Today the Conference Board reported that its index of Leading Economic Indicators (LEI) for February declined by 0.5% on the heel’s of January’s downwardly revised 0.3% drop. The January-February LEI average is down 0.49% from its Q1:2006 average. If the January and February levels of the LEI are not changed after revisions, then in order for the first quarter’s LEI average to equal that of Q1:2006, the March LEI would have to increase 1.7%. The last time the month-to-month increase in the LEI even approached this magnitude was back in March 2004, when it increased 1.4%. So, as of right now, the odds favor the first quarterly average year-over-year contraction in the LEI of this current economic expansion.
If, in fact, we are about to witness a year-over-year decline in the quarterly average of the LEI, would that be a big deal, cyclically speaking. History shouts, “YES!” Chart 1 shows that a year-over-year contraction in the quarterly average LEI has heralded every recession (vertically shaded areas) since that of 1960, yielding only one false signal. That false signal occurred in late 1966 through early 1967. Back then, this period of economic turbulence was called the “mini-recession of 1967.” An official recession was never named for this period but the pace of economic activity did slow. Real GDP just did not contract – perhaps because of series Fed rate cuts commencing early in 1967. Notice also in Chart 1 that after the first quarter the year-over-year change in the LEI is negative, successive quarters also are negative. In other words, the LEI has not given any “head-fakes” after it first signals a recession.
The LEI might be termed the ultimate Rodney Dangerfield of economic statistics – it can’t get no respect. The LEI often is referred to derisively by mainstream Wall Street economists as the index of Misleading Indicators. I suppose that if there were an indicator that gave consistently better advance warnings of the onset of recessions and recoveries than one’s my “proprietary” GDP forecasting model, I would not look kindly on this indicator either for fear of having my forecasting job replaced by a Conference Board press release. And although I might publicly deride the LEI, I would privately incorporate it into my forecasts. Judging from how poorly consensus economic forecasts consistently fail to anticipate cyclical turning points, it looks as though many macroeconomic forecasters are either ignorant of how well the LEI outperforms them or are just plain stupid. What is most amazing, though, is that evidently the chief economic forecaster for the Conference Board, the very organization that calculates and publishes the LEI, seems to be currently ignoring the very strong cyclical message being sent by the recent behavior of the LEI. To wit, the Conference Board’s 2007 real GDP growth forecast submitted for the March Blue Chip Survey was 2.9% -- considerably above the average forecast of the 50 survey respondents of 2.5% and the second highest of the forecasts, with 3.0% taking “top honors.” But it looks as though one forecaster may be paying more attention to the LEI than he used to. FOMC transcripts show that then Fed Chairman Alan Greenspan failed in August 1990 to realize that a recession already was underway and in October 2000 that a recession was imminent even though the behavior of the LEI clearly was signaling as much. But perhaps Greenspan’s recent 30% probability forecast of a 2007 recession is based on a new appreciation of the LEI.
To corroborate the recession-warning signal being sent by the LEI, I have developed another recession-warning indicator. I have found that every recession starting with the 1970 recession has been immediately preceded by the following combination - a negative spread between the yield on the Treasury 10-year security and the federal funds rate (hereafter referred to as “the spread) on a four-quarter moving average basis and a year-over-year contraction in the quarterly average of the CPI-adjusted monetary base. The monetary base is the sum of bank reserves and coin/currency, both of which have been created out of thin air, as it were, by the Fed. Chart 2 shows the historical behavior of the “Kasriel Recession-Warning Indicator” (KRWI). For the theoretical underpinnings of the KRWI, see “The Inverted Yield Curve – Is It Really Different This Time?” The Econtrarian, March 16, 2007.
The KRWI has given no false signals in that when it has warned of a recession, there has been one. Unlike the LEI, which signaled a recession for 1967, the KRWI did not. However the 1960 recession was not signaled by the KRWI because the spread remained positive, although it did narrow. As of the fourth quarter of last year, the spread moved into negative territory, but the year-over-year change in the real monetary base remained positive. So, like the LEI, as of the fourth quarter of last year, the KRWI had not signaled that a recession was imminent.
But how is the KRWI shaping up in the current quarter? About the same as the LEI. The KRWI in terms of monthly data is shown in Chart 3. Barring some miraculous change between now and the end of this month, the spread component of the KRWI will be deeper into negative territory. In February, the year-over-year change in the real monetary base turned negative by about 50 basis points. The January-February average of the real monetary base is barely above its quarterly average of Q1:2006. Again barring revisions to January/February data, the March 2007 real monetary base would have to increase by about 0.2% over that of its March 2006 level in order for the year-over-year change in the real monetary base to remain in positive territory in the first quarter of this year and thus not trigger an imminent recession warning by the KRWI. If the year-over-year increase in the March CPI were to stay at its February reading of 2.4%, this would require a year-over-year increase in the March nominal monetary base of 2.6% in order to get a positive year-over-year change in the real monetary base. In the first two weeks of March, the year-over-year increase in the nominal monetary base is just 1.9%.
In sum, barring upward revisions in the LEI and KRWI and sharp increases in the immediate months ahead, both of these indicators will be sending a signal that a recession is on the horizon. Perhaps this will be the first time in over 45 years that the KRWI will emit a false signal and only the second time that the LEI emits a false signal. Perhaps.
23 March 2007
18 March 2007
Subprime Contagion Effects:
Doug Nolan:
The Mortgage Finance Bubble should have burst last year, taking the lead from housing market dynamics. But the extraordinary dynamism associated with global Credit, speculative and liquidity excesses proved overpowering. The global leveraged speculating community was in aggressive expansion mode; Bubble excesses were going to reckless extremes throughout "Credit arbitrage;" the M&A and corporate debt Bubbles were in full bloom; and securities leveraging was taking the entire world by storm.
The resulting global liquidity cataclysm ensured insatiable demand for higher-yielding instruments, in large part satisfied by Wall Street's unprecedented CDO (collateralized debt obligations) issuance boom. Despite the turn in U.S. housing, the unprecedented deluge in speculative finance created rapacious demand for riskier loans, certainly including subprime mortgages - vulnerable housing markets notwithstanding. Readily available mortgage finance empowered subprime originators to accommodate throngs of simply terrible Credits (many borrowers content to submit fraudulent loan applications) desperate to refinance problematic mortgages with payments about to reset significantly higher. When Wall Street pool operators recognized the unfolding disaster - and began rigorously scouring portfolios for problem loans and imperfect applications to return to the originators ("early payment defaults") - the subprime Bubble was brought to a screeching halt.
That the Mortgage Finance Bubble did not succumb last year only ensured the peril associated with a protracted period of terminal blow-off excesses. Excesses included unprecedented speculation in Credit derivatives (including a Trillion or two of new CDOs), equities Bubbles spanning the globe, and only greater Bubble distortions and imbalances in U.S. and global economies. The exponential growth in risky lending, in the leveraged speculating community, in the derivatives markets, and in speculative flows to global asset markets were accommodated another year. Wall Street finance became an only more imposing source of global "money," Credit and marketplace liquidity, operating with the type of power and control central banks could only dream of.
Reading through this week's Wall Street earnings releases and listening to their conference calls left me with the sense that these firms and their clients are especially poorly positioned for an abrupt change in the market environment. Everyone is quick to state that their subprime exposure is small and that they have successfully "hedged." We are also told that market tumult has been isolated in the subprime marketplace, and that marketplace liquidity remains extraordinarily abundant. All of this may be true for now, but it does not alter the reality that the subprime collapse may very well mark a key (historic?) inflection point for the U.S. Mortgage Finance Bubble and intertwined global risk markets generally.
Clearly, the subprime collapse has quickly imposed dramatically tighter Credit standards and Availability for risky borrowers. I would expect this to speed housing price declines in some areas, with mounting Credit losses ushering in the ugly downside of Credit cycle. To be sure, this has provided a belated wakeup call regarding the latent Acute Financial Fragility of Ponzi Finance Units. Importantly, the flow (deluge) of speculative finance played a critical role in the subprime boom, and its abrupt reversal has instigated almost immediate collapse.
The bulls argue that subprime amounts to only a small portion of mortgage debt - and thus will have only minimal economic impact. More discerning analysis would instead focus on the Financial Sphere Ramifications Associated with the Hasty Reversal of Speculative Flows from Risky Mortgage Instruments. Is the flight out of subprime mortgages, securitizations and other derivatives a harbinger of things to come for the entire mortgage marketplace? Does the move toward Risk Aversion (position liquidation and/or hedging operations) in this sector mark a momentous marketplace shift from Risk Embracement to Risk Aversion?
In analyzing potential Subprime Contagion Effects, we must begin with a critical question: Is the general backdrop characterized by soundness and stability or is it more a case of excess, weak debt structures, and general fragility. Again, subprime collapsed so abruptly because of the acute fragility associated with Ponzi Finance. Unfortunately, analysis of general mortgage market vulnerability leaves me quite uneasy.
The entire Mortgage Finance Bubble is today especially susceptible to Subprime Contagion Effects. For starters, lending standards should be expected to tightened significantly throughout the "Alt-A," "jumbo," and prime "exotic" mortgage marketplace. This will likely pose a greater dilemma than subprime restraint for vulnerable high-priced housing across the country, with all eyes on California. For years now, the "Golden State" has been at the epicenter of mortgage lending excesses. I suspect the state has also been the leader in mortgage fraud. Going forward, I fully expect California to lead the nation in Credit losses and mortgage/housing angst.
Throughout the boom, the securitization of mortgage Credit provided endless finance for homebuyers and speculators, as well as endless profits for the holders of these instruments. As long as home prices were inflating, there was little concern whether the underlying collateral was a reasonably valued home in, say, Texas or a highly inflated property in the San Francisco Bay Area. Now, with Credit conditions beginning to tighten, I expect holders of MBS, ABS, CDOs, etc. to take a more keen interest in the type and location of underlying collateral. This Contagion Effect will mark a significant reversal in speculative flows from the mortgage arena.
For some time it has been my belief that a California housing bust would bring an end to the GSEs as we presently know them. Never in my wildest imagination did I contemplate the median price for the entire state inflating to $560,000. A bust would now likely take down the GSEs, the mortgage insurers, scores of banks, and wreak bloody havoc throughout the entire securitization and derivatives marketplaces. While few will today subscribe to such a scenario, I certainly expect the marketplace to begin contemplating and gravitating away from such risks. And I don't think it would take that much for the marketplace to start nervously totaling up the capital and reserves available for future Credit losses from the thinly capitalized guarantors of the so far pristine "AAA" agency securities marketplace. Again, there are now reasons to ponder various Contagion Effects that together could foster a major and self-reinforcing reversal of speculative flows.
Ominously, renewed dollar weakness has been an early Subprime Contagion Effect. Sure, the market now perceives the Fed will in the not too distant future cut rates and narrow rate differentials. But I also believe more may be at work. The transformation of risky Credits into perceived "money-like" instruments - that foreigners have been happy to accumulate - has lent great support to the dollar over these past few years of massive Current Account Deficits. A bursting Mortgage Finance Bubble and what it could mean for the securitization markets and risk intermediaries create the potential for Subprime Contagion Effects to precipitate a real problem for the dollar.
The Mortgage Finance Bubble should have burst last year, taking the lead from housing market dynamics. But the extraordinary dynamism associated with global Credit, speculative and liquidity excesses proved overpowering. The global leveraged speculating community was in aggressive expansion mode; Bubble excesses were going to reckless extremes throughout "Credit arbitrage;" the M&A and corporate debt Bubbles were in full bloom; and securities leveraging was taking the entire world by storm.
The resulting global liquidity cataclysm ensured insatiable demand for higher-yielding instruments, in large part satisfied by Wall Street's unprecedented CDO (collateralized debt obligations) issuance boom. Despite the turn in U.S. housing, the unprecedented deluge in speculative finance created rapacious demand for riskier loans, certainly including subprime mortgages - vulnerable housing markets notwithstanding. Readily available mortgage finance empowered subprime originators to accommodate throngs of simply terrible Credits (many borrowers content to submit fraudulent loan applications) desperate to refinance problematic mortgages with payments about to reset significantly higher. When Wall Street pool operators recognized the unfolding disaster - and began rigorously scouring portfolios for problem loans and imperfect applications to return to the originators ("early payment defaults") - the subprime Bubble was brought to a screeching halt.
That the Mortgage Finance Bubble did not succumb last year only ensured the peril associated with a protracted period of terminal blow-off excesses. Excesses included unprecedented speculation in Credit derivatives (including a Trillion or two of new CDOs), equities Bubbles spanning the globe, and only greater Bubble distortions and imbalances in U.S. and global economies. The exponential growth in risky lending, in the leveraged speculating community, in the derivatives markets, and in speculative flows to global asset markets were accommodated another year. Wall Street finance became an only more imposing source of global "money," Credit and marketplace liquidity, operating with the type of power and control central banks could only dream of.
