosperity".
link
Even the master of deregulation Garnaut the climate change economist... is pissed.
"THE national climate change adviser, Ross Garnaut, has damned the Rudd Government's carbon policy as a threat to the environment, the national budget and global prosperity.
Professor Garnaut has called on the Government to make urgent changes to the policy that the Prime Minister, Kevin Rudd, announced this week.
Writing in today's Herald, Professor Garnaut urges the Government to keep open the option of a more ambitious cut to carbon emissions to keep alive the prospect of averting dangerous climate change.
While Mr Rudd has limited Australia to a maximum cut to emissions of 15 per cent by 2020, Professor Garnaut writes "the Government should keep the 25 per cent option on the table".
He argues: "Australia cannot play a strongly positive role in encouraging the global community towards the best possible outcomes if it has ruled out in advance its own participation in strong outcomes."
The Government could restore this option without unpicking its overall package, he says.
But Professor Garnaut reserves his toughest criticisms for the Government's plan to compensate the biggest polluters.
"There is no public policy justification for $3.9 billion in unconditional payments to [electricity] generators in relation to hypothetical future 'loss of asset value'.
"Never in the history of Australian public finance has so much been given without public policy purpose, by so many, to so few."
The cost to the taxpayer was likely to blow out further over five years, posing "a large risk to public finances", he writes.
Professor Garnaut is even more alarmed at the dangers posed by the Government's decision to issue free carbon permits to industries exposed to international competition, such as steel, chemicals and paper and pulp.
He writes that this is an act of protectionism that threatened to provoke other countries to follow suit.
He likens the potential to the notorious US protectionism that deepened the Great Depression of the 1930s.
Professor Garnaut was an adviser to the former prime minister Bob Hawke and a key voice in arguing an end to protectionism in the 1980s.
Mr Rudd and the premiers commissioned him to write a report on options for responding to climate change - the Garnaut Review. The final version was delivered at the end of September.
Professor Garnaut says the Government had acknowledged there was a principle involved in compensating trade-exposed companies - levelling the playing field to allow them to compete against firms from countries which had no carbon restraint.
But the Government had failed to apply the principle: "The consequences of not having a principled basis for the issue of payments are profound."
The Government, in a green paper in July, initially proposed giving these industries free carbon permits equal to a maximum of 20 per cent of the value of all permits issued.
He endorses these as "reasonable upper limits to principled initial claims".
"By contrast, the white paper's approach would see the proportion of permit value given free to trade-exposed industries rising to 45 per cent on conservative assumptions."
Under some conditions, the share could rise as high as 75 per cent, he calculates.
Fixing this was "an urgent matter for the restoration of global prosperity".
link
The Charm of Zapata George
He knows that peak oil is the real deal and that OPEC are covering their tracks with production cuts.
We are headed for a economic crash, yes, but commodities, due to world growth, fiscal policy lead investment demand in infrastructure and most significantly embodied energy content and implied future costs of production, are going nowhere but up when deleveraging is complete and a massive move down in the US dollar kicks off.
Zapata George keeps it simple. He's the man on oil.
"
A recent release by the International Energy Agency (IEA) – they’re year end report – was quite interesting. What was significant was their reversal of form when it comes to Peak Oil. After repeatedly trying to convince us that all is well in the land of cheap oil, they’ve now jumped from a horse riding full tilt in one direction to the back of another horse running in the complete opposite direction! (Do you think someone over there has been listening to me?...ha!) In our full radio report this weekend, we will discuss this report more in full, but I wanted to share their opening remarks with you now:
“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable - environmentally, economically, and socially. But that can - and must - be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.”
Isn’t this what I’ve been saying all along? Guess I was right…maybe?
It’s important, I think, to understand a little about the output of the world’s oilfields. Only 1% of the top 5 oilfields in the world are of the “super-giant size” and the majority of all of these fields has peaked and turned to the downside.
The important thing to know about an oilfield or a country that exports oil is when the peak oil production occurs. The discovery and number of barrels available for eventual production, which they calculate up front – a calculated guess, really – has no bearing on the number of barrels actually produced.
There are also a number of reasons why some fields last longer than others. Some fields are managed well and nursed along to a pretty consistent production output. However, some countries hit their resources hard, because they want the revenue. Take a country like Nigeria…you get a new ruler who three days ago was just an ambitious soldier, and the first thing he wants to do is stuff his bank account in Switzerland. He cranks up production to drain off as much as possible before the next coup hits and a new ruler kicks him out. Then the new guy does the same thing. No thought for sustainability…just greed.
However, the fields owned by the big companies, Exxon, BP, Shell, Conoco, Chevron, etc. are in general better managed and we can learn much from them. The decline of those kinds of large fields is approximately 4.7 percent per year. With a daily production rate of approximately 85 or 86 million, 4.7 percent of that comes out to about 4 million barrels a day per annum. So once you’ve peaked, the decline will be about that rate. Well, there’s four quarters so it is my contention that we are making a decline rate of 1 million barrels per day per quarter. I also believe that the recent announcement that OPEC was cutting production about 4.2 million barrels a day confirms my decline suspicions. What’s’ happening? They’re saying “Oh, the price is too low. We’re going to cut production.” What they’re really doing is that they’re covering their tracks. They know they’re going to see a decline in output that they can do nothing about so they’re going to claim that it is voluntary, rather than being imposed on them by Mother Nature. This is a complete cover story that has nothing to do with reality.
Okay, so the IEA says that the energy system of the world is at a crossroads. They have never, ever used that kind of language before. They’re right. We are truly at the crossroads and in my opinion, if we had not had the economic slowdown and decline in consumption, we would already be feeling the effects of Peak Oil. We will surely feel them in the coming two quarters. The question is, what can we do about it? What are our alternatives? The lead time on effectively developing biofuels is measured in decades, not years, so we’re already behind the curve on that resource. What are our other options? Please turn in to our Radio Show on Free Radio Zapata George this weekend as we discuss this report and what it means for us over the next few years. I thank you for your time, and hope you’ll join us."
link
We are headed for a economic crash, yes, but commodities, due to world growth, fiscal policy lead investment demand in infrastructure and most significantly embodied energy content and implied future costs of production, are going nowhere but up when deleveraging is complete and a massive move down in the US dollar kicks off.
Zapata George keeps it simple. He's the man on oil.
"
A recent release by the International Energy Agency (IEA) – they’re year end report – was quite interesting. What was significant was their reversal of form when it comes to Peak Oil. After repeatedly trying to convince us that all is well in the land of cheap oil, they’ve now jumped from a horse riding full tilt in one direction to the back of another horse running in the complete opposite direction! (Do you think someone over there has been listening to me?...ha!) In our full radio report this weekend, we will discuss this report more in full, but I wanted to share their opening remarks with you now:
“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable - environmentally, economically, and socially. But that can - and must - be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.”
Isn’t this what I’ve been saying all along? Guess I was right…maybe?
It’s important, I think, to understand a little about the output of the world’s oilfields. Only 1% of the top 5 oilfields in the world are of the “super-giant size” and the majority of all of these fields has peaked and turned to the downside.
The important thing to know about an oilfield or a country that exports oil is when the peak oil production occurs. The discovery and number of barrels available for eventual production, which they calculate up front – a calculated guess, really – has no bearing on the number of barrels actually produced.
There are also a number of reasons why some fields last longer than others. Some fields are managed well and nursed along to a pretty consistent production output. However, some countries hit their resources hard, because they want the revenue. Take a country like Nigeria…you get a new ruler who three days ago was just an ambitious soldier, and the first thing he wants to do is stuff his bank account in Switzerland. He cranks up production to drain off as much as possible before the next coup hits and a new ruler kicks him out. Then the new guy does the same thing. No thought for sustainability…just greed.
However, the fields owned by the big companies, Exxon, BP, Shell, Conoco, Chevron, etc. are in general better managed and we can learn much from them. The decline of those kinds of large fields is approximately 4.7 percent per year. With a daily production rate of approximately 85 or 86 million, 4.7 percent of that comes out to about 4 million barrels a day per annum. So once you’ve peaked, the decline will be about that rate. Well, there’s four quarters so it is my contention that we are making a decline rate of 1 million barrels per day per quarter. I also believe that the recent announcement that OPEC was cutting production about 4.2 million barrels a day confirms my decline suspicions. What’s’ happening? They’re saying “Oh, the price is too low. We’re going to cut production.” What they’re really doing is that they’re covering their tracks. They know they’re going to see a decline in output that they can do nothing about so they’re going to claim that it is voluntary, rather than being imposed on them by Mother Nature. This is a complete cover story that has nothing to do with reality.
Okay, so the IEA says that the energy system of the world is at a crossroads. They have never, ever used that kind of language before. They’re right. We are truly at the crossroads and in my opinion, if we had not had the economic slowdown and decline in consumption, we would already be feeling the effects of Peak Oil. We will surely feel them in the coming two quarters. The question is, what can we do about it? What are our alternatives? The lead time on effectively developing biofuels is measured in decades, not years, so we’re already behind the curve on that resource. What are our other options? Please turn in to our Radio Show on Free Radio Zapata George this weekend as we discuss this report and what it means for us over the next few years. I thank you for your time, and hope you’ll join us."
link
Get Moving, Avoid Pain and Amputation: Exercise Can Beat Peripheral Arterial Disease
After a lifetime of smoking and lots of motorcycle accidents and a not perfect radius ulna fracture repair which decreased my arm rotation, I had developed a lot of bad habits posture wise and tended to favour one side, two years ago I got a sore that wouldn't heal on my left foot and felt that as far my body was concerned, the joy of life was all but over.
I took to taking hot baths to raise circulation in my feet, took up swimming and bicycle riding, cut the smoking to between five and ten a day on the way to zero and two years later feel great and look much better.
Now that was like making 500K in the markets and took exactly the same skills, patient application and attention, discipline, self belief and treating myself with kindness.
Best thing I ever did....
"NewsTarget.com 19/12/2008 08:00
(NaturalNews) According to the American Heart Association (AHA), about 8 million Americans have the most common form of peripheral vascular disease (PVD) known as peripheral arterial disease, or PAD. The risk of PAD increases as we get older and, by age 65, some 12 to 20 percent of the population has the condition. PAD is caused by deposits of fatty plaques in arteries that interrupts blood flow to the legs. You may have no symptoms of PAD or you can experience sometimes excruciating leg pain that doesn't go away when you finish exercising , the pain, called "intermittent claudication", is caused when plaque prevents muscles from getting an adequate blood supply during exercise. Other symptoms of PAD can include leg or foot wounds that heal slowly or not at all, and a marked decrease in the temperature of one leg compared to the rest of your body.
Finding out if you have PAD is crucial because, undiagnosed and untreated, the condition can lead to gangrene and even amputation. What's more, AHA statistics reveal people that with PAD have a four to five times higher risk of heart attack or stroke. But there's good news: a study just published in The Journal of Physiology concludes regular, moderate exercise can go a long way to eliminate PAD symptoms by some unexpected mechanisms. The new research suggests that exercise triggers the body to naturally solve the problem by expanding and multiplying the surrounding smaller blood vessels in a blocked area and also making blood vessels healthier.