Reading through this week's Wall Street earnings releases and listening to their conference calls left me with the sense that these firms and their clients are especially poorly positioned for an abrupt change in the market environment. Everyone is quick to state that their subprime exposure is small and that they have successfully "hedged." We are also told that market tumult has been isolated in the subprime marketplace, and that marketplace liquidity remains extraordinarily abundant. All of this may be true for now, but it does not alter the reality that the subprime collapse may very well mark a key (historic?) inflection point for the U.S. Mortgage Finance Bubble and intertwined global risk markets generally.
Clearly, the subprime collapse has quickly imposed dramatically tighter Credit standards and Availability for risky borrowers. I would expect this to speed housing price declines in some areas, with mounting Credit losses ushering in the ugly downside of Credit cycle. To be sure, this has provided a belated wakeup call regarding the latent Acute Financial Fragility of Ponzi Finance Units. Importantly, the flow (deluge) of speculative finance played a critical role in the subprime boom, and its abrupt reversal has instigated almost immediate collapse.
The bulls argue that subprime amounts to only a small portion of mortgage debt - and thus will have only minimal economic impact. More discerning analysis would instead focus on the Financial Sphere Ramifications Associated with the Hasty Reversal of Speculative Flows from Risky Mortgage Instruments. Is the flight out of subprime mortgages, securitizations and other derivatives a harbinger of things to come for the entire mortgage marketplace? Does the move toward Risk Aversion (position liquidation and/or hedging operations) in this sector mark a momentous marketplace shift from Risk Embracement to Risk Aversion?
In analyzing potential Subprime Contagion Effects, we must begin with a critical question: Is the general backdrop characterized by soundness and stability or is it more a case of excess, weak debt structures, and general fragility. Again, subprime collapsed so abruptly because of the acute fragility associated with Ponzi Finance. Unfortunately, analysis of general mortgage market vulnerability leaves me quite uneasy.
The entire Mortgage Finance Bubble is today especially susceptible to Subprime Contagion Effects. For starters, lending standards should be expected to tightened significantly throughout the "Alt-A," "jumbo," and prime "exotic" mortgage marketplace. This will likely pose a greater dilemma than subprime restraint for vulnerable high-priced housing across the country, with all eyes on California. For years now, the "Golden State" has been at the epicenter of mortgage lending excesses. I suspect the state has also been the leader in mortgage fraud. Going forward, I fully expect California to lead the nation in Credit losses and mortgage/housing angst.
Throughout the boom, the securitization of mortgage Credit provided endless finance for homebuyers and speculators, as well as endless profits for the holders of these instruments. As long as home prices were inflating, there was little concern whether the underlying collateral was a reasonably valued home in, say, Texas or a highly inflated property in the San Francisco Bay Area. Now, with Credit conditions beginning to tighten, I expect holders of MBS, ABS, CDOs, etc. to take a more keen interest in the type and location of underlying collateral. This Contagion Effect will mark a significant reversal in speculative flows from the mortgage arena.
For some time it has been my belief that a California housing bust would bring an end to the GSEs as we presently know them. Never in my wildest imagination did I contemplate the median price for the entire state inflating to $560,000. A bust would now likely take down the GSEs, the mortgage insurers, scores of banks, and wreak bloody havoc throughout the entire securitization and derivatives marketplaces. While few will today subscribe to such a scenario, I certainly expect the marketplace to begin contemplating and gravitating away from such risks. And I don't think it would take that much for the marketplace to start nervously totaling up the capital and reserves available for future Credit losses from the thinly capitalized guarantors of the so far pristine "AAA" agency securities marketplace. Again, there are now reasons to ponder various Contagion Effects that together could foster a major and self-reinforcing reversal of speculative flows.
Ominously, renewed dollar weakness has been an early Subprime Contagion Effect. Sure, the market now perceives the Fed will in the not too distant future cut rates and narrow rate differentials. But I also believe more may be at work. The transformation of risky Credits into perceived "money-like" instruments - that foreigners have been happy to accumulate - has lent great support to the dollar over these past few years of massive Current Account Deficits. A bursting Mortgage Finance Bubble and what it could mean for the securitization markets and risk intermediaries create the potential for Subprime Contagion Effects to precipitate a real problem for the dollar.
Digital gold and a flawed global order
By Benn Steil
It is remarkable how the world's short history of floating exchange rates has affected popular thinking about what is eternally normal and proper in the economic system. Recently, China-bashing US Senators Charles Schumer and Lindsey Graham wrote matter-of-factly that: "One of the fundamental tenets of free trade is that currencies should float."
Such a "tenet" would have been considered monstrous by most of the economics profession up until the last three decades of the 20th century, prior to which money accepted across borders had generally been gold, or claims on gold, for about 2,500 years. Even John Maynard Keynes, the arch-slayer of the last remnants of commodity money, was an adamant supporter of fixed exchange rates.
Floating exchange rates have proved a source of tremendous periodic instability, yielding repeated currency crises in countries whose currencies are not acceptable for international transactions, but which build up imbalances in their national balance sheets through their imports of dollar capital. The fundamental difference between capital flows under indelibly fixed and flexible exchange rates was well known generations ago, decades before the modern era of globalisation. As Friedrich Hayek noted in a 1937 lecture, under fixed rates "the effect of short-term capital movements will be on the whole to reduce the amplitude of the actual fluctuations . . . If exchanges, however, are variable, the capital movements will tend to work in the same direction as the original cause and thereby to intensify it." This logic was mirrored precisely by the radical change in capital flow behaviour that accompanied the crumbling of a credible international monetary anchor, gold, between the first and second world wars.
Monetary nationalists, who believe it natural that every country should have its own paper currency and not waste resources hoarding gold or hard currency reserves, must eventually demand capital controls - as the most noted economist critic of globalisation, Joseph Stiglitz, has done - in order to stop the people from disturbing the government's control of national credit conditions. But the government cannot stop there, Hayek reasoned, as "exchange control designed to prevent effectively the outflow of capital would really have to involve a complete control of foreign trade, since of course any variation in the terms of credit on exports or imports means an international capital movement".
Indeed, this is precisely the path the Argentine government has been following since abandoning its dollar currency board in 2002. Since writing off $80bn worth, or 75 per cent in nominal terms, of its debts, the government has been resorting to ever-more intrusive means in order to counteract the ability of its citizens to protect what remains of their savings and to buy from or sell to foreigners.
In 2003, the Argentine government introduced capital and domestic price controls, the aim being to keep the exchange rate down while simultaneously containing the inflation that policy was giving rise to. In 2004, energy sector controls were extended to include export taxes and partial export bans on oil and gas. In 2005, rules were imposed forcing companies to convert most foreign proceeds into pesos and limiting the amount of foreign currency that individuals could acquire to invest abroad. In 2006, in an effort to stop the rise of inflation beyond 1 per cent per month, President Nestor Kirchner demanded "voluntary" price freezes on about 300 products, targeting component products of the official consumer price index, and extended export bans to beef and other products.
Argentina could not be a more fitting fulfilment of Hayek's fears, that the spread of monetary nationalism could only lead to ever greater international economic and political conflict. Since the 2002 devaluation, the Argentine government has been in continuous conflict with its European counterparts over the expropriations imposed on the latter's bondholders and corporate direct investors; and the population has turned viscerally anti-American, anti-International Monetary Fund and anti-globalisation.
It was well understood before the Bretton Woods era that monetary nationalism would fundamentally change the way capital flows naturally operate, making of a benign economic force one that would necessarily wreak havoc with flexible exchange rates. The global monetary order that has emerged since the 1970s is now globalisation's greatest source of vulnerability.
What is to be done? Realistically, sauve qui peut must be the message for nations whose currencies are not wanted by foreigners. Dollarisation - abandonment of parochial currencies in favour of the dollar, euro or other internationally accepted money - is, in a world of fiat currencies, unsupported by gold or silver, the only way to globalise safely.
Of course, the status of internationally accepted money is not heaven-bestowed and there is no way effectively to insure against the unwinding of "global imbalances" should China, with nearly $1,000bn (£509bn) of reserves, and other reserve-rich central banks come to fear the unbearable lightness of their fiat holdings. Digitised commodity money may then be in store for us. Gold banks already exist that allow clients to make and receive digital gold payments - a form of electronic money, backed by gold in storage - around the globe. The business has grown significantly in recent years, in tandem with the dollar's decline.
As radical and implausible as it may sound, digitising the earth's 2,500-year experiment with commodity money may ultimately prove far more sustainable than our recent 35-year experiment with monetary sovereignty.
The writer is director of international economics at the Council on Foreign Relations and co-author of Financial Statecraft
It is remarkable how the world's short history of floating exchange rates has affected popular thinking about what is eternally normal and proper in the economic system. Recently, China-bashing US Senators Charles Schumer and Lindsey Graham wrote matter-of-factly that: "One of the fundamental tenets of free trade is that currencies should float."
Such a "tenet" would have been considered monstrous by most of the economics profession up until the last three decades of the 20th century, prior to which money accepted across borders had generally been gold, or claims on gold, for about 2,500 years. Even John Maynard Keynes, the arch-slayer of the last remnants of commodity money, was an adamant supporter of fixed exchange rates.
Floating exchange rates have proved a source of tremendous periodic instability, yielding repeated currency crises in countries whose currencies are not acceptable for international transactions, but which build up imbalances in their national balance sheets through their imports of dollar capital. The fundamental difference between capital flows under indelibly fixed and flexible exchange rates was well known generations ago, decades before the modern era of globalisation. As Friedrich Hayek noted in a 1937 lecture, under fixed rates "the effect of short-term capital movements will be on the whole to reduce the amplitude of the actual fluctuations . . . If exchanges, however, are variable, the capital movements will tend to work in the same direction as the original cause and thereby to intensify it." This logic was mirrored precisely by the radical change in capital flow behaviour that accompanied the crumbling of a credible international monetary anchor, gold, between the first and second world wars.
Monetary nationalists, who believe it natural that every country should have its own paper currency and not waste resources hoarding gold or hard currency reserves, must eventually demand capital controls - as the most noted economist critic of globalisation, Joseph Stiglitz, has done - in order to stop the people from disturbing the government's control of national credit conditions. But the government cannot stop there, Hayek reasoned, as "exchange control designed to prevent effectively the outflow of capital would really have to involve a complete control of foreign trade, since of course any variation in the terms of credit on exports or imports means an international capital movement".
Indeed, this is precisely the path the Argentine government has been following since abandoning its dollar currency board in 2002. Since writing off $80bn worth, or 75 per cent in nominal terms, of its debts, the government has been resorting to ever-more intrusive means in order to counteract the ability of its citizens to protect what remains of their savings and to buy from or sell to foreigners.
In 2003, the Argentine government introduced capital and domestic price controls, the aim being to keep the exchange rate down while simultaneously containing the inflation that policy was giving rise to. In 2004, energy sector controls were extended to include export taxes and partial export bans on oil and gas. In 2005, rules were imposed forcing companies to convert most foreign proceeds into pesos and limiting the amount of foreign currency that individuals could acquire to invest abroad. In 2006, in an effort to stop the rise of inflation beyond 1 per cent per month, President Nestor Kirchner demanded "voluntary" price freezes on about 300 products, targeting component products of the official consumer price index, and extended export bans to beef and other products.
Argentina could not be a more fitting fulfilment of Hayek's fears, that the spread of monetary nationalism could only lead to ever greater international economic and political conflict. Since the 2002 devaluation, the Argentine government has been in continuous conflict with its European counterparts over the expropriations imposed on the latter's bondholders and corporate direct investors; and the population has turned viscerally anti-American, anti-International Monetary Fund and anti-globalisation.
It was well understood before the Bretton Woods era that monetary nationalism would fundamentally change the way capital flows naturally operate, making of a benign economic force one that would necessarily wreak havoc with flexible exchange rates. The global monetary order that has emerged since the 1970s is now globalisation's greatest source of vulnerability.
What is to be done? Realistically, sauve qui peut must be the message for nations whose currencies are not wanted by foreigners. Dollarisation - abandonment of parochial currencies in favour of the dollar, euro or other internationally accepted money - is, in a world of fiat currencies, unsupported by gold or silver, the only way to globalise safely.
Of course, the status of internationally accepted money is not heaven-bestowed and there is no way effectively to insure against the unwinding of "global imbalances" should China, with nearly $1,000bn (£509bn) of reserves, and other reserve-rich central banks come to fear the unbearable lightness of their fiat holdings. Digitised commodity money may then be in store for us. Gold banks already exist that allow clients to make and receive digital gold payments - a form of electronic money, backed by gold in storage - around the globe. The business has grown significantly in recent years, in tandem with the dollar's decline.
As radical and implausible as it may sound, digitising the earth's 2,500-year experiment with commodity money may ultimately prove far more sustainable than our recent 35-year experiment with monetary sovereignty.