In animal experiments, University of Missouri researchers studied rats with blocked femoral arteries. When the rodents were made to exercise regularly, the scientists found that blood flow increased and was effective in restoring normal muscle function. This wasn't unexpected because, when a major artery in the leg becomes blocked, the body often creates another route for the blood to pass through by expanding and multiplying blood vessels in the area. This is known as collateral blood flow. But the scientists found that exercise appeared to spur the collateral vessels to become larger and less likely to contract , and vascular constriction is known to be a problem with PAD. More unexpected results: the blood vessels downstream from the blockage also went through healthy changes and became more efficient.
Dr. Ronald Terjung, of the University of Missouri's Dalton Cardiovascular Research Center, and other authors of the study stated in a media release they believe a regular exercise program would delay the onset of pain and increase mobility for people suffering with PAD. "Our findings raise the potential that new collateral vessels, that can develop in patients with PAD who are physically active, will function effectively to help minimize the consequences of the original vascular obstruction," Dr. Terjung said in the press statement.
The AHA points out that smoking, diabetes and high cholesterol increase your risk for the condition. Bottom line: exercise, smoking cessation, weight control and a healthy diet are all lifestyle factors that can help beat PAD, naturally.
For more information, see the links below. The American Heart Association: http://www.americanheart.org/presenter.jhtml?identifier=3020242
Media statement: http://www.eurekalert.org/pub_releases/2008-12/w-sof121208.php
About the author
Sherry Baker is a widely published writer whose work has appeared in Newsweek, Health, the Atlanta Journal and Constitution, Yoga Journal, Optometry, Atlanta, Arthritis Today, Natural Healing Newsletter, OMNI, UCLA's "Healthy Years" newsletter, Mount Sinai School of Medicine's "Focus on Health Aging" newsletter, the Cleveland Clinic's "Men's Health Advisor" newsletter and many others."
I took to taking hot baths to raise circulation in my feet, took up swimming and bicycle riding, cut the smoking to between five and ten a day on the way to zero and two years later feel great and look much better.
Now that was like making 500K in the markets and took exactly the same skills, patient application and attention, discipline, self belief and treating myself with kindness.
Best thing I ever did....
"NewsTarget.com 19/12/2008 08:00
(NaturalNews) According to the American Heart Association (AHA), about 8 million Americans have the most common form of peripheral vascular disease (PVD) known as peripheral arterial disease, or PAD. The risk of PAD increases as we get older and, by age 65, some 12 to 20 percent of the population has the condition. PAD is caused by deposits of fatty plaques in arteries that interrupts blood flow to the legs. You may have no symptoms of PAD or you can experience sometimes excruciating leg pain that doesn't go away when you finish exercising , the pain, called "intermittent claudication", is caused when plaque prevents muscles from getting an adequate blood supply during exercise. Other symptoms of PAD can include leg or foot wounds that heal slowly or not at all, and a marked decrease in the temperature of one leg compared to the rest of your body.
Finding out if you have PAD is crucial because, undiagnosed and untreated, the condition can lead to gangrene and even amputation. What's more, AHA statistics reveal people that with PAD have a four to five times higher risk of heart attack or stroke. But there's good news: a study just published in The Journal of Physiology concludes regular, moderate exercise can go a long way to eliminate PAD symptoms by some unexpected mechanisms. The new research suggests that exercise triggers the body to naturally solve the problem by expanding and multiplying the surrounding smaller blood vessels in a blocked area and also making blood vessels healthier.
In animal experiments, University of Missouri researchers studied rats with blocked femoral arteries. When the rodents were made to exercise regularly, the scientists found that blood flow increased and was effective in restoring normal muscle function. This wasn't unexpected because, when a major artery in the leg becomes blocked, the body often creates another route for the blood to pass through by expanding and multiplying blood vessels in the area. This is known as collateral blood flow. But the scientists found that exercise appeared to spur the collateral vessels to become larger and less likely to contract , and vascular constriction is known to be a problem with PAD. More unexpected results: the blood vessels downstream from the blockage also went through healthy changes and became more efficient.
Dr. Ronald Terjung, of the University of Missouri's Dalton Cardiovascular Research Center, and other authors of the study stated in a media release they believe a regular exercise program would delay the onset of pain and increase mobility for people suffering with PAD. "Our findings raise the potential that new collateral vessels, that can develop in patients with PAD who are physically active, will function effectively to help minimize the consequences of the original vascular obstruction," Dr. Terjung said in the press statement.
The AHA points out that smoking, diabetes and high cholesterol increase your risk for the condition. Bottom line: exercise, smoking cessation, weight control and a healthy diet are all lifestyle factors that can help beat PAD, naturally.
For more information, see the links below. The American Heart Association: http://www.americanheart.org/presenter.jhtml?identifier=3020242
Media statement: http://www.eurekalert.org/pub_releases/2008-12/w-sof121208.php
About the author
Sherry Baker is a widely published writer whose work has appeared in Newsweek, Health, the Atlanta Journal and Constitution, Yoga Journal, Optometry, Atlanta, Arthritis Today, Natural Healing Newsletter, OMNI, UCLA's "Healthy Years" newsletter, Mount Sinai School of Medicine's "Focus on Health Aging" newsletter, the Cleveland Clinic's "Men's Health Advisor" newsletter and many others."
19 December 2008
Pay them with their own trash
What a great idea, pay 100% of bonuses and 60% of salaries by distributing the banks illliquid assets. That fixes the moral equation, anyway.
"ZURICH -- Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.
The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can't sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year's pay, according to a memo made available by a spokesman.
"Employees receiving partner-asset facility units will participate in the potential gains from these assets over time if they are liquidated at prices above current market values and also bear risk of loss depending on the liquidation proceeds," the memo said.
The memo said that, with the introduction of PAF units, "a material block of legacy-risk positions will be removed from Credit Suisse's risk-weighted assets and this will also lead to a reduction in capital usage. This new compensation structure, therefore, helps to advance our strategy of reducing risk."
Employees will hold an equity stake of roughly 13% in the fund, which is composed of 60% of buyout loans and 40% CMBS, a person familiar with the situation.
The plan, the first of its kind among major Wall Street houses, puts focus squarely back to Credit Suisse's investment bankers, for whom the new system could potentially become lucrative. However, some employees were said to be enraged at the idea, saying they could potentially incur losses if tax is levied on the book value of the assets."
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"ZURICH -- Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.
The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can't sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year's pay, according to a memo made available by a spokesman.
"Employees receiving partner-asset facility units will participate in the potential gains from these assets over time if they are liquidated at prices above current market values and also bear risk of loss depending on the liquidation proceeds," the memo said.
The memo said that, with the introduction of PAF units, "a material block of legacy-risk positions will be removed from Credit Suisse's risk-weighted assets and this will also lead to a reduction in capital usage. This new compensation structure, therefore, helps to advance our strategy of reducing risk."
Employees will hold an equity stake of roughly 13% in the fund, which is composed of 60% of buyout loans and 40% CMBS, a person familiar with the situation.
The plan, the first of its kind among major Wall Street houses, puts focus squarely back to Credit Suisse's investment bankers, for whom the new system could potentially become lucrative. However, some employees were said to be enraged at the idea, saying they could potentially incur losses if tax is levied on the book value of the assets."
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Beware - "Quantitative Easing" is Hallucinogenic
The Bernanke Fed can’t wait to experiment with QE, by printing unlimited amounts of US-dollars out of thin air, and monetizing the US Treasury’s debt. On Dec 16th, the Fed shocked the market by adopting a target for the fed funds rate, within a range of zero to 0.25%, an all-time low, and said it would employ “all available tools” to dispel a year-long recession. “The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” remarked William Poole, former president of the St. Louis Fed.
However, “Quantitative Easing” is a very dangerous hallucinogenic drug, and quoting Santayana again, “Those who do not learn from history are doomed to repeat it.” Fed chief Ben “Bubbles” Bernanke, who strongly endorsed “Easy” Al Greenspan’s ultra-low interest rate policy earlier this decade, which was designed to inflate the commodity, housing, and sub-prime debt bubbles, is now fueling a massive Treasury market bubble, and legions of speculators are taking collective leave of their senses and succumbing to delusions of zero-percent 10-year yields.
If left unchecked, “Bubble-mania” engenders a massive, largely uncorrected rise in valuations that discounts not just the present and near-future, but also a distorted view of the far-horizon. The Fed’s bold shift to QE seems designed to head-off the possibility of a deflationary depression. However, “if inflation targeting creates the presumption that the central bank can look at consumer price inflation alone, then it might have the unintended effect of creating a bubble,” warned BoJ chief Shirakawa.
Japanese bond traders still carry the scars from the bursting of the JGB bubble in 2003, and so, far haven’t gotten caught-up in “irrational exuberance” of the US Treasury bond market. “Wisdom comes by disillusionment,” said Santayana. JGB traders are anxiously waiting to see how the BoJ’s reacts to the Fed’s dangerous experiment with QE, and whether it will boost its purchases of long-term JGB’s from the current 1.2-trillion yen ($13.2-billion) per month.
The BoJ has put a floor under the 10-year JGB yield at 1.25% for the past five-years, but BoJ chief Shirakawa is under heavy pressure from Tokyo warlords, to resume full-scale QE.“We acknowledge the Bank of Japan’s independence. But as stipulated under law, the BoJ and the government keep in close contact with each other in guiding economic policy,” said Finance chief Shoichi Nakagawa on Dec 16th. “I hope the BoJ reaches an appropriate conclusion, bearing in mind Japan’s economic and liquidity conditions,” he warned.
The yield on the US Treasury’s 2-year note has collapsed to 20-basis points above Japanese yields, the smallest gap since 1992, which in turn, has crushed the US$ versus the Japanese yen, to a 13-year low of 88-yen. Japan is heavily dependent on exports, particularly to the US and Europe, and a major factor sinking Japan’s Nikkei-225 index is the strength of the yen against all major currencies including the Euro and US-dollar. Falling exports have already led to a contraction in the Japanese economy in the second a third quarter, and the worst is yet to come.
On Dec 16th, BoJ chief Shirakawa said he is “examining quantitative easing,” and is increasingly concerned about a deepening recession. “In addition to falling exports due to a slowdown in overseas economies, corporate profits, household finances and job conditions are worsening, and it is taking a toll on domestic private demand. Output, employment and consumption data were all severe,” Shirakawa told parliament, sending JGB futures higher.
As the Fed floods the global money markets with another big tidal wave of US-dollars in the months ahead, the BoJ might return to QE, to cushion the slide of the dollar. The BoJ might buy commercial paper, increase its monthly purchases of Japanese government bonds, or expand the types of collateral it accepts when making loans, the Nikkei business newspaper reported on Dec 15th.
However, “Quantitative Easing” is a very dangerous hallucinogenic drug, and quoting Santayana again, “Those who do not learn from history are doomed to repeat it.” Fed chief Ben “Bubbles” Bernanke, who strongly endorsed “Easy” Al Greenspan’s ultra-low interest rate policy earlier this decade, which was designed to inflate the commodity, housing, and sub-prime debt bubbles, is now fueling a massive Treasury market bubble, and legions of speculators are taking collective leave of their senses and succumbing to delusions of zero-percent 10-year yields.