The writer is director of international economics at the Council on Foreign Relations and co-author of Financial Statecraft
17 March 2007
Why the subprime bust will spread
By Henry C K Liu
Years ago when the US debt bubble spread over to the housing sector, warnings from many quarters about the systemic danger of subprime mortgages were categorically dismissed by Wall Street cheerleaders as Chicken Little "sky is falling" hysteria. Even weeks before bad news on the housing finance sector was shaping up as a clear and present danger, adamant denial was still loud enough to drown out reason.
Both Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson, two top officials in charge of US monetary policy, continue to provide obligatory assurance to the nervous public that the United States' economic fundamentals are sound in the face of a jittery market. Days before being delisted from the New York Stock Exchange, shares of the collapsed New Century, a distressed subprime mortgage lender, were recommended by a major Wall Street brokerage firm as a "buy". That firm is now under criminal and regulatory investigation.
On the pages of Asia Times Online over the past two years, I have tried to put forth the rationale for the inevitability of a US housing bubble burst, pointing out reasons that the resultant financial meltdown will be much more widespread and severe than has been generally acknowledged.
On September 14, 2005, I wrote in Greenspan, the Wizard of Bubbleland:
History has shown that the Fed, more often than not, has made wrong decisions based on faulty projection. Greenspan has been rightly criticized for letting a housing price "bubble" develop, equating it to the one that swept technology stocks to stratospheric levels before bursting in 2000. Greenspan argues the Fed's role is to mop up after bubbles burst, since bubbles are hard to spot and deflate safely. But accidents are also difficult to predict, and that difficulty is not a good argument against buying insurance. There is no doubt that there is a price to be paid for every policy action. But the price of prematurely slowing down a debt bubble is infinitely lower than letting the bubble build until it bursts uncontrollably. In finance as in medicine, prevention is preferable to even the best cure. All market participants know pigs lose money. And a monetary pig loses control of the economy.
Alan Greenspan, then Fed chairman, notwithstanding his denial of responsibility in helping through the 1990s to unleash the equity bubble, had this to say in 2004 in hindsight after the bubble burst in 2000: "Instead of trying to contain a putative bubble by drastic actions with largely unpredictable consequences, we chose, as we noted in our mid-1999 congressional testimony, to focus on policies to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion."
By "the next expansion", Greenspan meant the next bubble, which manifested itself in housing. The mitigating policy was a massive injection of liquidity into the US banking system.
There is a structural reason that the housing bubble replaced the high-tech bubble. Houses cannot be imported like manufactured goods, although much of the content in houses, such as furniture, hardware, windows, kitchen equipment and bath fixtures, is manufactured overseas. Construction jobs cannot be outsourced overseas to take advantage of wage arbitrage. Instead, some non-skilled jobs are filled by low-wage illegal immigrants.
Total outstanding home mortgages in the US in 1999 were US$4.45 trillion, and by 2004 this amount had grown to $7.56 trillion, most of which was absorbed by refinancing of higher home prices at lower interest rates. When Greenspan took over at the Fed in 1987, total outstanding US home mortgages stood only at $1.82 trillion. On his watch, outstanding home mortgages quadrupled. Much of this money has been printed by the Fed, exported through the trade deficit and reimported as debt.
The most popular of all derivative products is the interest-rate swap, which in essence allows participants to make bets on the direction interest rates will take. According to the US Office of the Comptroller of the Currency (OCC), interest-rate swaps accounted for three out of four derivative contracts held by US commercial banks at the end of 1999. The notional value of these swaps totaled almost $25 trillion; 2-3% of that ($500 billion to $750 billion) reflected the banks' true credit risk in these products. Monetary economists have no idea whether notional values are part of the money supply and with what discount ratio. As we now know from experience, creative accounting has legally and illegally transformed debt proceeds as revenue.
The 2005 OCC report "Condition and Performance of Commercial Banks" shows that loan demand in the US grew at 11% in the first quarter of 2005 while core deposits grew at 7%, producing a 4-percentage-point gap. That meant that US banks' loan growth was not fully funded by deposits. The report identified possible risks as: cooling off in housing markets accompanying slower loan growth; past regional housing-price declines lingering; and credit-quality problems in housing spilling over to other loan types. Not a comforting picture.
Derivatives of all kinds weigh heavily on banks' capital structures. But interest-rate swaps can be especially toxic when interest rates rise. And since only a few business economists predicted a jump in rates for the first half of the year when 1999 began while yields in fact rose 25%, these institutions found themselves on the wrong side of an interest-rate gamble by 2000. Moreover, as interest rates rose, US banks' income diminished from interest-rate-related businesses such as mortgage lending. Interest-sensitive sources of income were the revenue disappointment in 2000, as trading was in 1999. The banks' response was to lower credit requirement for loans to increase interest-rate spread.
On Greenspan's 18-year watch, assets of US government-sponsored enterprises (GSEs) ballooned 830%, from $346 billion to $2.872 trillion. GSEs are financing entities created by the US Congress to fund subsidized loans to certain groups of borrowers such as middle- and low-income homeowners, farmers and students. Agency mortgage-backed securities (MBSs) surged 670% to $3.55 trillion. Outstanding asset-backed securities (ABSs) exploded from $75 billion to more than $2.7 trillion.
Greenspan presided over the greatest expansion of speculative finance in history, including a trillion-dollar hedge-fund industry, bloated Wall Street-firm balance sheets approaching $2 trillion, a $3.3 trillion repo (repurchase agreement) market, and a global derivatives market with notional values surpassing an unfathomable $220 trillion. Granted, notional values are not true risk exposures. But a swing of 1% in interest rate on a notional value of $220 trillion is $2.2 trillion, about 20% of US gross domestic product.
This practice of borrowing short-term at low interest rates to lend long-term at higher interest rates, known as "carry trade" in bank parlance, when globalized by deregulated cross-border flow of funds eventually led to the Asian financial crisis of 1997, when interest-rate and exchange-rate volatility became the new paradigm. Today, there are undeniable signs that the same interest-rate risks have infested the US housing bubble in recent years. And the Fed's traditional gradualism, now revived as "measured pace" in raising the Fed Funds Rate targets in response to rapid asset-price inflation, has had little effect in curbing bank lending to fund rampant speculation.
In 2005, Greenspan repeatedly denied the existence of a national housing bubble by drawing on the conventional wisdom that the US housing market was highly disaggregated by location, which was true enough. Disaggregated markets are normally not exposed to contagion, a term given to the process of distressed deals dragging down healthy deals in the same market as speculator throw good money after bad to try to stem the tide of losses. But the bubble in the housing market was caused by creative housing finance made possible by the emergence of a deregulated global credit market through finance liberalization. The low cost of mortgages lifted all US house prices beyond levels sustainable by household income in otherwise disaggregated markets.
Under cross-border finance liberalization, negative wealth effects from asset-value correction are highly contagious. For example, the Dallas Fed Beige Book released on July 27, 2005, states: "Contacts say real-estate investment is extremely high in part because the district's competitively priced markets are attracting investment capital from more expensive coastal markets." The nationwide proliferation of no-income-verification, interest-only, zero-equity and cash-out loans, while making financial sense in a rising market, is fatally toxic in a falling market, which will hit a speculative boom as surely as the sun will set. Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally.
Through mortgage-backed securitization, banks now are mere loan intermediaries that assume no long-term risk on the risky loans they make, which are sold as securitized debt of unbundled levels of risk to institutional investors with varying risk appetite commensurate with their varying need for higher returns. But who are institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages.
When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one until recently has been paying attention. The bursting of the housing bubble will act as a detonator for a massive pension crisis.
On September 29, 2005, I wrote in The repo time bomb:
Commercial banks profit from using low-interest-rate repo proceeds to finance high-interest-rate "subprime" lending - credit cards, home equity loans, automobile loans etc - to borrowers of high credit risks at double-digit interest rates compounded monthly. To reduce their capital requirement, banks then remove their loans from their balance sheets by selling the CMOs (collateralized mortgage obligations) with unbundled risks to a wide range of investors seeking higher returns commensurate with higher risk. In another era, such high-risk/high-interest loan activities were known as loan-sharking. Yet Greenspan is on record as having said that systemic risk is a good tradeoff for unprecedented economic expansion.
Repos are now one of the largest and most active sectors in the US money market. More specifically, banks appear to be actively managing their inventories, to respond to changes in customer demand and the opportunity costs of holding cash, using innovative ways to bypass reserve requirements. Rising customer demand for new loans is fueled by and in turn drives further down falling credit standards and widens interest-rate spread in a vicious cycle of unrestrained credit expansion.
Again, on October 27, 2005, I wrote in How the US money market really works:
When asset prices rise, it reflects a change in the money supply/asset relationship, meaning more money chasing the same number of assets. Thus when asset prices rise, it is not necessarily a healthy sign for the economy. It reflects a troublesome condition in which additional money is not creating correspondingly more assets. It is a fundamental self-deception for economists to view asset-price appreciation as economic growth. A housing bubble is an example of this ...
Money now, especially virtual money, is created quite independently of Fed action, and money creation has become much less sensitive to interest-rate fluctuations. This explains why the measured pace at which the Fed has been raising the Fed funds rate target has little direct or immediate effect on the housing bubble.
On January 11, 2006, I wrote in Of debt, deflation and rotten apples:
In the US, where loan securitization is widespread, banks are tempted to push risky loans by passing on the long-term risk to non-bank investors through debt securitization. Credit-default swaps, a relatively novel form of derivative contract, allow investors to hedge against securitized mortgage pools. This type of contract, known as asset-back securities, has been limited to the corporate bond market, conventional home mortgages, and auto and credit-card loans. Last June [2005], a new standard contract began trading by hedge funds that bets on home-equity securities backed by adjustable-rate loans to subprime borrowers, not as a hedge strategy but as a profit center. When bearish trades are profitable, their bets can easily become self-fulfilling prophesies by kick-starting a downward vicious cycle.
Total outstanding home mortgages in the US in 1999 were $4.45 trillion, and by the end of 2004 this amount grew to $8.13 trillion, most of which was absorbed by refinancing of higher home prices at lower interest rates. When Greenspan took over at the Fed in 1987, total outstanding home mortgages in the US stood only at $1.82 trillion. On his 18-year watch, outstanding home mortgages quadrupled to $8.821 trillion by the end of third-quarter 2005. Much of this money has been printed by the Fed, exported through the trade deficit and re-imported as debt [in the capital account surplus]. Given that new housing units have been about 5% of the US housing stock per year, at the rate of about 2 million units per year, the housing stock increased by 100% over a period of 18 years while outstanding mortgages increased by more than 400%.
The Bank of Japan's zero-interest policy, combined with general asset deflation in the yen economy, has caught the Japanese insurance companies in a financial vise. Both new loan rates and asset values are insufficient to carry previous long-term yields promised to customers. Japan does not have a debtor-friendly bankruptcy law, as the US has. At any rate, insurance companies, like banks, cannot file for bankruptcy in the US. As a regulated sector, insurance companies are governed by an insurance commission in each state, which normally has a reinsurance fund to take care of unit insolvency. The funds are nowhere near sufficient to handle systemic collapse. The same happened to the US Federal Deposit Insurance Corp in the 1980s.
The insurance sector in the US will face serious problems as the Federal Reserve again lowers the Fed Funds Rate targets and keeps them near zero for extended periods. Several segments of the insurance sector, such as health insurance and casualty insurance, are already in distress for other reasons. Government-insured pension schemes are under pressure as troubled industrial giants such as General Motors default on their pension obligation, along with the airlines.
In the era of industrial capitalism, a low interest rate was a stimulant. But in this era of finance capitalism flirting fearlessly with debt, lowering rates creates complex problems, especially when most big borrowers routinely hedge their interest-rate exposures. For them, even when short-term rates drop or rise abruptly, the cost remains the same for the duration of the loan term, the only difference being that they pay a different party. While debtors remain solvent, investors in securitized loans go under. Credit derivatives have been the hot source of profit for most finance companies and will be the weapon of massive destruction for the financial system, as Warren Buffet warned.
Again on February 16, 2006, I wrote in The global money and currency markets:
In the United States, when house prices have generally tripled in less than a decade, it is evidence that the value of the dollar has declined by a factor of three in the same time period. Consumer prices have not risen by the same amount because of outsourcing of manufacturing to low-wage economies overseas which also acts as a depressant on domestic wages. Imbalance in the economy appears if wages and earnings have not risen proportional to prices.
A homeowner whose house has increased 300% in market price while his income has risen only 30% has not become richer. He has become a victim of uneven inflation. He may enjoy a one-time joyride with cash-out financing with a new mortgage, but his income cannot sustain the new mortgage payments if interest rates rise, and he will lose his home. And interest rates will rise if his income increases, because that is how the Fed defines inflation. Thus when his income rises, the market price of his home will fall, giving him an incentive to walk away from a big mortgage in which he has little equity tie-up. This can become a systemic problem for the mortgage-backed security sector.
That, dear readers, is why the US subprime mortgage bust will spread and cause severe damage to the global finance system.