If left unchecked, “Bubble-mania” engenders a massive, largely uncorrected rise in valuations that discounts not just the present and near-future, but also a distorted view of the far-horizon. The Fed’s bold shift to QE seems designed to head-off the possibility of a deflationary depression. However, “if inflation targeting creates the presumption that the central bank can look at consumer price inflation alone, then it might have the unintended effect of creating a bubble,” warned BoJ chief Shirakawa.
Japanese bond traders still carry the scars from the bursting of the JGB bubble in 2003, and so, far haven’t gotten caught-up in “irrational exuberance” of the US Treasury bond market. “Wisdom comes by disillusionment,” said Santayana. JGB traders are anxiously waiting to see how the BoJ’s reacts to the Fed’s dangerous experiment with QE, and whether it will boost its purchases of long-term JGB’s from the current 1.2-trillion yen ($13.2-billion) per month.
The BoJ has put a floor under the 10-year JGB yield at 1.25% for the past five-years, but BoJ chief Shirakawa is under heavy pressure from Tokyo warlords, to resume full-scale QE.“We acknowledge the Bank of Japan’s independence. But as stipulated under law, the BoJ and the government keep in close contact with each other in guiding economic policy,” said Finance chief Shoichi Nakagawa on Dec 16th. “I hope the BoJ reaches an appropriate conclusion, bearing in mind Japan’s economic and liquidity conditions,” he warned.
The yield on the US Treasury’s 2-year note has collapsed to 20-basis points above Japanese yields, the smallest gap since 1992, which in turn, has crushed the US$ versus the Japanese yen, to a 13-year low of 88-yen. Japan is heavily dependent on exports, particularly to the US and Europe, and a major factor sinking Japan’s Nikkei-225 index is the strength of the yen against all major currencies including the Euro and US-dollar. Falling exports have already led to a contraction in the Japanese economy in the second a third quarter, and the worst is yet to come.
On Dec 16th, BoJ chief Shirakawa said he is “examining quantitative easing,” and is increasingly concerned about a deepening recession. “In addition to falling exports due to a slowdown in overseas economies, corporate profits, household finances and job conditions are worsening, and it is taking a toll on domestic private demand. Output, employment and consumption data were all severe,” Shirakawa told parliament, sending JGB futures higher.
As the Fed floods the global money markets with another big tidal wave of US-dollars in the months ahead, the BoJ might return to QE, to cushion the slide of the dollar. The BoJ might buy commercial paper, increase its monthly purchases of Japanese government bonds, or expand the types of collateral it accepts when making loans, the Nikkei business newspaper reported on Dec 15th.
Like an 'addict returning to the drug': Archbishop slams Brown's plan to spend his way out of recession
way out of recession
By Daily Mail Reporter
Last updated at 10:48 AM on 18th December 2008
The Archbishop of Canterbury has hit out at Gordon Brown's plans to combat recession by boosting spending and has likened them to an 'addict returning to the drug'.
Rowan Williams also said the credit crunch is a welcome 'reality check' for a society that has become driven by unsustainable greed.
The head of the Church of England's outspoken comments came as he delivered a scathing assessment of moral failings in Britain's economy.
In an interviewed on BBC Radio 4's Today programme, he insisted the country had been 'going in the wrong direction' for decades by relying on financial speculation to generate wealth quickly rather than 'making things'.
Dr Rowan Williams said the credit crunch was a welcome reality check for a society driven by unsustainable greed
In an interviewed on BBC Radio 4's Today programme, he insisted the country had been 'going in the wrong direction' for decades by relying on financial speculation to generate wealth quickly rather than 'making things'.
He said the UK had backed itself 'into a corner', and must now rediscover 'patience' and re-think the way it viewed material gain.
Dr Williams said the effect of the global financial crisis on the economy had been beneficial because it acted as a reality check.
'A reminder that what I think some people have called fairy gold is just that - that sooner or later you have to ask: "What are we making or what are we assembling or accumulating wealth for?",' he said.
Dr Williams went on: 'I would like to think that in this sort of crisis people would be reflecting more on how you develop a volunteer culture, how you develop a culture of people willing to put their services at the needs of others so that there can be a more active, a more vital civil society.'
The archbishop called on the Government to give more of a lead on 'how the civil society is created and expressed concerns over the Prime Minister's fiscal stimulus package, which included cutting VAT to get the public spending again.
Questioned on whether increased spending was the right way to tackle the downturn, he said: 'It seems a little bit like the addict returning to the drug.
'When the Bible uses the word repentance, it doesn't just mean beating your breast, it means getting a new perspective, and that is perhaps what we are shrinking away from.'
The archbishop added: 'It is about what is sustainable in the long term and if this is going to drive us back into the same spin, I do not think that is going to help us.'
He said people should not 'spend to save the economy', but instead spend for 'human reasons' - to provide for their own needs.
Dr Williams admitted that he was likely to face criticism for giving economists 'advice' on how to tackle the crisis but said he wanted to ask where the moral questions were in the economic discourse.
By Daily Mail Reporter
Last updated at 10:48 AM on 18th December 2008
The Archbishop of Canterbury has hit out at Gordon Brown's plans to combat recession by boosting spending and has likened them to an 'addict returning to the drug'.
Rowan Williams also said the credit crunch is a welcome 'reality check' for a society that has become driven by unsustainable greed.
The head of the Church of England's outspoken comments came as he delivered a scathing assessment of moral failings in Britain's economy.
In an interviewed on BBC Radio 4's Today programme, he insisted the country had been 'going in the wrong direction' for decades by relying on financial speculation to generate wealth quickly rather than 'making things'.
Dr Rowan Williams said the credit crunch was a welcome reality check for a society driven by unsustainable greed
In an interviewed on BBC Radio 4's Today programme, he insisted the country had been 'going in the wrong direction' for decades by relying on financial speculation to generate wealth quickly rather than 'making things'.
He said the UK had backed itself 'into a corner', and must now rediscover 'patience' and re-think the way it viewed material gain.
Dr Williams said the effect of the global financial crisis on the economy had been beneficial because it acted as a reality check.
'A reminder that what I think some people have called fairy gold is just that - that sooner or later you have to ask: "What are we making or what are we assembling or accumulating wealth for?",' he said.
Dr Williams went on: 'I would like to think that in this sort of crisis people would be reflecting more on how you develop a volunteer culture, how you develop a culture of people willing to put their services at the needs of others so that there can be a more active, a more vital civil society.'
The archbishop called on the Government to give more of a lead on 'how the civil society is created and expressed concerns over the Prime Minister's fiscal stimulus package, which included cutting VAT to get the public spending again.
Questioned on whether increased spending was the right way to tackle the downturn, he said: 'It seems a little bit like the addict returning to the drug.
'When the Bible uses the word repentance, it doesn't just mean beating your breast, it means getting a new perspective, and that is perhaps what we are shrinking away from.'
The archbishop added: 'It is about what is sustainable in the long term and if this is going to drive us back into the same spin, I do not think that is going to help us.'
He said people should not 'spend to save the economy', but instead spend for 'human reasons' - to provide for their own needs.
Dr Williams admitted that he was likely to face criticism for giving economists 'advice' on how to tackle the crisis but said he wanted to ask where the moral questions were in the economic discourse.
18 December 2008
Deutsche stuns market by delaying bond redemption
A move by Deutsche Bank to go against industry practice by passing up an opportunity to redeem a chunk of subordinated debt has escalated the level of turmoil in financial markets as investors worry that problems at the German financial services giant might be greater than imagined.
Meanwhile, at least one analyst is speculating that Canadian banks could follow suit on a portion of the more than $3-billion of bonds that they have coming due in the next few months.
Deutsche Bank stunned the market when it said on Wednesday it will not redeem 1-billion euros of callable bonds at the first opportunity. The debt does not mature until 2014, but it has a call date of January 2009, meaning the debt can be paid back as early as next month.
It is a long-time industry practice for banks to redeem such bonds on the earliest possible date, as proof of the soundness of their balance sheets.
Analysts said Deutsche is the first major player to break the tradition.
The move "raises some awkward questions about [the German bank's] financial position," said CreditSights analyst Simon Adamson. "But more than that, it is a signal that banks do not see a return to more normal funding conditions in the foreseeable future, and that is a damaging statement for the banking sector."
"This is a big deal in the bond market," said another analyst who asked not to be named, pointing out that investors have always taken for granted that such debt always gets paid back at the earliest opportunity.
Banks around the world are under the spotlight as investors try to figure out how this episode of the credit crisis will play out, whether other banks will copy Deutsche or whether it will end up as an isolated occurrence.
"We will see if any of the Canadian banks follow suit," said the analyst, adding that they will do so if they believe they can gain by it.
He said there could be several reasons for Deutsche's decision not to redeem. One possibility is that it simply needs the cash and is willing to pay the penalty for later payment in order to hold onto the money longer. A second possibility is that it already has sufficient funding to keep it going for a considerable period and can afford to take a step that would make it much more expensive to access the credit markets.
"Do you want to shut yourself out of the market, which is what you would do?" the analyst said.
You would also shut your competitors out of the market because the whole sector would likely be tainted.
According to Desjardins Securities analyst Michael Goldberg, Canadian institutions have several bond issues that are callable in the coming months, including Capital Desjardins in March ($450-million), Scotiabank in May ($350-million), Royal Bank ($1-billion) and CIBC ($750-million) in June, and CIBC ($500-million) again in October. The first innovative Tier 1 note issued in Canada from TD Capital Trust of $900-million is callable next December.
see title link..
Meanwhile, at least one analyst is speculating that Canadian banks could follow suit on a portion of the more than $3-billion of bonds that they have coming due in the next few months.
Deutsche Bank stunned the market when it said on Wednesday it will not redeem 1-billion euros of callable bonds at the first opportunity. The debt does not mature until 2014, but it has a call date of January 2009, meaning the debt can be paid back as early as next month.
It is a long-time industry practice for banks to redeem such bonds on the earliest possible date, as proof of the soundness of their balance sheets.
Analysts said Deutsche is the first major player to break the tradition.
The move "raises some awkward questions about [the German bank's] financial position," said CreditSights analyst Simon Adamson. "But more than that, it is a signal that banks do not see a return to more normal funding conditions in the foreseeable future, and that is a damaging statement for the banking sector."
"This is a big deal in the bond market," said another analyst who asked not to be named, pointing out that investors have always taken for granted that such debt always gets paid back at the earliest opportunity.
Banks around the world are under the spotlight as investors try to figure out how this episode of the credit crisis will play out, whether other banks will copy Deutsche or whether it will end up as an isolated occurrence.
"We will see if any of the Canadian banks follow suit," said the analyst, adding that they will do so if they believe they can gain by it.
He said there could be several reasons for Deutsche's decision not to redeem. One possibility is that it simply needs the cash and is willing to pay the penalty for later payment in order to hold onto the money longer. A second possibility is that it already has sufficient funding to keep it going for a considerable period and can afford to take a step that would make it much more expensive to access the credit markets.
"Do you want to shut yourself out of the market, which is what you would do?" the analyst said.
You would also shut your competitors out of the market because the whole sector would likely be tainted.
According to Desjardins Securities analyst Michael Goldberg, Canadian institutions have several bond issues that are callable in the coming months, including Capital Desjardins in March ($450-million), Scotiabank in May ($350-million), Royal Bank ($1-billion) and CIBC ($750-million) in June, and CIBC ($500-million) again in October. The first innovative Tier 1 note issued in Canada from TD Capital Trust of $900-million is callable next December.
see title link..
Gold virus spreads
"Gold is almost surely on its way to an inflation-adjusted high, which is approximately $2,500 (based on January 1980 high of $870 an ounce), depending on whose inflation figures are used.
While the inflation that eventually will accompany the $2 trillion manufacturing of American currency this summer and autumn will help gold in traditional economic terms, I believe the best one-word, tipping point phrase for the looming precious metals phenomenon is still counter-party risk.
Here is a primer from former economist, author and GoldMoney.com owner James Turk on why 2009 will be different than 1932. I chatted with him via an electronic mail exchange today (Wednesday). My question to him: How can gold rise if the American dollar (and other currencies) stay flat or “dry up” in a rapid and severe deflating of economies and consumer prices?
“Dollars became scarce in the depths of the Great Depression for one reason. The gold standard then in place restricted the number of dollars that could be created by the Federal Reserve. Therefore, as people sought gold to avoid the risk of bank failures, they redeemed dollars for gold, which forced a contraction in the quantity of dollars in circulation,” Mr. Turk tells me.
Deflation was the result. “The purchasing power of both gold and the dollar rose, assuming you had the good fortune to hold dollar cash or to have your dollars on deposit in a bank that did not fail. Gold is a safe-haven because it does not have the counterparty risk that comes with holding dollars,” Mr. Turk notes.
Our tracking of the manufacture of paper currency rolls at U.S. Mints, defined by the St. Louis Adjusted Monetary Base, concurs with the newspaper coverage today: The Federal Reserve will use any and all means to sidestep a catastrophic deflation of prices and “drying up” of currency.
“Today there is no constraint on the quantity of dollars that can be created, and the Federal Reserve announced yesterday that it will ‘employ all available tools’ to flood the system with dollars in the hope that low interest rates and easy money will jump-start a moribund economy,” James Turk says. See James Turk’s commentary.
Currencies, starting with the dollar, eventually will suffer from the ballast blasting that always comes with additional currency flooding a nation and a planet. Yet the purchasing power of gold can and will rise, albeit some of its heft punctured by those inflationary dollars."
title link available.
While the inflation that eventually will accompany the $2 trillion manufacturing of American currency this summer and autumn will help gold in traditional economic terms, I believe the best one-word, tipping point phrase for the looming precious metals phenomenon is still counter-party risk.
Here is a primer from former economist, author and GoldMoney.com owner James Turk on why 2009 will be different than 1932. I chatted with him via an electronic mail exchange today (Wednesday). My question to him: How can gold rise if the American dollar (and other currencies) stay flat or “dry up” in a rapid and severe deflating of economies and consumer prices?
“Dollars became scarce in the depths of the Great Depression for one reason. The gold standard then in place restricted the number of dollars that could be created by the Federal Reserve. Therefore, as people sought gold to avoid the risk of bank failures, they redeemed dollars for gold, which forced a contraction in the quantity of dollars in circulation,” Mr. Turk tells me.
Deflation was the result. “The purchasing power of both gold and the dollar rose, assuming you had the good fortune to hold dollar cash or to have your dollars on deposit in a bank that did not fail. Gold is a safe-haven because it does not have the counterparty risk that comes with holding dollars,” Mr. Turk notes.
Our tracking of the manufacture of paper currency rolls at U.S. Mints, defined by the St. Louis Adjusted Monetary Base, concurs with the newspaper coverage today: The Federal Reserve will use any and all means to sidestep a catastrophic deflation of prices and “drying up” of currency.
“Today there is no constraint on the quantity of dollars that can be created, and the Federal Reserve announced yesterday that it will ‘employ all available tools’ to flood the system with dollars in the hope that low interest rates and easy money will jump-start a moribund economy,” James Turk says. See James Turk’s commentary.
Currencies, starting with the dollar, eventually will suffer from the ballast blasting that always comes with additional currency flooding a nation and a planet. Yet the purchasing power of gold can and will rise, albeit some of its heft punctured by those inflationary dollars."
title link available.
Martin Weiss finally acknowledges Deflation
Just before hyperinflation strikes in the US. And he is ready to sell you a way to get rick quick because of it...
"Nearly 40,000 concerned investors registered to get answers to protect and grow their wealth in this disturbing new deflationary environment, and “Thank You” e-mails are already flooding in from across America and around the world.
The timing for this emergency briefing couldn’t have been better. Just yesterday, the U.S. Department of Labor announced that — just as we’ve warned — deflation now has the U.S. economy in its icy grip:
Its CPI report revealed consumer prices plunged by a bone-chilling 1.7% in November alone. If it continued at that pace for a year, it would be a 20% deflation — fully twice the plunge in consumer prices we saw during The Great Depression nearly 80 years ago!
No wonder Fed Chief Bernanke panicked. No wonder he slashed interest rates to a range between .25% and ZERO! But even Bernanke’s desperation play doesn’t have a snowball’s chance of ending this deflationary spiral.
The reason: Bernanke is addressing the wrong problem!
The fact is, we didn’t get into this mess because interest rates were too high. Nor are we experiencing a debt crisis because of too FEW debts! Clearly, we got into this mess because everyone — from banks to companies to consumers — have too MUCH debt and are now scared to death, cancelling purchases, hoarding dollars like there’s no tomorrow.
Here’s the key: The cheap money the Fed is providing can buy some things. But it cannot buy CONFIDENCE! To restore confidence takes a long, LONG time. And without it, banks won’t resume lending. Nor will consumers or businesses resume spending.
Deflation is a LONG-TERM reality in the U.S.! Therefore, it’s more crucial than ever that you get the answers you need to survive and THRIVE in the year ahead.
But events are moving so quickly, we can’t leave the video of today’s event up for long. So the ONLY way I can guarantee you’ll have the opportunity to watch it is for you to click this link now!
In this historic emergency briefing, we did everything in our power to help you protect your income, savings, investments and retirement with frank, objective, timely and actionable analysis and recommendations — the answers you need most right now."
When I was an investment newbie, I sent Martin Weiss 2.5K for a six months subscription to an "Interest Rate Advisory". It turned out that Martin has hired some
"expert" who agreed with his thesis at the time, interest rates were going through the roof. Needless to say my over 10K was gone is two months. Did Martin apologise, admit he was wrong and refund the sub. No, he apoligised and moved on to the next "service". That is the mystery of Martin, he makes a compelling fear based case, talks about his fathers experience and then leverages the lot with an expensive offering and then Leaves you to go hang.
Avoid this man like the plague.
"Nearly 40,000 concerned investors registered to get answers to protect and grow their wealth in this disturbing new deflationary environment, and “Thank You” e-mails are already flooding in from across America and around the world.
The timing for this emergency briefing couldn’t have been better. Just yesterday, the U.S. Department of Labor announced that — just as we’ve warned — deflation now has the U.S. economy in its icy grip:
Its CPI report revealed consumer prices plunged by a bone-chilling 1.7% in November alone. If it continued at that pace for a year, it would be a 20% deflation — fully twice the plunge in consumer prices we saw during The Great Depression nearly 80 years ago!
No wonder Fed Chief Bernanke panicked. No wonder he slashed interest rates to a range between .25% and ZERO! But even Bernanke’s desperation play doesn’t have a snowball’s chance of ending this deflationary spiral.
The reason: Bernanke is addressing the wrong problem!
The fact is, we didn’t get into this mess because interest rates were too high. Nor are we experiencing a debt crisis because of too FEW debts! Clearly, we got into this mess because everyone — from banks to companies to consumers — have too MUCH debt and are now scared to death, cancelling purchases, hoarding dollars like there’s no tomorrow.
Here’s the key: The cheap money the Fed is providing can buy some things. But it cannot buy CONFIDENCE! To restore confidence takes a long, LONG time. And without it, banks won’t resume lending. Nor will consumers or businesses resume spending.
Deflation is a LONG-TERM reality in the U.S.! Therefore, it’s more crucial than ever that you get the answers you need to survive and THRIVE in the year ahead.
But events are moving so quickly, we can’t leave the video of today’s event up for long. So the ONLY way I can guarantee you’ll have the opportunity to watch it is for you to click this link now!
In this historic emergency briefing, we did everything in our power to help you protect your income, savings, investments and retirement with frank, objective, timely and actionable analysis and recommendations — the answers you need most right now."
When I was an investment newbie, I sent Martin Weiss 2.5K for a six months subscription to an "Interest Rate Advisory". It turned out that Martin has hired some
"expert" who agreed with his thesis at the time, interest rates were going through the roof. Needless to say my over 10K was gone is two months. Did Martin apologise, admit he was wrong and refund the sub. No, he apoligised and moved on to the next "service". That is the mystery of Martin, he makes a compelling fear based case, talks about his fathers experience and then leverages the lot with an expensive offering and then Leaves you to go hang.
Avoid this man like the plague.
Gold majors and liquid unhedged juniors a big buy
Gold is now up on a year to year basis.The Gold stocks were hammered by the shorts, unwound by the overleveraged and wacked by the rising costs of crude. They are so oversold by all counts they are a big investment buy, here, now.
Computers feel that they should "crash", too!
I was discussing gold vs. bits in a computer with Yogi in a thread below here and mentioned that gold would still be around when computers failed. Yogi quipped, is that something you have been waiting for since they were invented? Well he knows that I am in computers for my living so I don''t know what he was thinking. My answer was that I have lived with computers failing the entire 30 years of my career. It''s what I do for a living, program computers and fix failing computers systems. The number of ways that computers can fail is almost too numerous to count.
Computers are dependent on so many support systems it''s a wonder they work as well as they do. Moreover, they are so complex on their own that they can''t be counted on to last for very long at all. As the amount of memory in a computer increased the number of errors that occurred on a random basis in that memory increased. This error rate is due to alpha particles colliding with the electrons in the computer memory and causing what is called a bit error. When a bit error occurs, a computer may be forced to shut down. The solution was to use Error Checking and Correcting memory or ECC. Well how does an error get detected much less corrected? The answer is that it takes an extra 7 bits for every 32 bits to check for and correct a single bit error in each 32 bit word. So the amount of memory required in most mission critical systems is 25% greater due to the susceptibility of computers to failure as a result of a single bit error.
Sun found out in early 2000 what a problem it could be to design a CPU chip running 400Mhz without having ECC in the cache. The Sparc 440Mhz and 400Mhz CPUs had problems with single bit errors. Sun had parity checking on their bus paths and when a parity error occurred, they were forced to stop the CPU. Well it turned out that in their multi-cpu systems this was causing machines to halt quite frequently, i.e. more than once a month per system in some cases. I had several big customers that were the victims of this particular failure and it was devestating when it happened because the system failed and rebooted. Let''s not even get into what happens to a mission critical application when that occurs in the middle of a busy day.