---------------------------------------------------
Henry C K Liu is chairman of a New York-based private investment group. His website is at www.henryckliu.com.
Years ago when the US debt bubble spread over to the housing sector, warnings from many quarters about the systemic danger of subprime mortgages were categorically dismissed by Wall Street cheerleaders as Chicken Little "sky is falling" hysteria. Even weeks before bad news on the housing finance sector was shaping up as a clear and present danger, adamant denial was still loud enough to drown out reason.
Both Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson, two top officials in charge of US monetary policy, continue to provide obligatory assurance to the nervous public that the United States' economic fundamentals are sound in the face of a jittery market. Days before being delisted from the New York Stock Exchange, shares of the collapsed New Century, a distressed subprime mortgage lender, were recommended by a major Wall Street brokerage firm as a "buy". That firm is now under criminal and regulatory investigation.
On the pages of Asia Times Online over the past two years, I have tried to put forth the rationale for the inevitability of a US housing bubble burst, pointing out reasons that the resultant financial meltdown will be much more widespread and severe than has been generally acknowledged.
On September 14, 2005, I wrote in Greenspan, the Wizard of Bubbleland:
History has shown that the Fed, more often than not, has made wrong decisions based on faulty projection. Greenspan has been rightly criticized for letting a housing price "bubble" develop, equating it to the one that swept technology stocks to stratospheric levels before bursting in 2000. Greenspan argues the Fed's role is to mop up after bubbles burst, since bubbles are hard to spot and deflate safely. But accidents are also difficult to predict, and that difficulty is not a good argument against buying insurance. There is no doubt that there is a price to be paid for every policy action. But the price of prematurely slowing down a debt bubble is infinitely lower than letting the bubble build until it bursts uncontrollably. In finance as in medicine, prevention is preferable to even the best cure. All market participants know pigs lose money. And a monetary pig loses control of the economy.
Alan Greenspan, then Fed chairman, notwithstanding his denial of responsibility in helping through the 1990s to unleash the equity bubble, had this to say in 2004 in hindsight after the bubble burst in 2000: "Instead of trying to contain a putative bubble by drastic actions with largely unpredictable consequences, we chose, as we noted in our mid-1999 congressional testimony, to focus on policies to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion."
By "the next expansion", Greenspan meant the next bubble, which manifested itself in housing. The mitigating policy was a massive injection of liquidity into the US banking system.
There is a structural reason that the housing bubble replaced the high-tech bubble. Houses cannot be imported like manufactured goods, although much of the content in houses, such as furniture, hardware, windows, kitchen equipment and bath fixtures, is manufactured overseas. Construction jobs cannot be outsourced overseas to take advantage of wage arbitrage. Instead, some non-skilled jobs are filled by low-wage illegal immigrants.
Total outstanding home mortgages in the US in 1999 were US$4.45 trillion, and by 2004 this amount had grown to $7.56 trillion, most of which was absorbed by refinancing of higher home prices at lower interest rates. When Greenspan took over at the Fed in 1987, total outstanding US home mortgages stood only at $1.82 trillion. On his watch, outstanding home mortgages quadrupled. Much of this money has been printed by the Fed, exported through the trade deficit and reimported as debt.
The most popular of all derivative products is the interest-rate swap, which in essence allows participants to make bets on the direction interest rates will take. According to the US Office of the Comptroller of the Currency (OCC), interest-rate swaps accounted for three out of four derivative contracts held by US commercial banks at the end of 1999. The notional value of these swaps totaled almost $25 trillion; 2-3% of that ($500 billion to $750 billion) reflected the banks' true credit risk in these products. Monetary economists have no idea whether notional values are part of the money supply and with what discount ratio. As we now know from experience, creative accounting has legally and illegally transformed debt proceeds as revenue.
The 2005 OCC report "Condition and Performance of Commercial Banks" shows that loan demand in the US grew at 11% in the first quarter of 2005 while core deposits grew at 7%, producing a 4-percentage-point gap. That meant that US banks' loan growth was not fully funded by deposits. The report identified possible risks as: cooling off in housing markets accompanying slower loan growth; past regional housing-price declines lingering; and credit-quality problems in housing spilling over to other loan types. Not a comforting picture.
Derivatives of all kinds weigh heavily on banks' capital structures. But interest-rate swaps can be especially toxic when interest rates rise. And since only a few business economists predicted a jump in rates for the first half of the year when 1999 began while yields in fact rose 25%, these institutions found themselves on the wrong side of an interest-rate gamble by 2000. Moreover, as interest rates rose, US banks' income diminished from interest-rate-related businesses such as mortgage lending. Interest-sensitive sources of income were the revenue disappointment in 2000, as trading was in 1999. The banks' response was to lower credit requirement for loans to increase interest-rate spread.
On Greenspan's 18-year watch, assets of US government-sponsored enterprises (GSEs) ballooned 830%, from $346 billion to $2.872 trillion. GSEs are financing entities created by the US Congress to fund subsidized loans to certain groups of borrowers such as middle- and low-income homeowners, farmers and students. Agency mortgage-backed securities (MBSs) surged 670% to $3.55 trillion. Outstanding asset-backed securities (ABSs) exploded from $75 billion to more than $2.7 trillion.
Greenspan presided over the greatest expansion of speculative finance in history, including a trillion-dollar hedge-fund industry, bloated Wall Street-firm balance sheets approaching $2 trillion, a $3.3 trillion repo (repurchase agreement) market, and a global derivatives market with notional values surpassing an unfathomable $220 trillion. Granted, notional values are not true risk exposures. But a swing of 1% in interest rate on a notional value of $220 trillion is $2.2 trillion, about 20% of US gross domestic product.
This practice of borrowing short-term at low interest rates to lend long-term at higher interest rates, known as "carry trade" in bank parlance, when globalized by deregulated cross-border flow of funds eventually led to the Asian financial crisis of 1997, when interest-rate and exchange-rate volatility became the new paradigm. Today, there are undeniable signs that the same interest-rate risks have infested the US housing bubble in recent years. And the Fed's traditional gradualism, now revived as "measured pace" in raising the Fed Funds Rate targets in response to rapid asset-price inflation, has had little effect in curbing bank lending to fund rampant speculation.
In 2005, Greenspan repeatedly denied the existence of a national housing bubble by drawing on the conventional wisdom that the US housing market was highly disaggregated by location, which was true enough. Disaggregated markets are normally not exposed to contagion, a term given to the process of distressed deals dragging down healthy deals in the same market as speculator throw good money after bad to try to stem the tide of losses. But the bubble in the housing market was caused by creative housing finance made possible by the emergence of a deregulated global credit market through finance liberalization. The low cost of mortgages lifted all US house prices beyond levels sustainable by household income in otherwise disaggregated markets.
Under cross-border finance liberalization, negative wealth effects from asset-value correction are highly contagious. For example, the Dallas Fed Beige Book released on July 27, 2005, states: "Contacts say real-estate investment is extremely high in part because the district's competitively priced markets are attracting investment capital from more expensive coastal markets." The nationwide proliferation of no-income-verification, interest-only, zero-equity and cash-out loans, while making financial sense in a rising market, is fatally toxic in a falling market, which will hit a speculative boom as surely as the sun will set. Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally.
Through mortgage-backed securitization, banks now are mere loan intermediaries that assume no long-term risk on the risky loans they make, which are sold as securitized debt of unbundled levels of risk to institutional investors with varying risk appetite commensurate with their varying need for higher returns. But who are institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages.
When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one until recently has been paying attention. The bursting of the housing bubble will act as a detonator for a massive pension crisis.
On September 29, 2005, I wrote in The repo time bomb:
Commercial banks profit from using low-interest-rate repo proceeds to finance high-interest-rate "subprime" lending - credit cards, home equity loans, automobile loans etc - to borrowers of high credit risks at double-digit interest rates compounded monthly. To reduce their capital requirement, banks then remove their loans from their balance sheets by selling the CMOs (collateralized mortgage obligations) with unbundled risks to a wide range of investors seeking higher returns commensurate with higher risk. In another era, such high-risk/high-interest loan activities were known as loan-sharking. Yet Greenspan is on record as having said that systemic risk is a good tradeoff for unprecedented economic expansion.
Repos are now one of the largest and most active sectors in the US money market. More specifically, banks appear to be actively managing their inventories, to respond to changes in customer demand and the opportunity costs of holding cash, using innovative ways to bypass reserve requirements. Rising customer demand for new loans is fueled by and in turn drives further down falling credit standards and widens interest-rate spread in a vicious cycle of unrestrained credit expansion.
Again, on October 27, 2005, I wrote in How the US money market really works:
When asset prices rise, it reflects a change in the money supply/asset relationship, meaning more money chasing the same number of assets. Thus when asset prices rise, it is not necessarily a healthy sign for the economy. It reflects a troublesome condition in which additional money is not creating correspondingly more assets. It is a fundamental self-deception for economists to view asset-price appreciation as economic growth. A housing bubble is an example of this ...
Money now, especially virtual money, is created quite independently of Fed action, and money creation has become much less sensitive to interest-rate fluctuations. This explains why the measured pace at which the Fed has been raising the Fed funds rate target has little direct or immediate effect on the housing bubble.
On January 11, 2006, I wrote in Of debt, deflation and rotten apples:
In the US, where loan securitization is widespread, banks are tempted to push risky loans by passing on the long-term risk to non-bank investors through debt securitization. Credit-default swaps, a relatively novel form of derivative contract, allow investors to hedge against securitized mortgage pools. This type of contract, known as asset-back securities, has been limited to the corporate bond market, conventional home mortgages, and auto and credit-card loans. Last June [2005], a new standard contract began trading by hedge funds that bets on home-equity securities backed by adjustable-rate loans to subprime borrowers, not as a hedge strategy but as a profit center. When bearish trades are profitable, their bets can easily become self-fulfilling prophesies by kick-starting a downward vicious cycle.
Total outstanding home mortgages in the US in 1999 were $4.45 trillion, and by the end of 2004 this amount grew to $8.13 trillion, most of which was absorbed by refinancing of higher home prices at lower interest rates. When Greenspan took over at the Fed in 1987, total outstanding home mortgages in the US stood only at $1.82 trillion. On his 18-year watch, outstanding home mortgages quadrupled to $8.821 trillion by the end of third-quarter 2005. Much of this money has been printed by the Fed, exported through the trade deficit and re-imported as debt [in the capital account surplus]. Given that new housing units have been about 5% of the US housing stock per year, at the rate of about 2 million units per year, the housing stock increased by 100% over a period of 18 years while outstanding mortgages increased by more than 400%.
The Bank of Japan's zero-interest policy, combined with general asset deflation in the yen economy, has caught the Japanese insurance companies in a financial vise. Both new loan rates and asset values are insufficient to carry previous long-term yields promised to customers. Japan does not have a debtor-friendly bankruptcy law, as the US has. At any rate, insurance companies, like banks, cannot file for bankruptcy in the US. As a regulated sector, insurance companies are governed by an insurance commission in each state, which normally has a reinsurance fund to take care of unit insolvency. The funds are nowhere near sufficient to handle systemic collapse. The same happened to the US Federal Deposit Insurance Corp in the 1980s.
The insurance sector in the US will face serious problems as the Federal Reserve again lowers the Fed Funds Rate targets and keeps them near zero for extended periods. Several segments of the insurance sector, such as health insurance and casualty insurance, are already in distress for other reasons. Government-insured pension schemes are under pressure as troubled industrial giants such as General Motors default on their pension obligation, along with the airlines.
In the era of industrial capitalism, a low interest rate was a stimulant. But in this era of finance capitalism flirting fearlessly with debt, lowering rates creates complex problems, especially when most big borrowers routinely hedge their interest-rate exposures. For them, even when short-term rates drop or rise abruptly, the cost remains the same for the duration of the loan term, the only difference being that they pay a different party. While debtors remain solvent, investors in securitized loans go under. Credit derivatives have been the hot source of profit for most finance companies and will be the weapon of massive destruction for the financial system, as Warren Buffet warned.
Again on February 16, 2006, I wrote in The global money and currency markets:
In the United States, when house prices have generally tripled in less than a decade, it is evidence that the value of the dollar has declined by a factor of three in the same time period. Consumer prices have not risen by the same amount because of outsourcing of manufacturing to low-wage economies overseas which also acts as a depressant on domestic wages. Imbalance in the economy appears if wages and earnings have not risen proportional to prices.
A homeowner whose house has increased 300% in market price while his income has risen only 30% has not become richer. He has become a victim of uneven inflation. He may enjoy a one-time joyride with cash-out financing with a new mortgage, but his income cannot sustain the new mortgage payments if interest rates rise, and he will lose his home. And interest rates will rise if his income increases, because that is how the Fed defines inflation. Thus when his income rises, the market price of his home will fall, giving him an incentive to walk away from a big mortgage in which he has little equity tie-up. This can become a systemic problem for the mortgage-backed security sector.