Of course people designing computer based systems have been aware of the need for redundancy for years, this is why things started moving from mainframes to servers in a distributed environment in the mid 90s. The distributed approach allows for an increase in the capacity of the system but it leads to greater complexity in the software. Why you ask? Well consider that all those computers now have to communicate and coordinate in order to divvy up the work they are doing. That requires more complex software and it also requires a large number of additional communications paths that weren''t there on the monolithic mainframe. It also puts a lot more computers out there with lot''s more opportunities for failures to be introduced. The mean time between failures decreases with the number of computers in the system. That means that a computer failure in a distributed system is much more likely than in a mainframe system. However, because of the redundancy, the failure of a single computer need not bring the system down but it often slows it down.
The third area of failure that began to occur with greater regularity in these distributed systems was with disks. When a disk fails the data on it is usually lost immediately. It''s true that in some cases much of the data can be recovered but not usually. So now we saw the emergence what are called Redundand Arrays of Inexpensive Disks or RAID technology. This requires two to three times the amount of disk capacity with respect to actual data stored which also decreases MTBF. The good news with RAID arrays is that when a disk fails, no data is lost. Now if the failed disk is not replaced, there is risk of the loss of data. So RAID arrays are always being updated with bigger, newer, faster models.
Because RAID arrays were restricted to a single computer, Storage Array Networks or SAN''s were invented. These are even more complicated devices that allow several big computers to share storage over an optical network. Of course they require multiple paths of data from multiple computers into them and so they are far more complex than even a simple RAID. All of this complexity leads to a tremendous need for people to service it as well as consuming lavish amounts of power directly through the components themselves and indirectly to keep it cool. This stuff will literally burn itself up if it''s not cooled night and day. Of course that costs money and energy, two things we seem to be running short of in the US of late.
OK you might think wow, what a mess can it get worse? Well of course it can because we haven''t even begun to touch on how software can cause computers to fail or how overloading a computer system can cause it to fail. Those topics will be the subject of another thread sometime in the future. For now just consider yourselves lucky that most of you only have to deal with one or a few computers failing you from time to time.
My experience with computers is why I deride bits in a computer on a regular basis on this forum. I know to those of you who are igorant of this it seems like I am some sort of Luddite but I promise you, I am anything but that.
Computers are dependent on so many support systems it''s a wonder they work as well as they do. Moreover, they are so complex on their own that they can''t be counted on to last for very long at all. As the amount of memory in a computer increased the number of errors that occurred on a random basis in that memory increased. This error rate is due to alpha particles colliding with the electrons in the computer memory and causing what is called a bit error. When a bit error occurs, a computer may be forced to shut down. The solution was to use Error Checking and Correcting memory or ECC. Well how does an error get detected much less corrected? The answer is that it takes an extra 7 bits for every 32 bits to check for and correct a single bit error in each 32 bit word. So the amount of memory required in most mission critical systems is 25% greater due to the susceptibility of computers to failure as a result of a single bit error.
Sun found out in early 2000 what a problem it could be to design a CPU chip running 400Mhz without having ECC in the cache. The Sparc 440Mhz and 400Mhz CPUs had problems with single bit errors. Sun had parity checking on their bus paths and when a parity error occurred, they were forced to stop the CPU. Well it turned out that in their multi-cpu systems this was causing machines to halt quite frequently, i.e. more than once a month per system in some cases. I had several big customers that were the victims of this particular failure and it was devestating when it happened because the system failed and rebooted. Let''s not even get into what happens to a mission critical application when that occurs in the middle of a busy day.
Of course people designing computer based systems have been aware of the need for redundancy for years, this is why things started moving from mainframes to servers in a distributed environment in the mid 90s. The distributed approach allows for an increase in the capacity of the system but it leads to greater complexity in the software. Why you ask? Well consider that all those computers now have to communicate and coordinate in order to divvy up the work they are doing. That requires more complex software and it also requires a large number of additional communications paths that weren''t there on the monolithic mainframe. It also puts a lot more computers out there with lot''s more opportunities for failures to be introduced. The mean time between failures decreases with the number of computers in the system. That means that a computer failure in a distributed system is much more likely than in a mainframe system. However, because of the redundancy, the failure of a single computer need not bring the system down but it often slows it down.
The third area of failure that began to occur with greater regularity in these distributed systems was with disks. When a disk fails the data on it is usually lost immediately. It''s true that in some cases much of the data can be recovered but not usually. So now we saw the emergence what are called Redundand Arrays of Inexpensive Disks or RAID technology. This requires two to three times the amount of disk capacity with respect to actual data stored which also decreases MTBF. The good news with RAID arrays is that when a disk fails, no data is lost. Now if the failed disk is not replaced, there is risk of the loss of data. So RAID arrays are always being updated with bigger, newer, faster models.
Because RAID arrays were restricted to a single computer, Storage Array Networks or SAN''s were invented. These are even more complicated devices that allow several big computers to share storage over an optical network. Of course they require multiple paths of data from multiple computers into them and so they are far more complex than even a simple RAID. All of this complexity leads to a tremendous need for people to service it as well as consuming lavish amounts of power directly through the components themselves and indirectly to keep it cool. This stuff will literally burn itself up if it''s not cooled night and day. Of course that costs money and energy, two things we seem to be running short of in the US of late.
OK you might think wow, what a mess can it get worse? Well of course it can because we haven''t even begun to touch on how software can cause computers to fail or how overloading a computer system can cause it to fail. Those topics will be the subject of another thread sometime in the future. For now just consider yourselves lucky that most of you only have to deal with one or a few computers failing you from time to time.
My experience with computers is why I deride bits in a computer on a regular basis on this forum. I know to those of you who are igorant of this it seems like I am some sort of Luddite but I promise you, I am anything but that.
Get rid of that Liver Fat..
(NaturalNews) For years, people who are pear-shaped with extra fat deposited in their thighs and backsides have been designated at lower risk for high blood pressure, heart disease and diabetes than those who are rounder and apple-shaped with excess fat stored around their middles. But two studies from nutrition researchers at Washington University School of Medicine in St. Louis, published in the journals Obesity and American Journal of Clinical Nutrition, conclude body shapes don't tell the whole story.
Instead, the most important key to high cholesterol, insulin resistance and other problems that can lead to diabetes and cardiovascular disease is having too much fat stored in your liver. The cause of this condition, known as nonalcoholic fatty liver disease, is overeating. But there's good news: scientists say simply by changing eating habits to a healthier diet and getting weight under control, the condition can be completely reversed.
"Since obesity is so much more common now, both in adults and in children, we are seeing a corresponding increase in the incidence of nonalcoholic fatty liver disease," Samuel Klein, M.D., who heads the Division of Geriatrics and Nutritional Science and the Center for Human Nutrition at Washington University, said in a statement to media. "That can lead to serious liver disorders such as cirrhosis in extreme cases, but more often it tends to have metabolic consequences."
Dr. Klein headed a research team that studied obese adolescents divided into two groups: one group had excessive liver fat and another with no evidence of fatty liver disease. The groups were matched by age, sex, body mass index, body fat percentage and the degree of their excess weight. The scientists found the teens with fatty liver disease also had abnormalities in glucose and fat metabolism, including lower levels of HDL cholesterol ( known as the "good" cholesterol). The youngsters who didn't have fatty livers also didn't have markers of metabolic problems. Bottom line: it wasn't bodies shaped like apples that indicated metabolic risks, it was fat in their livers.
"Abdominal fat is not the best marker for risk," Dr. Klein, who also directs the Nutrition Support Service at Barnes-Jewish Hospital, said in the media statement. "It appears liver fat is the real marker. Abdominal fat probably has been cited in the past because it tends to track so closely with liver fat. But if you look at people where the two don't correspond -- with excess fat in the liver but not in the abdomen and vice versa -- the only thing that consistently predicts metabolic derangements is fat in the liver."
In a second study, Klein's research team found nonalcoholic fatty liver disease was linked to the release of larger amounts of fatty acids into the bloodstream. Those fatty acids, in turn, were associated with high triglyceride levels and insulin resistance -- strong risk factors for type 2 diabetes. "Multiple organ systems become resistant to insulin in these adolescent children with fatty liver disease," Dr. Klein stated. "The liver becomes resistant to insulin and muscle tissue does, too. This tells us fat in the liver is a marker for metabolic problems throughout the entire system."
The findings indicate that both children and adults with fatty liver disease are at particularly high risk for heart disease and diabetes. However, there's a way to naturally treat fatty liver disease. In fact, it can be totally eliminated by losing excess weight and the condition of your liver can be improved in a matter of days. "Fatty liver disease is completely reversible you lose weight, and you quickly eliminate fat in your liver. As little as two days of calorie restriction can improve the situation dramatically, and as fat in the liver is reduced, insulin sensitivity and metabolic problems improve," Dr. Klein stated.
About the author
Sherry Baker is a widely published writer whose work has appeared in Newsweek, Health, the Atlanta Journal and Constitution, Yoga Journal, Optometry, Atlanta, Arthritis Today, Natural Healing Newsletter, OMNI, UCLA's "Healthy Years" newsletter, Mount Sinai School of Medicine's "Focus on Health Aging" newsletter, the Cleveland Clinic's "Men's Health Advisor" newsletter and many others.
Instead, the most important key to high cholesterol, insulin resistance and other problems that can lead to diabetes and cardiovascular disease is having too much fat stored in your liver. The cause of this condition, known as nonalcoholic fatty liver disease, is overeating. But there's good news: scientists say simply by changing eating habits to a healthier diet and getting weight under control, the condition can be completely reversed.
"Since obesity is so much more common now, both in adults and in children, we are seeing a corresponding increase in the incidence of nonalcoholic fatty liver disease," Samuel Klein, M.D., who heads the Division of Geriatrics and Nutritional Science and the Center for Human Nutrition at Washington University, said in a statement to media. "That can lead to serious liver disorders such as cirrhosis in extreme cases, but more often it tends to have metabolic consequences."
Dr. Klein headed a research team that studied obese adolescents divided into two groups: one group had excessive liver fat and another with no evidence of fatty liver disease. The groups were matched by age, sex, body mass index, body fat percentage and the degree of their excess weight. The scientists found the teens with fatty liver disease also had abnormalities in glucose and fat metabolism, including lower levels of HDL cholesterol ( known as the "good" cholesterol). The youngsters who didn't have fatty livers also didn't have markers of metabolic problems. Bottom line: it wasn't bodies shaped like apples that indicated metabolic risks, it was fat in their livers.
"Abdominal fat is not the best marker for risk," Dr. Klein, who also directs the Nutrition Support Service at Barnes-Jewish Hospital, said in the media statement. "It appears liver fat is the real marker. Abdominal fat probably has been cited in the past because it tends to track so closely with liver fat. But if you look at people where the two don't correspond -- with excess fat in the liver but not in the abdomen and vice versa -- the only thing that consistently predicts metabolic derangements is fat in the liver."
In a second study, Klein's research team found nonalcoholic fatty liver disease was linked to the release of larger amounts of fatty acids into the bloodstream. Those fatty acids, in turn, were associated with high triglyceride levels and insulin resistance -- strong risk factors for type 2 diabetes. "Multiple organ systems become resistant to insulin in these adolescent children with fatty liver disease," Dr. Klein stated. "The liver becomes resistant to insulin and muscle tissue does, too. This tells us fat in the liver is a marker for metabolic problems throughout the entire system."
The findings indicate that both children and adults with fatty liver disease are at particularly high risk for heart disease and diabetes. However, there's a way to naturally treat fatty liver disease. In fact, it can be totally eliminated by losing excess weight and the condition of your liver can be improved in a matter of days. "Fatty liver disease is completely reversible you lose weight, and you quickly eliminate fat in your liver. As little as two days of calorie restriction can improve the situation dramatically, and as fat in the liver is reduced, insulin sensitivity and metabolic problems improve," Dr. Klein stated.
About the author
Sherry Baker is a widely published writer whose work has appeared in Newsweek, Health, the Atlanta Journal and Constitution, Yoga Journal, Optometry, Atlanta, Arthritis Today, Natural Healing Newsletter, OMNI, UCLA's "Healthy Years" newsletter, Mount Sinai School of Medicine's "Focus on Health Aging" newsletter, the Cleveland Clinic's "Men's Health Advisor" newsletter and many others.
Economy "f****d" ~ Sir Richard Branson
Sir Richard Branson has delivered a characteristically blunt verdict on the state of the economy, describing it as "f****d".
But Britain's cheeriest billionaire said that he hoped that the downturn might only last a couple of years instead of becoming a repeat of the Great Depression of the 1930s as so many economists now fear.
The Virgin boss was asked his views on the economy by Five News. “I was going to say, it’s f*****, but I think I had better not have said that,” he replied.
He added: “I think it is a terrible, terrible mess, which has been brought upon us by some very irresponsible people in the banking community, some very lax regulation and we are going to have to work hard to dig ourselves out of it.
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But Britain's cheeriest billionaire said that he hoped that the downturn might only last a couple of years instead of becoming a repeat of the Great Depression of the 1930s as so many economists now fear.
The Virgin boss was asked his views on the economy by Five News. “I was going to say, it’s f*****, but I think I had better not have said that,” he replied.
He added: “I think it is a terrible, terrible mess, which has been brought upon us by some very irresponsible people in the banking community, some very lax regulation and we are going to have to work hard to dig ourselves out of it.
link
Dollar No Longer Haven After Fed Moves Rate Near Zero
Dec. 17 (Bloomberg) -- The world’s biggest currency-trading firms say the dollar’s appeal as a haven amid the financial crisis all but evaporated.
The U.S. currency slid to a 13-year low against the yen today and had its biggest one-day decline versus the euro after the Federal Reserve reduced its target interest rate yesterday to a range of zero to 0.25 percent, the lowest among the world’s biggest economies. CMC Markets said today the currency’s prospects appear “ominous.” State Street Global markets said the dollar’s outlook has been “undermined.”
“The dollar has been under heavy downward pressure,” said Robert Minikin, a senior currency strategist in London at Standard Chartered Bank Plc. “This move is very well-justified and has a long way to run.” Standard Chartered is preparing to cut its dollar forecasts, Minikin said.
Yesterday’s rate cut brings the Fed’s target to below the Bank of Japan’s for the first time since January 1993. U.S. policy makers repeated plans to buy agency debt and mortgage- backed securities and said they will study buying Treasuries, a policy known as quantitative easing.
The dollar fell to 87.14 yen, the lowest since July 1995, before trading at 87.84 yen as of 11:46 a.m. in New York, from 89.05 yesterday. It depreciated to $1.4331 from $1.4002 and traded at $1.4437, the weakest since Sept. 30.
‘Ominous’ Outlook
The dollar is likely to decline “longer term,” analysts including New York-based Ashraf Laidi at CMC Markets wrote in a report. “Prospects ahead appear particularly ominous for the world’s reserve currency once global economic stability starts to build up.”
The Fed’s debt purchases will cause the dollar to weaken to $1.4860 per euro, analysts led by Robert Sinche, New York-based head of global currency strategy at Bank of America Corp., wrote in a report yesterday. The Fed reduced the scarcity of dollars and investors slowed the deleveraging process, which drove the currency to a 2 1/2-year high against the euro in October, Sinche said.
“Those temporary supports for the dollar appear to have eroded,” Sinche wrote. “Aggressive quantitative easing by the Fed should add to U.S. dollar supply globally and undermine the value of the dollar.”
State Street Global Markets, a unit of the world’s largest money manager for institutions, said the Fed’s move is “perilous” for the dollar as investors accumulated an “extreme” long position on the currency, or bets it will climb.
Record Low Yields
“This implies a significant potential for a dollar unwind if the real money community attempts to chase price,” Hong Kong-based strategist Dwyfor Evans wrote today in a report. The shift toward quantitative easing “has undermined the U.S. dollar significantly over recent weeks.”
The dollar declined 11 percent against the euro and 8 percent against the yen this month as yields on two-, five-, 10- and 30-year Treasuries fell to record lows, encouraging investors to look outside the U.S. for higher returns.
“The dollar is going to struggle while it has low yields,” said Roddy MacPherson, the Edinburgh-based head of currency strategy at Scottish Widows Investment Partnership Ltd., which manages the equivalent of $152 billion. “We’re looking to add to our short dollar position if U.S. yields continue downward.”
UBS Stays Bullish
MacPherson said he moved toward a short dollar position, or a bet it will depreciate, against the euro in the past four days. The currency may end next year at $1.40 per euro, he said.
For UBS AG, the world’s second-largest foreign-exchange trader, demand for cash amid the freeze in bank lending will support the currency. The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, was at 140 basis points today, or about 14 times its average in the five years before the credit crisis began.
“There is still a premium on liquidity, which will be supportive to the dollar even in the current environment,” said Geoff Kendrick, a senior strategist in London at UBS.
Goldman Sachs Group Inc. said investors can profit from the dollar’s decline by selling the currency for its Canadian counterpart.
The U.S. currency’s drop is becoming “broader-based,” Jens Nordvig, a New York-based strategist for the U.S. securities firm, wrote today. “Temporary dollar demand from deleveraging and funding flows has come to an end. The prospect of aggressive quantitative easing is starting to have a significant negative impact on the dollar.”
link
The U.S. currency slid to a 13-year low against the yen today and had its biggest one-day decline versus the euro after the Federal Reserve reduced its target interest rate yesterday to a range of zero to 0.25 percent, the lowest among the world’s biggest economies. CMC Markets said today the currency’s prospects appear “ominous.” State Street Global markets said the dollar’s outlook has been “undermined.”
“The dollar has been under heavy downward pressure,” said Robert Minikin, a senior currency strategist in London at Standard Chartered Bank Plc. “This move is very well-justified and has a long way to run.” Standard Chartered is preparing to cut its dollar forecasts, Minikin said.
Yesterday’s rate cut brings the Fed’s target to below the Bank of Japan’s for the first time since January 1993. U.S. policy makers repeated plans to buy agency debt and mortgage- backed securities and said they will study buying Treasuries, a policy known as quantitative easing.
The dollar fell to 87.14 yen, the lowest since July 1995, before trading at 87.84 yen as of 11:46 a.m. in New York, from 89.05 yesterday. It depreciated to $1.4331 from $1.4002 and traded at $1.4437, the weakest since Sept. 30.
‘Ominous’ Outlook
The dollar is likely to decline “longer term,” analysts including New York-based Ashraf Laidi at CMC Markets wrote in a report. “Prospects ahead appear particularly ominous for the world’s reserve currency once global economic stability starts to build up.”
The Fed’s debt purchases will cause the dollar to weaken to $1.4860 per euro, analysts led by Robert Sinche, New York-based head of global currency strategy at Bank of America Corp., wrote in a report yesterday. The Fed reduced the scarcity of dollars and investors slowed the deleveraging process, which drove the currency to a 2 1/2-year high against the euro in October, Sinche said.
“Those temporary supports for the dollar appear to have eroded,” Sinche wrote. “Aggressive quantitative easing by the Fed should add to U.S. dollar supply globally and undermine the value of the dollar.”
State Street Global Markets, a unit of the world’s largest money manager for institutions, said the Fed’s move is “perilous” for the dollar as investors accumulated an “extreme” long position on the currency, or bets it will climb.
Record Low Yields
“This implies a significant potential for a dollar unwind if the real money community attempts to chase price,” Hong Kong-based strategist Dwyfor Evans wrote today in a report. The shift toward quantitative easing “has undermined the U.S. dollar significantly over recent weeks.”
The dollar declined 11 percent against the euro and 8 percent against the yen this month as yields on two-, five-, 10- and 30-year Treasuries fell to record lows, encouraging investors to look outside the U.S. for higher returns.
“The dollar is going to struggle while it has low yields,” said Roddy MacPherson, the Edinburgh-based head of currency strategy at Scottish Widows Investment Partnership Ltd., which manages the equivalent of $152 billion. “We’re looking to add to our short dollar position if U.S. yields continue downward.”
UBS Stays Bullish
MacPherson said he moved toward a short dollar position, or a bet it will depreciate, against the euro in the past four days. The currency may end next year at $1.40 per euro, he said.
For UBS AG, the world’s second-largest foreign-exchange trader, demand for cash amid the freeze in bank lending will support the currency. The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, was at 140 basis points today, or about 14 times its average in the five years before the credit crisis began.
“There is still a premium on liquidity, which will be supportive to the dollar even in the current environment,” said Geoff Kendrick, a senior strategist in London at UBS.
Goldman Sachs Group Inc. said investors can profit from the dollar’s decline by selling the currency for its Canadian counterpart.
The U.S. currency’s drop is becoming “broader-based,” Jens Nordvig, a New York-based strategist for the U.S. securities firm, wrote today. “Temporary dollar demand from deleveraging and funding flows has come to an end. The prospect of aggressive quantitative easing is starting to have a significant negative impact on the dollar.”
link
17 December 2008
“Your grandfather just lost everything,” she said.”
The words on Mr. Madoff’s website now seem gravely ironic. "In an era of faceless organizations ... Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark." It is doubtful that the words “high ethical standards” will grace Mr. Madoff’s gravestone. Even as his ponzi scheme was unraveling, his high ethical standards led him to try and distribute his $200 to $300 million to family, friends, and employees before the victims of his crimes could attempt to recover some of their money. It is too soon to conclude what the long term effects of this scandal will have on our financial system. It is likely that the name Bernard Madoff will go down in the history of ignominy with Michael Milken, Ivan Boesky, Ken Lay, Bernie Ebbers, and Dennis Kazlowski as examples of the most disgraceful behavior in the history of our financial markets.
How can a man live such a Big Lie for decades and sleep soundly at night? Aspects of Theodore Dreiser’s classic novel An American Tragedy are evident in this heartrending story. Dreiser’s theme of the desire to rise up socially and financially in modern America holding the very seeds by which such desires are denied is clearly apparent in this tale of woe. The lure of materialism isn't solely the acquisition of wealth and goods, but the attraction such wealth and goods holds over people, often at the expense of other values. As Mr. Madoff’s success grew, his desire to attain ever higher social status must have led him to take more risk and use illegal means to continue up the social ladder. This overwhelming aspiration for acceptance and accolades in the wealthiest high society of Manhattan and West Palm Beach, led this man to risk everything. The result has been a tragedy of epic proportions. This fraud is reminiscent of the 1938 indictment of the respected former President of the NYSE Dick Whitney for looting his firm, friends, relatives, and charities of millions to fund his high society lifestyle. Those who forget the past are condemned to relive it.