That, dear readers, is why the US subprime mortgage bust will spread and cause severe damage to the global finance system.
---------------------------------------------------
Henry C K Liu is chairman of a New York-based private investment group. His website is at www.henryckliu.com.
16 March 2007
A sea-change in risk perception
RISKY BUSINESS
A sea-change in risk perception
By Jephraim P Gundzik
Overly loose monetary policy in the US and Japan has masked rising global investment risk. This tidal wave of cheap dollars and yen encouraged investors to ignore age-old risks associated with soaring credit growth.
Plunging stock markets around the world and dollar depreciation indicate that risk perceptions are changing dramatically. This change in risk perception will produce a prolonged and sharp correction in all of the world's stock markets. Growing risk aversion will push US Treasury yields lower, triggering dollar devaluation and soaring precious-metals prices in the months ahead.
Blame the Fed and the BOJ
In an attempt to deflect imported deflation from Japan, the US Federal Reserve under Alan Greenspan began to loosen monetary policy in early 2001. After the terrorist attacks on New York City and the Pentagon in September 2001, the Greenspan Fed pushed interest rates aggressively lower to support the US economy and financial system. Though the economy began to recover in 2002, the Fed maintained its aggressive easing through 2004, pushing US interest rates to a 50-year low.
The Fed reversed course in late 2004, but the very slow pace of monetary-policy tightening did little to weaken thriving mortgage-credit growth, which continued to bound higher in 2005. The combination of super-loose monetary policy and very gradual monetary-policy tightening encouraged mortgage lenders in the US greatly to loosen credit standards, triggering unprecedented growth in US real-estate values and home construction.
The booming housing market accelerated US economic growth, further obscuring investment risk associated with very rapid credit growth and sharply deteriorating credit standards.
The Bank of Japan (BOJ) followed the Fed's example throughout the early 2000s, leaving nominal interest rates at 0%. Monetary policy in Japan was further loosened after the BOJ implemented its quantitative easing policy, which flooded the financial system with cash in the hope of reviving domestic credit growth and private demand. Rapidly changing demographics in Japan muted the impact of the BOJ's free-money policy. This forced the BOJ to prolong this policy, which remains largely in place.
Though the BOJ had trouble boosting private demand at home, its free-money policy began to flow through the financial system, which became an intermediary for external yen borrowing. This external borrowing, more commonly known as the yen carry trade, lavished trillions of yen on foreign banks, brokers, insurance companies and investors who subsequently invested in much higher-yielding assets, especially in emerging-market countries.
The limitless supply of ultra-cheap yen from the BOJ greatly obscured investment risk not only in Japan but wherever the yen carry trade was used by investors to boost returns. Because the yen carry trade was employed in stock, bond and real-estate markets around the world, the BOJ in effect muted global investment risk, pushing asset values to massively overvalued levels relative to risk.
Risk exists after all
Though monetary policy in the US and Japan remains extremely loose, the sudden downdraft in global equity markets and dollar depreciation, which began early this month, indicate that risk perceptions have changed dramatically. This sudden shift was driven by unexpected weakness in the US economy - the product of the collapsing housing market, soaring real-estate foreclosures, and their very negative impact on the US financial system.
Investors around the world ignored excruciatingly obvious indications, which first appeared in early 2006, that the US housing market was rapidly weakening. Investors also failed to understand the negative implications this weakness held for global economic growth and asset values. While the Fed and the BOJ are to blame for obscuring investment risk, the perpetuation of this masquerade has been greatly abetted by the world's largest investment banks and brokerages.
These institutions, with their exceedingly optimistic global economic outlooks, also encouraged investors to ignore investment risk associated with super-fast credit growth. The time has come to pay the piper. Banks, brokerages and investors will pay a huge price over the next several months for ignoring rising investment risk over the past several years. Unlike the mid-2006 mild correction in global asset values and the dollar, the current correction promises to be exceedingly brutal.
The 2006 mini-correction was driven by fear that monetary policy in the US and Japan would tighten significantly. The Fed and the BOJ quickly allayed these fears by keeping monetary policy overly loose. This led to a rebound in asset values and dollar appreciation against the yen as investors redoubled their yen-carry-trade positions.
In contrast, the current correction is being driven by the closing gap between US economic reality and perceptions spun by banks and brokers promising a "Goldilocks" recovery. As the reality of rapidly slowing US economic growth and spreading problems in the financial system overtakes investors, the overvalued US equity market will continue its downward trek, falling another 20% at least. To be sure, the gathering US economic recession will force the Fed to loosen monetary policy further. However, this will do little to arrest the decline of the economy or the stock market.
Though interest rates will fall in the US, this will not immediately stimulate a resurgence in the housing market. Mortgage lenders and banks saddled with growing non-performing loan portfolios will continue to tighten credit standards, leaving many potential borrowers in the cold. At the same time, surging foreclosures will add to the housing supply, forcing home prices much lower. This loss of home equity combined with a credit drought will undercut private demand in the US, prompting a rise in unemployment and further weakness in private demand.
A 20% correction in US stocks will push stock markets around the world lower. However, emerging-market equity and bond prices are likely to plunge much more deeply. The yen carry trade has pushed hundreds of billions of dollars into emerging-market assets over the past two years, though investment risk in many countries has increased exponentially. Economic recession and falling interest rates in the US could prove to be the dollar's death knell, forcing sustained unwinding of the yen carry trade.
Dollar weakness will greatly benefit precious metals, especially gold, in 2007. Falling US interest rates will also benefit precious metals, particularly if rising commodity prices continue to push global inflation higher. The pendulum has begun to swing away from risk predilection toward risk aversion. Fasten your seatbelts, because this swing is gaining momentum.
----------------------------------------------
Jephraim P Gundzik is president of Condor Advisers. Condor Advisers provides investment risk analysis to individuals and institutions worldwide. Visit www.condoradvisers.com for more information.
A sea-change in risk perception
By Jephraim P Gundzik
Overly loose monetary policy in the US and Japan has masked rising global investment risk. This tidal wave of cheap dollars and yen encouraged investors to ignore age-old risks associated with soaring credit growth.
Plunging stock markets around the world and dollar depreciation indicate that risk perceptions are changing dramatically. This change in risk perception will produce a prolonged and sharp correction in all of the world's stock markets. Growing risk aversion will push US Treasury yields lower, triggering dollar devaluation and soaring precious-metals prices in the months ahead.
Blame the Fed and the BOJ
In an attempt to deflect imported deflation from Japan, the US Federal Reserve under Alan Greenspan began to loosen monetary policy in early 2001. After the terrorist attacks on New York City and the Pentagon in September 2001, the Greenspan Fed pushed interest rates aggressively lower to support the US economy and financial system. Though the economy began to recover in 2002, the Fed maintained its aggressive easing through 2004, pushing US interest rates to a 50-year low.
The Fed reversed course in late 2004, but the very slow pace of monetary-policy tightening did little to weaken thriving mortgage-credit growth, which continued to bound higher in 2005. The combination of super-loose monetary policy and very gradual monetary-policy tightening encouraged mortgage lenders in the US greatly to loosen credit standards, triggering unprecedented growth in US real-estate values and home construction.
The booming housing market accelerated US economic growth, further obscuring investment risk associated with very rapid credit growth and sharply deteriorating credit standards.
The Bank of Japan (BOJ) followed the Fed's example throughout the early 2000s, leaving nominal interest rates at 0%. Monetary policy in Japan was further loosened after the BOJ implemented its quantitative easing policy, which flooded the financial system with cash in the hope of reviving domestic credit growth and private demand. Rapidly changing demographics in Japan muted the impact of the BOJ's free-money policy. This forced the BOJ to prolong this policy, which remains largely in place.
Though the BOJ had trouble boosting private demand at home, its free-money policy began to flow through the financial system, which became an intermediary for external yen borrowing. This external borrowing, more commonly known as the yen carry trade, lavished trillions of yen on foreign banks, brokers, insurance companies and investors who subsequently invested in much higher-yielding assets, especially in emerging-market countries.
The limitless supply of ultra-cheap yen from the BOJ greatly obscured investment risk not only in Japan but wherever the yen carry trade was used by investors to boost returns. Because the yen carry trade was employed in stock, bond and real-estate markets around the world, the BOJ in effect muted global investment risk, pushing asset values to massively overvalued levels relative to risk.
Risk exists after all
Though monetary policy in the US and Japan remains extremely loose, the sudden downdraft in global equity markets and dollar depreciation, which began early this month, indicate that risk perceptions have changed dramatically. This sudden shift was driven by unexpected weakness in the US economy - the product of the collapsing housing market, soaring real-estate foreclosures, and their very negative impact on the US financial system.
Investors around the world ignored excruciatingly obvious indications, which first appeared in early 2006, that the US housing market was rapidly weakening. Investors also failed to understand the negative implications this weakness held for global economic growth and asset values. While the Fed and the BOJ are to blame for obscuring investment risk, the perpetuation of this masquerade has been greatly abetted by the world's largest investment banks and brokerages.
These institutions, with their exceedingly optimistic global economic outlooks, also encouraged investors to ignore investment risk associated with super-fast credit growth. The time has come to pay the piper. Banks, brokerages and investors will pay a huge price over the next several months for ignoring rising investment risk over the past several years. Unlike the mid-2006 mild correction in global asset values and the dollar, the current correction promises to be exceedingly brutal.
The 2006 mini-correction was driven by fear that monetary policy in the US and Japan would tighten significantly. The Fed and the BOJ quickly allayed these fears by keeping monetary policy overly loose. This led to a rebound in asset values and dollar appreciation against the yen as investors redoubled their yen-carry-trade positions.
In contrast, the current correction is being driven by the closing gap between US economic reality and perceptions spun by banks and brokers promising a "Goldilocks" recovery. As the reality of rapidly slowing US economic growth and spreading problems in the financial system overtakes investors, the overvalued US equity market will continue its downward trek, falling another 20% at least. To be sure, the gathering US economic recession will force the Fed to loosen monetary policy further. However, this will do little to arrest the decline of the economy or the stock market.
Though interest rates will fall in the US, this will not immediately stimulate a resurgence in the housing market. Mortgage lenders and banks saddled with growing non-performing loan portfolios will continue to tighten credit standards, leaving many potential borrowers in the cold. At the same time, surging foreclosures will add to the housing supply, forcing home prices much lower. This loss of home equity combined with a credit drought will undercut private demand in the US, prompting a rise in unemployment and further weakness in private demand.
A 20% correction in US stocks will push stock markets around the world lower. However, emerging-market equity and bond prices are likely to plunge much more deeply. The yen carry trade has pushed hundreds of billions of dollars into emerging-market assets over the past two years, though investment risk in many countries has increased exponentially. Economic recession and falling interest rates in the US could prove to be the dollar's death knell, forcing sustained unwinding of the yen carry trade.
Dollar weakness will greatly benefit precious metals, especially gold, in 2007. Falling US interest rates will also benefit precious metals, particularly if rising commodity prices continue to push global inflation higher. The pendulum has begun to swing away from risk predilection toward risk aversion. Fasten your seatbelts, because this swing is gaining momentum.
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Jephraim P Gundzik is president of Condor Advisers. Condor Advisers provides investment risk analysis to individuals and institutions worldwide. Visit www.condoradvisers.com for more information.
15 March 2007
Top investor sees U.S. property crash
MOSCOW (Reuters) - Commodities investment guru Jim Rogers stepped into the U.S. subprime fray on Wednesday, predicting a real estate crash that would trigger defaults and spread contagion to emerging markets.
"You can't believe how bad it's going to get before it gets any better," the prominent U.S. fund manager told Reuters by telephone from New York.
"It's going to be a disaster for many people who don't have a clue about what happens when a real estate bubble pops.
"It is going to be a huge mess," said Rogers, who has put his $15 million belle epoque mansion on Manhattan's Upper West Side on the market and is planning to move to Asia.
Worries about losses in the U.S. mortgage market have sent stock prices falling in Asia and Europe, with shares in financial services companies falling the most.
Some investors fear the problems of lenders who make subprime loans to people with weak credit histories are spreading to mainstream financial firms and will worsen the U.S. housing slowdown.
"Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history," Rogers said.
"When markets turn from bubble to reality, a lot of people get burned."
The fund manager, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s and has focused on commodities since 1998, said the crisis would spread to emerging markets which he said now faced a prolonged bear run.
"When you have a financial crisis, it reverberates in other financial markets, especially in those with speculative excess," he said.
"Right now, there is huge speculative excess in emerging markets around the world. There will be a lot of money coming out of emerging markets.
"I've sold out of emerging markets except for China," said Rogers, long a prominent China bull.
Even in China, the world's fastest expanding economy, Rogers said stocks were overvalued and could go down 30-40 percent.
But he added: "China is one of the few countries in the world where I'm willing to sit out a 30-40 percent decline."
The last stock market bubble to burst was the dot-com craze which sparked a crash from March 2000 to October 2002.