The definition of a ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from net revenues generated by the business. Mr. Madoff’s investment firm ponzi scheme was incredibly unsophisticated. He was spectacularly successful at marketing his fund to the ultra-rich Jewish communities in New York and Florida as well as Europeans at ski competitions attended by the rich ruling elite. His fund generated returns of 12% to 13% per year consistently for decades. The fund only had five losing months since 1996. The market has had dramatic monthly moves over this time. It is a virtual statistical impossibility for an investor to have such a consistent record through bull and bear markets. Madoff refused to provide his clients online access to their accounts. He sent out accounting statements by mail, whereas most hedge funds email statements and allow them to be downloaded via computer for easier analysis by investors. His books were audited by a three-person accounting firm, Friehling & Horowitz, operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs. A $17 billion fund could not possibly be audited by one partner and one accountant. These facts were all warning signals that many skeptical investment analysts had pointed out years ago to the SEC and in articles in Barron’s.
It was not topnotch undercover investigating that revealed this fraud. The SEC investigated Madoff’s firm twice in the last eight years and found nothing. Madoff’s son-in-law was an SEC official. The SEC has an annual budget in excess of $900 million and has failed miserably in its mission to protect investors. The oversight of hedge funds has been virtually non-existent during the Bush administration. Again, Alan Greenspan, the patron saint of free markets, proved his prescience in 2000 when he campaigned before Congress to not regulate hedge funds. He described hedge funds as “a vibrant trillion-dollar industry dominated by U.S. firms. They are essentially free of government regulation, and I hope they will remain so. Why do we wish to inhibit the pollinating bees of Wall Street?” These killer bees have contributed greatly to the biggest financial destruction of wealth in history. What are the odds of one man being on the wrong side of every major financial debacle in our country in the last ten years? Mr. Greenspan wins the grand prize again.
What brought down Bernie Madoff was not his guilty conscious, but redemptions of $7 billion from investors that overwhelmed his ability to pay them from new funds. The story that he wants everyone to believe is that he was the only one who knew about the fraud. His brother, two sons, niece, and other family members held high level positions in the firm. It is beyond believability that none of these people knew what was going on. A $50 billion fraud can not be perpetuated by one man acting alone. It certainly appears that as a 70 year old man, he is attempting to shield his family members who should also be spending 20 years in prison. If he was truly remorseful, he would have done the world a favor and taken a swan dive off his 12th floor balcony. Instead, he will hire high powered lawyers, using his phony wealth, to extend his life of luxury secluded in his 12th floor hideaway. This is a man who gives Ponzi a bad name.
Ultimately, Mr. Madoff will be judged by his Maker. A special place in Hell awaits him, next to Hitler, Stalin, and Timothy McVeigh. The victims of his crimes are many. The Robert I. Lappin Charitable Foundation has lost its entire $8 million endowment; The North Shore-Long Island Jewish Health System and the Texas-based Julian J. Levitt Foundation have lost millions; the town of Fairfield, Conn. has seen 15 percent of its retiree pension fund totaling $42 million vanish; Maxam Capital Management run by Sandra Manzke has been wiped out; Tremont Capital Management has lost millions; and thousands more have lost their life savings. A personal story told by Minyanville writer Justin Rohrlich about his grandfather addresses the true heart braking tragedy of this man’s immoral actions.
“Last night, it happened to my 88 year-old grandfather Carl. World War II veteran, Captain in the Army, saw combat in the Philippines. His father was a dry-cleaner, his grandfather was a fabric dyer on the Lower East Side at the turn of the century. My granddad was scheduled to go into the invasion of Japan before we dropped the bomb. Instead of going into certain death, he came home and went to the City College of New York on the GI Bill.
Armed with a mathematics degree, my Grandfather eventually landed a job at Neuberger Berman. Became a CFA. Was a director of Tishman Speyer. Helped build Roosevelt Raceway. Ran the pension fund for Price Chopper supermarkets. I had dinner with my grandfather on Wednesday night. Over sushi, he told me about how amazing Bernie Madoff was. This was a common refrain in our conversations. “While the rest of the market is tanking, Madoff is up for the month.” Today, I bought the New York Post on the way to the subway. Bernie Madoff was on the front page. His fund was described as a “Ponzi scheme” that lost $50 billion. My phone rang. It was my mother.
“Your grandfather just lost everything,” she said.”
This blackest of marks in investment history will forever alter the faith that investors have in investment managers, financial advisors, mutual funds, and hedge funds. Americans are being buried under a blizzard of lies. This is truly an American Tragedy.
link
How can a man live such a Big Lie for decades and sleep soundly at night? Aspects of Theodore Dreiser’s classic novel An American Tragedy are evident in this heartrending story. Dreiser’s theme of the desire to rise up socially and financially in modern America holding the very seeds by which such desires are denied is clearly apparent in this tale of woe. The lure of materialism isn't solely the acquisition of wealth and goods, but the attraction such wealth and goods holds over people, often at the expense of other values. As Mr. Madoff’s success grew, his desire to attain ever higher social status must have led him to take more risk and use illegal means to continue up the social ladder. This overwhelming aspiration for acceptance and accolades in the wealthiest high society of Manhattan and West Palm Beach, led this man to risk everything. The result has been a tragedy of epic proportions. This fraud is reminiscent of the 1938 indictment of the respected former President of the NYSE Dick Whitney for looting his firm, friends, relatives, and charities of millions to fund his high society lifestyle. Those who forget the past are condemned to relive it.
The definition of a ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from net revenues generated by the business. Mr. Madoff’s investment firm ponzi scheme was incredibly unsophisticated. He was spectacularly successful at marketing his fund to the ultra-rich Jewish communities in New York and Florida as well as Europeans at ski competitions attended by the rich ruling elite. His fund generated returns of 12% to 13% per year consistently for decades. The fund only had five losing months since 1996. The market has had dramatic monthly moves over this time. It is a virtual statistical impossibility for an investor to have such a consistent record through bull and bear markets. Madoff refused to provide his clients online access to their accounts. He sent out accounting statements by mail, whereas most hedge funds email statements and allow them to be downloaded via computer for easier analysis by investors. His books were audited by a three-person accounting firm, Friehling & Horowitz, operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs. A $17 billion fund could not possibly be audited by one partner and one accountant. These facts were all warning signals that many skeptical investment analysts had pointed out years ago to the SEC and in articles in Barron’s.
It was not topnotch undercover investigating that revealed this fraud. The SEC investigated Madoff’s firm twice in the last eight years and found nothing. Madoff’s son-in-law was an SEC official. The SEC has an annual budget in excess of $900 million and has failed miserably in its mission to protect investors. The oversight of hedge funds has been virtually non-existent during the Bush administration. Again, Alan Greenspan, the patron saint of free markets, proved his prescience in 2000 when he campaigned before Congress to not regulate hedge funds. He described hedge funds as “a vibrant trillion-dollar industry dominated by U.S. firms. They are essentially free of government regulation, and I hope they will remain so. Why do we wish to inhibit the pollinating bees of Wall Street?” These killer bees have contributed greatly to the biggest financial destruction of wealth in history. What are the odds of one man being on the wrong side of every major financial debacle in our country in the last ten years? Mr. Greenspan wins the grand prize again.
What brought down Bernie Madoff was not his guilty conscious, but redemptions of $7 billion from investors that overwhelmed his ability to pay them from new funds. The story that he wants everyone to believe is that he was the only one who knew about the fraud. His brother, two sons, niece, and other family members held high level positions in the firm. It is beyond believability that none of these people knew what was going on. A $50 billion fraud can not be perpetuated by one man acting alone. It certainly appears that as a 70 year old man, he is attempting to shield his family members who should also be spending 20 years in prison. If he was truly remorseful, he would have done the world a favor and taken a swan dive off his 12th floor balcony. Instead, he will hire high powered lawyers, using his phony wealth, to extend his life of luxury secluded in his 12th floor hideaway. This is a man who gives Ponzi a bad name.
Ultimately, Mr. Madoff will be judged by his Maker. A special place in Hell awaits him, next to Hitler, Stalin, and Timothy McVeigh. The victims of his crimes are many. The Robert I. Lappin Charitable Foundation has lost its entire $8 million endowment; The North Shore-Long Island Jewish Health System and the Texas-based Julian J. Levitt Foundation have lost millions; the town of Fairfield, Conn. has seen 15 percent of its retiree pension fund totaling $42 million vanish; Maxam Capital Management run by Sandra Manzke has been wiped out; Tremont Capital Management has lost millions; and thousands more have lost their life savings. A personal story told by Minyanville writer Justin Rohrlich about his grandfather addresses the true heart braking tragedy of this man’s immoral actions.
“Last night, it happened to my 88 year-old grandfather Carl. World War II veteran, Captain in the Army, saw combat in the Philippines. His father was a dry-cleaner, his grandfather was a fabric dyer on the Lower East Side at the turn of the century. My granddad was scheduled to go into the invasion of Japan before we dropped the bomb. Instead of going into certain death, he came home and went to the City College of New York on the GI Bill.
Armed with a mathematics degree, my Grandfather eventually landed a job at Neuberger Berman. Became a CFA. Was a director of Tishman Speyer. Helped build Roosevelt Raceway. Ran the pension fund for Price Chopper supermarkets. I had dinner with my grandfather on Wednesday night. Over sushi, he told me about how amazing Bernie Madoff was. This was a common refrain in our conversations. “While the rest of the market is tanking, Madoff is up for the month.” Today, I bought the New York Post on the way to the subway. Bernie Madoff was on the front page. His fund was described as a “Ponzi scheme” that lost $50 billion. My phone rang. It was my mother.
“Your grandfather just lost everything,” she said.”
This blackest of marks in investment history will forever alter the faith that investors have in investment managers, financial advisors, mutual funds, and hedge funds. Americans are being buried under a blizzard of lies. This is truly an American Tragedy.
link
16 December 2008
Voodoo banking ~ Finance on Steriods
Earlier in 2008, CitiGroup announced that it was seeking Board members who had “expertise in finance and investments”. What was the experience and expertise of the Citi Board and senior management that has registered over US$50 billion in losses? Shareholders and taxpayers, that have provided over billions in new capital, will be hoping that the new recruits also possess “magic” to restore Citi’s fortunes. The same applies to the banking sector generally.
Until the late 1970s/ early 1980s, banking was highly regulated. It was the world of George Bailey (played by Jimmy Stewart) in It’s A Wonderful Life. Community banking was the rule. The banker could dip into his “honeymoon money” to stave of a potential bank run. It also fueled jokes - the “3-6-3” rule; borrow at 3%; lend at 6%; hit the golf course at 3 p.m.
Once de-regulated, banks evolved into complex organisations providing varied financial services. De-regulation brought benefits for the economy (better access to capital and more varied investment opportunities) and the banks (growth and higher profits).
Over the last 15 years, increased competition (within the industry and increasingly from non-banking institutions) and the reduction of earning from the commoditisation of products forced banks to rely on “voodoo banking” - performance enhancement to boost returns.