When the last bubble burst in Japan, said Rogers, stock prices went down 85 percent despite the country's high savings rate and huge balance of payment surplus.
"This is the end of the liquidity party," said Rogers. "Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse."
"You can't believe how bad it's going to get before it gets any better," the prominent U.S. fund manager told Reuters by telephone from New York.
"It's going to be a disaster for many people who don't have a clue about what happens when a real estate bubble pops.
"It is going to be a huge mess," said Rogers, who has put his $15 million belle epoque mansion on Manhattan's Upper West Side on the market and is planning to move to Asia.
Worries about losses in the U.S. mortgage market have sent stock prices falling in Asia and Europe, with shares in financial services companies falling the most.
Some investors fear the problems of lenders who make subprime loans to people with weak credit histories are spreading to mainstream financial firms and will worsen the U.S. housing slowdown.
"Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history," Rogers said.
"When markets turn from bubble to reality, a lot of people get burned."
The fund manager, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s and has focused on commodities since 1998, said the crisis would spread to emerging markets which he said now faced a prolonged bear run.
"When you have a financial crisis, it reverberates in other financial markets, especially in those with speculative excess," he said.
"Right now, there is huge speculative excess in emerging markets around the world. There will be a lot of money coming out of emerging markets.
"I've sold out of emerging markets except for China," said Rogers, long a prominent China bull.
Even in China, the world's fastest expanding economy, Rogers said stocks were overvalued and could go down 30-40 percent.
But he added: "China is one of the few countries in the world where I'm willing to sit out a 30-40 percent decline."
The last stock market bubble to burst was the dot-com craze which sparked a crash from March 2000 to October 2002.
When the last bubble burst in Japan, said Rogers, stock prices went down 85 percent despite the country's high savings rate and huge balance of payment surplus.
"This is the end of the liquidity party," said Rogers. "Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse."
14 March 2007
Leaving Iraq: The Grim Truth
Rolling Stone : Leaving Iraq: The Grim Truth: "The war in Iraq isn't over yet, but -- surge or no surge -- the United States has already lost. That's the grim consensus of a panel of experts assembled by Rolling Stone to assess the future of Iraq. 'Even if we had a million men to go in, it's too late now,' says retired four-star Gen. Tony McPeak, who served on the Joint Chiefs of Staff during the Gulf War. 'Humpty Dumpty can't be put back together again.'
Those on the panel -- including diplomats, counterterror analysts and a former top military commander -- agree that President Bush's attempt to secure Baghdad will only succeed in dragging out the conflict, creating something far beyond any Vietnam-style 'quagmire.' The surge won't bring an end to the sectarian cleansing that has ravaged Iraq, as the newly empowered Shiite majority seeks to settle scores built up during centuries of oppressive rule by the Sunni minority. It will do nothing to defuse the powder keg that an independence-minded Kurdistan, in Iraq's northern provinces, poses to the governments of Turkey, Syria and Iran, which have long brutalized their own Kurdish separatists. And it will only worsen the global war on terror."
Those on the panel -- including diplomats, counterterror analysts and a former top military commander -- agree that President Bush's attempt to secure Baghdad will only succeed in dragging out the conflict, creating something far beyond any Vietnam-style 'quagmire.' The surge won't bring an end to the sectarian cleansing that has ravaged Iraq, as the newly empowered Shiite majority seeks to settle scores built up during centuries of oppressive rule by the Sunni minority. It will do nothing to defuse the powder keg that an independence-minded Kurdistan, in Iraq's northern provinces, poses to the governments of Turkey, Syria and Iran, which have long brutalized their own Kurdish separatists. And it will only worsen the global war on terror."
The Minsky Moment: They Can Run, But They Can’t Hide
The collapse of New Century this week illustrates in spades the end game of Ponzi finance. All the incentives for Ponzi business models are front loaded, that being collecting fees and commissions for silly season and often fraudulent transactions. Once the string has been run, the loots from these transactions are stuffed into the criminal rat lines, and the game of musical chairs begins.
It is at this twisting in the wind “break point” that the hyperreality crowd gets the “surprise”, that makes their denial no longer an illusionary asset, but a liability. There is then a mad scramble to determine who becomes the final bagholders of the Ponzi scam. That’s when a term that will without doubt become increasingly familiar enters the lexicon, the “margin call”. Margin calls pull the plug on Ponzi finance “liquidity”.
New Century said in a securities filing yesterday that all its lenders had frozen their credit lines and were demanding that it buy back $8.4 billion in loans that it issued using the money it borrowed from the banks — money New Century says it does not have.
Of course all the players will pretend and proclaim that it will be somebody else who will end up holding these Old Maid Cards, or guarantee their loss claims. They will also pretend that this drama will be drawn out, and that they can head for the exits in an orderly fashion. In reality though historic Minsky moments of this magnitude unfold quite rapidly. In fact, last night we were greeted with yet another budding implosion, this time an outfit with the hyperreal motherhood and apple pie name Accredited Home Lenders.
What continues to be remarkable about these turkey shoot setups is how the shares stay levitated right up to the very end. Incredibly, even on the eve of their collapses these firms are fully supported by Wall Street dead fish with “buy recommendations”. Despite the overwhelming evidence that Toto has pulled the curtain on the magnificent Wizard of Oz, these firms still are treated as credible institutions? A thinking person has to wonder at what point the marks tire of “surprises” and the commentary from shills, thus accelerating the Minsky moment.
link
It is at this twisting in the wind “break point” that the hyperreality crowd gets the “surprise”, that makes their denial no longer an illusionary asset, but a liability. There is then a mad scramble to determine who becomes the final bagholders of the Ponzi scam. That’s when a term that will without doubt become increasingly familiar enters the lexicon, the “margin call”. Margin calls pull the plug on Ponzi finance “liquidity”.
New Century said in a securities filing yesterday that all its lenders had frozen their credit lines and were demanding that it buy back $8.4 billion in loans that it issued using the money it borrowed from the banks — money New Century says it does not have.
Of course all the players will pretend and proclaim that it will be somebody else who will end up holding these Old Maid Cards, or guarantee their loss claims. They will also pretend that this drama will be drawn out, and that they can head for the exits in an orderly fashion. In reality though historic Minsky moments of this magnitude unfold quite rapidly. In fact, last night we were greeted with yet another budding implosion, this time an outfit with the hyperreal motherhood and apple pie name Accredited Home Lenders.
What continues to be remarkable about these turkey shoot setups is how the shares stay levitated right up to the very end. Incredibly, even on the eve of their collapses these firms are fully supported by Wall Street dead fish with “buy recommendations”. Despite the overwhelming evidence that Toto has pulled the curtain on the magnificent Wizard of Oz, these firms still are treated as credible institutions? A thinking person has to wonder at what point the marks tire of “surprises” and the commentary from shills, thus accelerating the Minsky moment.
link
12 March 2007
Peak Gold
St. LOUIS (ResourceInvestor.com) -- Yesterday, South Africa’s Chamber of Mines reported that gold output fell last year to 275 tonnes, down 8% from 2005. Some sources say South Africa’s decline in gold production is now becoming a global affair, as seen in leading gold producing countries.
According to stats from GoldSheets.com, U.S. gold output for last year declined from 262 tonnes to 260 tonnes. Australian production fell to 251 tonnes from 263 tonnes. Gold produced in Peru declined to 203 tonnes from 207 tonnes. Russian gold output dropped 4 tonnes in 2006 to152 tonnes, while Canada fell from 118 tonnes to 104 tonnes.
“Production in Australia, South Africa, Canada and Peru is expected to continue slumping in the next few years, probably stabilizing in 2010, but never reaching their peak levels from years past,” said Neal R. Ryan, Vice President and Director of Economic Research for Blanchard and Company, Inc. Peak Oil
According to stats from GoldSheets.com, U.S. gold output for last year declined from 262 tonnes to 260 tonnes. Australian production fell to 251 tonnes from 263 tonnes. Gold produced in Peru declined to 203 tonnes from 207 tonnes. Russian gold output dropped 4 tonnes in 2006 to152 tonnes, while Canada fell from 118 tonnes to 104 tonnes.
“Production in Australia, South Africa, Canada and Peru is expected to continue slumping in the next few years, probably stabilizing in 2010, but never reaching their peak levels from years past,” said Neal R. Ryan, Vice President and Director of Economic Research for Blanchard and Company, Inc. Peak Oil
6 March 2007
Profound Prediction from Priceton
May correction and early top in 2007 predicted in 1997. The 6.8 year international confidence cycle.
1 March 2007
(OT) Chaney in Afghanistan -- amusing and insightfull
The Swamp - Chicago Tribune - Blogs.: "One of the most peculiar artifices of the White House is the 'senior administration official.''
This is the official who provides all sorts of background information and insight into the White House's thinking on policies and practices for reporters, but refuses to permit his or her name to be cited.
Such as this 'senior administration official,'' who spoke with reporters about Vice President Dick Cheney's intentions with his visits to Pakistan and Afghanistan this week as the vice president was flying out of Kabul on a military transport jet, according to an official White House transcript released:"
This is the official who provides all sorts of background information and insight into the White House's thinking on policies and practices for reporters, but refuses to permit his or her name to be cited.
Such as this 'senior administration official,'' who spoke with reporters about Vice President Dick Cheney's intentions with his visits to Pakistan and Afghanistan this week as the vice president was flying out of Kabul on a military transport jet, according to an official White House transcript released:"
28 February 2007
A European Perspective
Feb 27, 2007 Gold and Uranium - A European Perspective Dudley Baker 321gold . . . Inc: "The question now becomes, 'will the European investors EVER be investing in 'our' (U.S. and Canadian) bull market in the precious metals stocks?' Most analysts assume (I know, this is usually trouble) that all investors in the world will one day be investing in the precious metals stocks and/or warrants. Maybe - Maybe Not!! Is it possible this bull market will remain basically a U.S. and Canadian affair? Do we need the rest of the investors of the world to assist with driving the mining shares to the outrageous price levels predicted by some analysts as we peak in the coming years?
Conclusion:
Investors' views and opinions of the world financial markets, gold, uranium, etc. are dictated by the specific currency in which we make our investment decisions. As the U.S. dollar rises or declines, the Euro rises or declines as well as all other currencies of the world, investors are faced with making investment decisions as viewed from their particular currency. It is possible the lack of European investors in the mining shares is a sign that we are still in the early stages of this bull market. Perhaps; but it is entirely possible that this bull market will take place basically on this side of the pond. Either way it will still be a great party but the more investors the better before the clock strikes midnight."
Conclusion:
Investors' views and opinions of the world financial markets, gold, uranium, etc. are dictated by the specific currency in which we make our investment decisions. As the U.S. dollar rises or declines, the Euro rises or declines as well as all other currencies of the world, investors are faced with making investment decisions as viewed from their particular currency. It is possible the lack of European investors in the mining shares is a sign that we are still in the early stages of this bull market. Perhaps; but it is entirely possible that this bull market will take place basically on this side of the pond. Either way it will still be a great party but the more investors the better before the clock strikes midnight."
Great Balls of Fire Financials Hit Bigtime
Feb 28, 2007 Great Balls of Fire Richard Russell 321gold . . . Inc: "Yesterday the Shanghai Stock Exchange Composite suffered its biggest loss in a decade -- down about 9%. The Chinese government has been warning that it would slow China's furious rate of growth. Bank reserves were contracted a few times, the Chinese central bank stepped on the brakes. The result -- a major smash in Chinese stocks. It was a crash heard 'round the world.
If China slows down, China's enormous export of goods will slow down. China's huge use of commodities will slow down. The activities of 1.3 billion Chinese people will slow down. How much of a change the nine percent drop in Chinese stocks will bring on, remains to be seen. Some see it as merely a temporary warning, a 'gut-check.' Others take it more seriously. My opinion -- major bull moves don't tend to end this way. Major tops entail weeks, more often months, of distribution. I haven't seen the signs of steady distribution yet. I've seen overvaluation, over-speculation, over-optimism, ignoring of risk -- but I have not yet [seen] the signs of distribution.
It used to be said that when the US sneezed, the rest of the world caught a cold. And I wonder, has that changed? Is it China that has now taken the US's place? When China coughs, is the rest of the world in trouble. Hard to believe, but that may well be the case today. Below, a daily chart of FXI, the 'China 25 Index Fund.'"
If China slows down, China's enormous export of goods will slow down. China's huge use of commodities will slow down. The activities of 1.3 billion Chinese people will slow down. How much of a change the nine percent drop in Chinese stocks will bring on, remains to be seen. Some see it as merely a temporary warning, a 'gut-check.' Others take it more seriously. My opinion -- major bull moves don't tend to end this way. Major tops entail weeks, more often months, of distribution. I haven't seen the signs of steady distribution yet. I've seen overvaluation, over-speculation, over-optimism, ignoring of risk -- but I have not yet [seen] the signs of distribution.