Traditionally banks made loans that tied up their capital for long periods e.g. up to 25/30 years in a mortgage. In the new “originate to distribute” model, banks “underwrote” the loan, “warehoused” it on balance sheet for a short time and then parceled them up with other loans and created securities that could be sold to investors (“securitisation”). The bank tied up capital for a short time (until the loans were sold off) and then the same capital could be reused and the process repeated. Interest earnings over the life of the loan could be discounted back and recognised immediately. Banks increased the “velocity of capital” – effectively sweating the same capital harder to increase returns.
In the traditional model, banks earned the net interest rate margin over the life of the loan – “annuity” income. When loan assets are sold off and the earnings recognised up-front, banks need to make new loans to be sold off to maintain earnings. This created pressure on banks to find “new” borrowers. Initially, creditworthy borrowers without access to credit in the regulated banking environment entered the market. Over time, banks were forced to “innovate” to maintain lending volumes.
Banks created substantial new markets for borrowing: ? Retail clients – expanding traditional lending (housing and car finance) and developing new credit facilities (credit cards and home equity loans). ? Private equity – providing borrowings in leveraged buyouts and sundry other highly leveraged transactions. ? Hedge funds/ private investors – providing (often) high levels of debt against the value of assets.
Banks increasingly also out sourced the origination of the loans to brokers, incentivised by large “upfront” fees.
The expansion in debt provision relied increasingly on quantitative models for assessing risk. It also relied on collateral - the borrower put up a portion of the price of the asset and agreed to cover any fall in value with additional cash cover.
The model allowed banks to expand the quantum of loans and allowed extension of credit to lower rated borrowers. Banks did not plan to hold the loan long term and were only exposed to “underwriting” risk in the period before the loans were sold off. Where the loan was collateralised, the value of the asset and the agreement to “top up” the collateral where the asset value fell was considered to provide ample protection.
Favorable regulatory rules (the capital required was modest), optimistic views of market liquidity and faith in models underpinned this growth in lending.
Banks also increased their trading activities, especially in derivatives and other financial products. Initially, this was targeted at companies and investors seeking to manage financial risk. Over time it increasingly focused on creating risk allowing investors to increase returns and companies to lower borrowing costs or improve currency rates. As profits margins eroded, banks created ever more complex exotic products, usually incorporating derivatives. Derivatives also increasingly became a way to provide additional leverage to customers.
The development of hedge funds was especially important. They borrowed money (against securities offered as collateral) and were extensive users of derivatives. They also traded frequently and aggressively boosting volumes. Prime broking services (bundling settlement, clearing, financial and capital raising) emerged as a major source of earnings for some banks.
Banks also increased their own risk taking. Traditionally, banks took little or no risk other than credit risk. Over time, banks increasingly assumed market risk and investment risk. Originally, banks traded financial products primarily as “agents” standing between two closely matched counterparties. Over time banks became principals in order to provide clients with better, more immediate execution and also increase profit margins.
Increased risk taking was also dictated by business contingencies. Advisory mandates (mergers and acquisition; corporate finance work) were conditional on extension of credit. Banks increasingly “seeded” or invested in hedge funds to gain preferential access to business.
Clients often sought “alignment” of interests requiring banks to take risk positions in transactions. This evolved into the “principal” business as banks increasingly made high risk investment in transactions. In some banks, this evolved into a model where the bank acted purely as “principal” rolling back the clock to the days of J.P. Morgan. Banks convinced themselves of the strategy on the basis that the risks were acceptable (it was their deal after all!), the risk could be always sold off at a price (market were liquid) and (the real reason) high returns.
Enhanced revenues (growing volumes and increasing risk) were augmented by increased leverage and adroit capital management. “Regulatory arbitrage” evolved into a business model. Required risk capital was reduced by creating the “shadow” banking system – a complex network of off balance sheet vehicle and hedge funds. Risk was transferred into the “unregulated” shadow banking system. The strategies exploited bank capital rules. Some or all of the real risk remained indirectly with the originating bank.
Banks reduced “real” equity – common shares – by substituting creative hybrid capital instruments that reduced the cost of capital. The structures generally used high income to attract investors, especially retail investors, while disguising the (less obvious) equity price risk. In some cases, banks used these new forms of capital to repurchase shares to boost returns. For example, CitiGroup repurchased US$12.8 billion of its shares in 2005 and an additional US$7 billion in 2006.
Banks increasingly “hollowed out” capital and liquidity reserves – that is, they reduced these to minimum levels. Concepts of “purchased” capital and “purchased” liquidity gained in popularity. The theory was that banks did not need to hold equity and cash buffers as these items could always be purchased in the market at a price.
Bank profits in recent history were driven by rapid and large growth in lending, trading revenues and increased risk taking. Banking returns were underwritten by an extremely favourable economic environment (a long period of relatively uninterrupted expansion, low inflation, low interest rates and the “dividends” from the end of communism and growth in international trade)
Bankers would argue that the source of higher returns was “innovation”. John Kenneth Galbraith, in A Short History of Financial Euphoria, noted that: “ Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design . . . The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.”
Elite athletes often use performance enhancement drugs to boost performance. Voodoo banking operated similarly enabling banks to enhance short-term performance whilst risking longer-term damage.
© 2008 Satyajit Das All Rights reserved.
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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Until the late 1970s/ early 1980s, banking was highly regulated. It was the world of George Bailey (played by Jimmy Stewart) in It’s A Wonderful Life. Community banking was the rule. The banker could dip into his “honeymoon money” to stave of a potential bank run. It also fueled jokes - the “3-6-3” rule; borrow at 3%; lend at 6%; hit the golf course at 3 p.m.
Once de-regulated, banks evolved into complex organisations providing varied financial services. De-regulation brought benefits for the economy (better access to capital and more varied investment opportunities) and the banks (growth and higher profits).
Over the last 15 years, increased competition (within the industry and increasingly from non-banking institutions) and the reduction of earning from the commoditisation of products forced banks to rely on “voodoo banking” - performance enhancement to boost returns.
Traditionally banks made loans that tied up their capital for long periods e.g. up to 25/30 years in a mortgage. In the new “originate to distribute” model, banks “underwrote” the loan, “warehoused” it on balance sheet for a short time and then parceled them up with other loans and created securities that could be sold to investors (“securitisation”). The bank tied up capital for a short time (until the loans were sold off) and then the same capital could be reused and the process repeated. Interest earnings over the life of the loan could be discounted back and recognised immediately. Banks increased the “velocity of capital” – effectively sweating the same capital harder to increase returns.
In the traditional model, banks earned the net interest rate margin over the life of the loan – “annuity” income. When loan assets are sold off and the earnings recognised up-front, banks need to make new loans to be sold off to maintain earnings. This created pressure on banks to find “new” borrowers. Initially, creditworthy borrowers without access to credit in the regulated banking environment entered the market. Over time, banks were forced to “innovate” to maintain lending volumes.
Banks created substantial new markets for borrowing: ? Retail clients – expanding traditional lending (housing and car finance) and developing new credit facilities (credit cards and home equity loans). ? Private equity – providing borrowings in leveraged buyouts and sundry other highly leveraged transactions. ? Hedge funds/ private investors – providing (often) high levels of debt against the value of assets.
Banks increasingly also out sourced the origination of the loans to brokers, incentivised by large “upfront” fees.
The expansion in debt provision relied increasingly on quantitative models for assessing risk. It also relied on collateral - the borrower put up a portion of the price of the asset and agreed to cover any fall in value with additional cash cover.
The model allowed banks to expand the quantum of loans and allowed extension of credit to lower rated borrowers. Banks did not plan to hold the loan long term and were only exposed to “underwriting” risk in the period before the loans were sold off. Where the loan was collateralised, the value of the asset and the agreement to “top up” the collateral where the asset value fell was considered to provide ample protection.
Favorable regulatory rules (the capital required was modest), optimistic views of market liquidity and faith in models underpinned this growth in lending.
Banks also increased their trading activities, especially in derivatives and other financial products. Initially, this was targeted at companies and investors seeking to manage financial risk. Over time it increasingly focused on creating risk allowing investors to increase returns and companies to lower borrowing costs or improve currency rates. As profits margins eroded, banks created ever more complex exotic products, usually incorporating derivatives. Derivatives also increasingly became a way to provide additional leverage to customers.
The development of hedge funds was especially important. They borrowed money (against securities offered as collateral) and were extensive users of derivatives. They also traded frequently and aggressively boosting volumes. Prime broking services (bundling settlement, clearing, financial and capital raising) emerged as a major source of earnings for some banks.
Banks also increased their own risk taking. Traditionally, banks took little or no risk other than credit risk. Over time, banks increasingly assumed market risk and investment risk. Originally, banks traded financial products primarily as “agents” standing between two closely matched counterparties. Over time banks became principals in order to provide clients with better, more immediate execution and also increase profit margins.
Increased risk taking was also dictated by business contingencies. Advisory mandates (mergers and acquisition; corporate finance work) were conditional on extension of credit. Banks increasingly “seeded” or invested in hedge funds to gain preferential access to business.
Clients often sought “alignment” of interests requiring banks to take risk positions in transactions. This evolved into the “principal” business as banks increasingly made high risk investment in transactions. In some banks, this evolved into a model where the bank acted purely as “principal” rolling back the clock to the days of J.P. Morgan. Banks convinced themselves of the strategy on the basis that the risks were acceptable (it was their deal after all!), the risk could be always sold off at a price (market were liquid) and (the real reason) high returns.
Enhanced revenues (growing volumes and increasing risk) were augmented by increased leverage and adroit capital management. “Regulatory arbitrage” evolved into a business model. Required risk capital was reduced by creating the “shadow” banking system – a complex network of off balance sheet vehicle and hedge funds. Risk was transferred into the “unregulated” shadow banking system. The strategies exploited bank capital rules. Some or all of the real risk remained indirectly with the originating bank.
Banks reduced “real” equity – common shares – by substituting creative hybrid capital instruments that reduced the cost of capital. The structures generally used high income to attract investors, especially retail investors, while disguising the (less obvious) equity price risk. In some cases, banks used these new forms of capital to repurchase shares to boost returns. For example, CitiGroup repurchased US$12.8 billion of its shares in 2005 and an additional US$7 billion in 2006.
Banks increasingly “hollowed out” capital and liquidity reserves – that is, they reduced these to minimum levels. Concepts of “purchased” capital and “purchased” liquidity gained in popularity. The theory was that banks did not need to hold equity and cash buffers as these items could always be purchased in the market at a price.
Bank profits in recent history were driven by rapid and large growth in lending, trading revenues and increased risk taking. Banking returns were underwritten by an extremely favourable economic environment (a long period of relatively uninterrupted expansion, low inflation, low interest rates and the “dividends” from the end of communism and growth in international trade)
Bankers would argue that the source of higher returns was “innovation”. John Kenneth Galbraith, in A Short History of Financial Euphoria, noted that: “ Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design . . . The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.”
Elite athletes often use performance enhancement drugs to boost performance. Voodoo banking operated similarly enabling banks to enhance short-term performance whilst risking longer-term damage.
© 2008 Satyajit Das All Rights reserved.
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).
link
more das
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