It used to be said that when the US sneezed, the rest of the world caught a cold. And I wonder, has that changed? Is it China that has now taken the US's place? When China coughs, is the rest of the world in trouble. Hard to believe, but that may well be the case today. Below, a daily chart of FXI, the 'China 25 Index Fund.'"
Calm Before the Storm?
Safe Haven Calm Before the Storm?: "CURRENT SITUATION - Everything seems to be going well in the financial world and the investing public is busy doing what it does best - bidding up stock prices after a big rally. Today, there is no regard for risk with the investors' greed being stoked by the mainstream financial media which claims that the US economy is in a sweet spot due to reasonable growth and low inflation (as measured by the bogus official statistics). In all fairness, the bulls have plenty to cheer about. After all, the long-term bond-yield in the US is still relatively low, the price of oil has taken a tumble and global stock markets are flirting with their record-highs. So, I ask myself whether we should join the herd or is it time for caution?
My observation is that dark clouds are gathering over the horizon and this is the time to be on guard. In fact, we may be experiencing the proverbial calm before the storm. Bearing in mind the recent developments in the Middle-East, I suspect that a geo-political disaster is around the corner. I hope I am wrong but it increasingly looks as though either Israel or the US will attack Iran over its 'nuclear program'. I had first forecast this in August 2005 and believe my fears will be validated in the near future. Over the past few weeks, Washington has increased its rhetoric over Iran's 'nuclear program' and dispatched the USS John C. Stennis and USS Eisenhower aircraft carrier groups to Iran. This is an ominous development and suggests that we may be at the brink of another war."
My observation is that dark clouds are gathering over the horizon and this is the time to be on guard. In fact, we may be experiencing the proverbial calm before the storm. Bearing in mind the recent developments in the Middle-East, I suspect that a geo-political disaster is around the corner. I hope I am wrong but it increasingly looks as though either Israel or the US will attack Iran over its 'nuclear program'. I had first forecast this in August 2005 and believe my fears will be validated in the near future. Over the past few weeks, Washington has increased its rhetoric over Iran's 'nuclear program' and dispatched the USS John C. Stennis and USS Eisenhower aircraft carrier groups to Iran. This is an ominous development and suggests that we may be at the brink of another war."
US recession and financial distress
Today we had a meltdown of many stock markets, first in China, then in Europe, the U.S., emerging markets and globally. What happened today is consistent with my outlook for a U.S. hard landing this year.
The China crash had its source in the stock market bubble in China that is now beginning to burst as Chinese authorities started to crack down on these speculative excesses. This crash may be the beginning of a broader downward adjustment in the stock market in China that may lead to a broader economic slowdown in China.
We also had contagion from China to other global stock markets. This contagion is a combination of the China crash and of the lousy economic news out of the US. ..This is not the first time that financial contagion happens from emerging markets to advanced economies: in the fall of 1997 when the Asian crisis became global a collapse of the Hong Kong market in October led to a sharp sell-off of the Dow Jones (500 points in one day), as the one we had today. Also the collapse of Russia in August 1998 led - with a short lag - to contagion to US financial markets and to the LTCM near-bankruptcy. So shocks from emerging markets can affect markets and economies in developed countries, especially when the latter have meaningful financial and real vulnerabilities, like the US today.
The US is likely to enter into a recession in 2007; and even a likely and early easing of monetary policy by the Fed will not prevent such a recession as there are too many weaknesses in the US economy: a housing recession, an auto recession, a manufacturing recession, a real investment recession (as corporations are reducing real capital investment and inventories are falling), a US consumer that is on the ropes and at its tipping point; a meltdown in sub-prime mortgages that is leading to a generalized credit crunch in the economy. It is already ugly and it will get uglier in the real economy and in the financial markets. We are likely to observe a vicious cycle where a credit crunch and a persistent sell-off in equities leads to a worsening of the real economy with a hard landing (recession) that then weakens further the financial system. One cannot rule out a broader banking crisis if a deep recession occurs.
What will be the fallout of a US recession for the rest of the world? Europe, Asia and the rest of the world will not decouple from a US hard landing. If the US were to experience a soft landing Europe and the rest of the world will do fine. But if a US recession does occur there will be a significant economic slowdown in Europe, as well as in China, Asia and other emerging markets. China will be a primary victim as its excesses and its dependence on exports to the US are particularly important. So it is still the case that when the US sneezes the rest of the world gets the cold.
A US recession will be the result of the bubbles and excesses of the US economy in the last few years: a housing bubble now going bust; negative household savings; negative government savings (i.e. large budget deficits), low national savings and thus a large current account deficit. The party will be soon over; and the complacency and under-pricing of risk in financial markets will soon be corrected with painful consequences for the US and the global economy. The US economy has been living in a financial bubble for too long. Now this bubble is bursting – yesterday in housing and sub-prime, today in the stock market, soon enough in a wide range of other risky assets. The fallout will be very painful for the US and the world once a US recession and severe financial sector distress interact in a vicious cycle.
The China crash had its source in the stock market bubble in China that is now beginning to burst as Chinese authorities started to crack down on these speculative excesses. This crash may be the beginning of a broader downward adjustment in the stock market in China that may lead to a broader economic slowdown in China.
We also had contagion from China to other global stock markets. This contagion is a combination of the China crash and of the lousy economic news out of the US. ..This is not the first time that financial contagion happens from emerging markets to advanced economies: in the fall of 1997 when the Asian crisis became global a collapse of the Hong Kong market in October led to a sharp sell-off of the Dow Jones (500 points in one day), as the one we had today. Also the collapse of Russia in August 1998 led - with a short lag - to contagion to US financial markets and to the LTCM near-bankruptcy. So shocks from emerging markets can affect markets and economies in developed countries, especially when the latter have meaningful financial and real vulnerabilities, like the US today.
The US is likely to enter into a recession in 2007; and even a likely and early easing of monetary policy by the Fed will not prevent such a recession as there are too many weaknesses in the US economy: a housing recession, an auto recession, a manufacturing recession, a real investment recession (as corporations are reducing real capital investment and inventories are falling), a US consumer that is on the ropes and at its tipping point; a meltdown in sub-prime mortgages that is leading to a generalized credit crunch in the economy. It is already ugly and it will get uglier in the real economy and in the financial markets. We are likely to observe a vicious cycle where a credit crunch and a persistent sell-off in equities leads to a worsening of the real economy with a hard landing (recession) that then weakens further the financial system. One cannot rule out a broader banking crisis if a deep recession occurs.
What will be the fallout of a US recession for the rest of the world? Europe, Asia and the rest of the world will not decouple from a US hard landing. If the US were to experience a soft landing Europe and the rest of the world will do fine. But if a US recession does occur there will be a significant economic slowdown in Europe, as well as in China, Asia and other emerging markets. China will be a primary victim as its excesses and its dependence on exports to the US are particularly important. So it is still the case that when the US sneezes the rest of the world gets the cold.
A US recession will be the result of the bubbles and excesses of the US economy in the last few years: a housing bubble now going bust; negative household savings; negative government savings (i.e. large budget deficits), low national savings and thus a large current account deficit. The party will be soon over; and the complacency and under-pricing of risk in financial markets will soon be corrected with painful consequences for the US and the global economy. The US economy has been living in a financial bubble for too long. Now this bubble is bursting – yesterday in housing and sub-prime, today in the stock market, soon enough in a wide range of other risky assets. The fallout will be very painful for the US and the world once a US recession and severe financial sector distress interact in a vicious cycle.
27 February 2007
Fieldstone Accepts Buyout by C-BASS ((CS), (CSGN.VX), (FICC), J.P. Morgan Chase & Co. (JPM), Lehman Brothers Holdings Inc. (LEH), MGIC Investment Corp. (MTG), Radian Group Inc. (RDN), (CH001213), (US46
Fieldstone Accepts Buyout by C-BASS ((CS), (CSGN.VX), (FICC), J.P. Morgan Chase & Co. (JPM), Lehman Brothers Holdings Inc. (LEH), MGIC Investment Corp. (MTG), Radian Group Inc. (RDN), (CH001213), (US46: "NEW YORK -(Dow Jones)- Mortgage lender Fieldstone Investment Corp. (FICC) said Friday it agreed to be bought for about $259 million by C-BASS LLC, a purchaser of credit-sensitive assets like home loans to people with poor credit, becoming the latest subprime lender to sell out amid an ongoing shakeout in the sector.
New York-based C-BASS, majority-owned by mortgage insurers MGIC Investment Corp. (MTG) and Radian Group Inc. (RDN), will buy Fieldstone for $5.53 a share in cash, a 113% premium to Fieldstone's closing price Thursday. The two insurers announced plan to merge early this month. Fieldstone's shares recently traded up 95.8%, or $2.49, to $5.09 on volume of 10,3 million compared with average daily volume of 787,600.
The deal is worth $259 million based on 46.9 million Fieldstone shares outstanding, according to CapitalIQ. The purchase price is subject to a reduction of 20 cents a share should Fieldstone not settle litigation before the merger, the companies said. "
New York-based C-BASS, majority-owned by mortgage insurers MGIC Investment Corp. (MTG) and Radian Group Inc. (RDN), will buy Fieldstone for $5.53 a share in cash, a 113% premium to Fieldstone's closing price Thursday. The two insurers announced plan to merge early this month. Fieldstone's shares recently traded up 95.8%, or $2.49, to $5.09 on volume of 10,3 million compared with average daily volume of 787,600.
The deal is worth $259 million based on 46.9 million Fieldstone shares outstanding, according to CapitalIQ. The purchase price is subject to a reduction of 20 cents a share should Fieldstone not settle litigation before the merger, the companies said. "
The Food Chain of Finance
THE TRIUMPH OF CREDIT MARKETINGAND ITS INEVITABLE IMPLICATION, by Jeffrey Webster, Editor, Investment Sense. 'Leaving aside ethical questions, which depend on the reader’s personal sense of justice, the fact is that there are practical limits beyond which consumers simply become incapable of paying. In fact the “Merchants of Misery” may well enjoy a period of fervid growth in the initial phases of the contraction. However at some point social mores will switch from a general acceptance of aggressive debt promotion and massive profit margins earned on the poor to a sense of disgust and a desire to reform. No doubt there will be a new wave of anti-usury laws targeting Second Tier enterprises like rent-to-own, check cashing and pawn shops. No tree grows to the sky. Eventually the three decade promotion of debt to the highest risk groups will backfire, leading to unprecedented losses through exceedingly high rates of default.'"
Atlantic Free Press - Hard Truths for Hard Times - The Second Great Depression
Atlantic Free Press - Hard Truths for Hard Times - The Second Great Depression: "This week’s data on the sagging real estate market leaves no doubt that the housing bubble is quickly crashing to earth and that hard times are on the way. “The slump in home prices from the end of 2005 to the end of 2006 was the biggest year over year drop since the National Association of Realtors started keeping track in 1982.” (New York Times) The Commerce Dept announced that the construction of new homes fell in January by a whopping 14.3%. Prices fell in half of the nation’s major markets and “existing home sales declined in 40 states”. Arizona, Florida, California, and Virginia have seen precipitous drops in sales. The Commerce Department also reported that “the number of vacant homes increased by 34% in 2006 to 2.1 million at the end of the year, nearly double the long-term vacancy rate.” (Marketwatch)"
26 February 2007
It's the sitting that does it!
"And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars, I want to tell you this: It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine-that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader, after he knows how to trade than hundreds did in the days of his ignorance". -Jesse Livermore (Reminiscences of a Stock Operator)
22 February 2007
Storm Cloud at the Global Bazaar? - washingtonpost.com
Robert J. Samuelson - Storm Cloud at the Global Bazaar? - washingtonpost.com: "Global finance is mysterious, exciting and sometimes reckless. A specter now haunts it -- the specter of excess 'liquidity.' Will this prove a passing anxiety or, as in 1997 and 1998 with the Asian financial crisis, will it threaten the stability of the entire global economy? Good question."
Australia was once awash with gold, says new geological study
"The chemistry of gold in brine suggests that water has a lot higher capacity to carry gold than we have been able to measure. We have very salty groundwater in parts of Australia, particularly in some of our gold-bearing regions," ABC quoted him as saying.Dr Frank Reith and his team, also a part of the study, found that bacteria played a key role in forming gold grains and nuggets. They found that certain species of bacteria removed gold from the soil and deposited pure grains of it around them.Dr McPhail said these two pieces of evidence became important when scientists looked back millions of years, to periods when Australian rocks were subject to a process known as deep weathering."During these times, the rocks were being weathered by interaction with the atmosphere and water," Dr McPhail said."That weathering may have taken place during times when much of Australia was less arid than it is now. Over millions of years you get climate changes. There were periods when a lot of Australia was tropical," added Dr Reith.Dr McPhail said these hot, wet conditions would have provided the ideal environment for gold-moving bugs and for water to contain higher gold concentrations."During those times, and we're talking about 60 million years ago or 12 million years ago for example, groundwater may have contained more gold," he said."The work could prove a boon for mineral explorers," he added."If gold was more mobile in the geological past, such as during deep weathering episodes, then this work could help focus exploration in weathered terrains. It could point to new deposits," he said. (ANI)
Westpac report finds risks and opportunities in climate change
Westpac Internet -Latest news: "The 2006 report sets out Westpac's non-financial performance across more than 110 indicators covering human, social and environmental capital. The report again emphases the links between sustainability and shareholder value, with Westpac CEO, Dr David Morgan, stating that managing social, environmental and workplace performance, along with stakeholder relationships and other intangibles, is fundamentally linked to long-term shareholder value.
Dr Morgan said the value proposition was most obvious around climate change, with 2006 shaping up as a turning point in Australia: 'With widespread acceptance that climate change is real, business has a tiger by the tail. There are critical risks but also real business opportunities - from lending in a water and carbon-constrained environment to valuing next generation assets.'
In 2006 Westpac was a key member of the Australian Business Roundtable on Climate Change; commenced trading in the EU Emission Trading Scheme (EU ETS), and was recognised for 'best in class' management and disclosure practices in the Carbon Disclosure Project's (CDP) global Climate Leaders Index. Westpac continues to look at pursuing the ultimate goal of carbon neutrality; that is zero net emissions."
Dr Morgan said the value proposition was most obvious around climate change, with 2006 shaping up as a turning point in Australia: 'With widespread acceptance that climate change is real, business has a tiger by the tail. There are critical risks but also real business opportunities - from lending in a water and carbon-constrained environment to valuing next generation assets.'
In 2006 Westpac was a key member of the Australian Business Roundtable on Climate Change; commenced trading in the EU Emission Trading Scheme (EU ETS), and was recognised for 'best in class' management and disclosure practices in the Carbon Disclosure Project's (CDP) global Climate Leaders Index. Westpac continues to look at pursuing the ultimate goal of carbon neutrality; that is zero net emissions."
Can 4% of Homeowners Sink the Entire Market?
charles hugh smith-Weblog and wEssays: "That's $6.5 trillion, which means all 50 million mortgage holders are left with a grand total of $1.5 trillion in net equity. If housing values decline 15%, that's a $2.85 trillion haircut off net equity. If we set 2/3 of that against mortgaged real estate, (the other 1/3 being a decline in the value of free and clear homes), then the decline collectively suffered by all mortgage holders is $1.9 trillion--enough to put them in a negative equity hole.
This is a staggering conclusion, for it suggests just how a 'mere' 4% delinquency/foreclosure rate could trigger a 'modest' 15% decline in housing values, which would put the nation's mortgage holders (if taken in aggregate) under water: the nation's household debt would exceed the value of the mortgaged residential real estate.
So let's put this together. With the Pareto Principle in hand, we can foresee the distinct possibility that when a mere 4% of outstanding mortgages enter delinquency / foreclosure, then a 'tipping point' will be reached, triggering effects which far outsize the proximate causes.
Please examine the chart above carefully. Over 69% of the population are homeowners, and another 26% are in poverty. According to the FDIC, the recent surge in ownership from 64% to 69.5% has created a pool of 'at-risk' borrowers who couldn't have purchased a house with a conventional mortgage. Of the remaining 4% who are not homeowners or those living below the poverty line, the recent stalling home ownership rates at about 69.1-69.7% suggests these households are just above the poverty level and unable to buy a house, not yuppies renting penthouse suites who are now ready to buy a McMansion. "
This is a staggering conclusion, for it suggests just how a 'mere' 4% delinquency/foreclosure rate could trigger a 'modest' 15% decline in housing values, which would put the nation's mortgage holders (if taken in aggregate) under water: the nation's household debt would exceed the value of the mortgaged residential real estate.
So let's put this together. With the Pareto Principle in hand, we can foresee the distinct possibility that when a mere 4% of outstanding mortgages enter delinquency / foreclosure, then a 'tipping point' will be reached, triggering effects which far outsize the proximate causes.
Please examine the chart above carefully. Over 69% of the population are homeowners, and another 26% are in poverty. According to the FDIC, the recent surge in ownership from 64% to 69.5% has created a pool of 'at-risk' borrowers who couldn't have purchased a house with a conventional mortgage. Of the remaining 4% who are not homeowners or those living below the poverty line, the recent stalling home ownership rates at about 69.1-69.7% suggests these households are just above the poverty level and unable to buy a house, not yuppies renting penthouse suites who are now ready to buy a McMansion. "
The Korea Times : Year of Pig Ushers in Hopeful Year
The Korea Times : Year of Pig Ushers in Hopeful Year: "A pig ironically has a dual image _ both positive and negative.
Since it began living as a domestic animal in Korea some 2,000 years ago, pigs have brought a lot of myths and superstitions closely associated with wealth, good luck and sometimes a mythical supernatural power in sacrificial rituals.
However, pigs are also synonymous with greed, laziness, stupidity and dirtiness.
Pigs found in Korean history carry these mixed blessings long grafted onto folk culture and handed down to current times.
This year will find many people fussing a lot more than usual over all kinds of myths and rumors as the year of 2007 ushers in the year of a pig, hopefully an abundant year.
Year of the Golden Pig?
The belief about pigs is expected to be exaggerated more than ever this year.
The lunar calendar designates each year as one of the 12 zodiac animals; the pig is the 12th zodiac animal.
The lunar year follows the sequence of the 12 zodiac animals _ rat, ox, tiger, rabbit, dragon, snake, horse, sheep, monkey, rooster, dog and lastly, pig.
But this pig year, called the year of ``chonghae,’’ which means a red pig, returns every 60 years."
Since it began living as a domestic animal in Korea some 2,000 years ago, pigs have brought a lot of myths and superstitions closely associated with wealth, good luck and sometimes a mythical supernatural power in sacrificial rituals.
However, pigs are also synonymous with greed, laziness, stupidity and dirtiness.
Pigs found in Korean history carry these mixed blessings long grafted onto folk culture and handed down to current times.
This year will find many people fussing a lot more than usual over all kinds of myths and rumors as the year of 2007 ushers in the year of a pig, hopefully an abundant year.
Year of the Golden Pig?
The belief about pigs is expected to be exaggerated more than ever this year.
The lunar calendar designates each year as one of the 12 zodiac animals; the pig is the 12th zodiac animal.
The lunar year follows the sequence of the 12 zodiac animals _ rat, ox, tiger, rabbit, dragon, snake, horse, sheep, monkey, rooster, dog and lastly, pig.
But this pig year, called the year of ``chonghae,’’ which means a red pig, returns every 60 years."
21 February 2007
Monday view: Cheap solar power poised to undercut oil and gas by half
Within five years, solar power will be cheap enough to compete with carbon-generated electricity, even in Britain, Scandinavia or upper Siberia. In a decade, the cost may have fallen so dramatically that solar cells could undercut oil, gas, coal and nuclear power by up to half. Technology is leaping ahead of a stale political debate about fossil fuels.
Anil Sethi, the chief executive of the Swiss start-up company Flisom, says he looks forward to the day - not so far off - when entire cities in America and Europe generate their heating, lighting and air-conditioning needs from solar films on buildings with enough left over to feed a surplus back into the grid.
The secret? Mr Sethi lovingly cradles a piece of dark polymer foil, as thin a sheet of paper. It is 200 times lighter than the normal glass-based solar materials, which require expensive substrates and roof support. Indeed, it is so light it can be stuck to the sides of buildings.
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Rather than being manufactured laboriously piece by piece, it can be mass-produced in cheap rolls like packaging - in any colour.
The "tipping point" will arrive when the capital cost of solar power falls below $1 (51p) per watt, roughly the cost of carbon power. We are not there yet. The best options today vary from $3 to $4 per watt - down from $100 in the late 1970s.
Mr Sethi believes his product will cut the cost to 80 cents per watt within five years, and 50 cents in a decade.
It is based on a CIGS (CuInGaSe2) semiconductor compound that absorbs light by freeing electrons. This is then embedded on the polymer base. It will be ready commercially in late 2009.
"It'll even work on a cold, grey, cloudy day in England, which still produces 25pc to 30pc of the optimal light level. That is enough, if you cover half the roof," he said.
"We don't need subsidies, we just need governments to get out of the way and do no harm. They've spent $170bn subsidising nuclear power over the last thirty years," he said.
His ultra-light technology, based on a copper indium compound, can power mobile phones and laptop computers with a sliver of foil.
"You won't have to get down on your knees ever again to hunt for plug socket," he said
Michael Rogol, a solar expert at Credit Lyonnais, expects the solar industry to grow from $7bn in 2004 to nearer $40bn by 2010, with operating earnings of $3bn.
The sector is poised to outstrip wind power. It is a remarkable boom for a technology long dismissed by experts as hopelessly unviable. link
Anil Sethi, the chief executive of the Swiss start-up company Flisom, says he looks forward to the day - not so far off - when entire cities in America and Europe generate their heating, lighting and air-conditioning needs from solar films on buildings with enough left over to feed a surplus back into the grid.
The secret? Mr Sethi lovingly cradles a piece of dark polymer foil, as thin a sheet of paper. It is 200 times lighter than the normal glass-based solar materials, which require expensive substrates and roof support. Indeed, it is so light it can be stuck to the sides of buildings.
advertisement
Rather than being manufactured laboriously piece by piece, it can be mass-produced in cheap rolls like packaging - in any colour.
The "tipping point" will arrive when the capital cost of solar power falls below $1 (51p) per watt, roughly the cost of carbon power. We are not there yet. The best options today vary from $3 to $4 per watt - down from $100 in the late 1970s.
Mr Sethi believes his product will cut the cost to 80 cents per watt within five years, and 50 cents in a decade.
It is based on a CIGS (CuInGaSe2) semiconductor compound that absorbs light by freeing electrons. This is then embedded on the polymer base. It will be ready commercially in late 2009.
"It'll even work on a cold, grey, cloudy day in England, which still produces 25pc to 30pc of the optimal light level. That is enough, if you cover half the roof," he said.
"We don't need subsidies, we just need governments to get out of the way and do no harm. They've spent $170bn subsidising nuclear power over the last thirty years," he said.
His ultra-light technology, based on a copper indium compound, can power mobile phones and laptop computers with a sliver of foil.
"You won't have to get down on your knees ever again to hunt for plug socket," he said
Michael Rogol, a solar expert at Credit Lyonnais, expects the solar industry to grow from $7bn in 2004 to nearer $40bn by 2010, with operating earnings of $3bn.
The sector is poised to outstrip wind power. It is a remarkable boom for a technology long dismissed by experts as hopelessly unviable. link
16 February 2007
Ghawar Is Dying
August,2001--"Ghawar is dying." Could those three simple words signal the beginning of the end for the industrialized human civilization on Planet Earth? No one in a position of knowledge or authority has uttered them publicly yet, nor are they likely to for a few years to come. So we do have some time--but not much. Then again, they may have been said quietly two years ago and we would never know. Life's funny that way. Too bad this isn't a laughing matter.
Some two hundred kilometers east of Riyadh, Saudi Arabia, is a stretch of uninhabited and unremarkable desert in the Empty Quarter. This hot, desolate landscape sits above the largest oil field in the world: the Ghawar. It's a big chunk of nothing one hundred and fifty miles long and twenty-five miles wide, but thousands of meters below its surface lie seventy billion barrels of oil patiently waiting to be pumped out. They've waited for millions of years. A few more won't matter. And after that? After that, Ghawar will no longer be dying. It will be dead. Nothing left but sand and sinkholes.
Before you sit back, all smug and comfy with that seventy billion barrel figure, let me do a bit of quick math for you: that's only an 875 day supply of oil for the world at the current rate of use. (And that rate rises every year, just as the Ghawar's not unlimited oil reserves get lower.) Admittedly, the Ghawar is not our only source of oil. (And unless you happen to be Saudi, its not even your oil at all, now is it?) Still, the Ghawar is The Big One, and when it goes, things will change--forever. The only questions are: When will it happen, and how will we know?
The when is easy, if vague: it could happen at any time from two years ago to twenty years from now. But how will we know? That's a far more difficult question to answer.
I can picture a Mercedes Unimog lumbering alongside pipelines in the desert, stopping at each well head. At each stop, a man climbs down from the machine and walks over to the well. He looks and records a number from the gauge, then returns to the truck. This scene plays out over and over. It would take days to record all the numbers from the wells in the Ghawar. Still, it must be done. Those hand-written numbers are given to a field technician who dutifully records them, one well at a time, in a computer database. All that data gets sent to the Saudi government, where the numbers are studied, analyzed, and agonized over. If the figures are the same as or higher than the last figures, life is good. If not, then what?
What if the Ghawar IS dying? It would be easy enough to play with the numbers for a year or two--until the decline rate starts to speed up and the loss can't be hidden. After that? Plan B might call for a declared "voluntary reduction" in oil production to "stabilize the market at the optimum level." Yeah, right. How in the world would you ever know exactly how much oil is being pumped or shipped from a country half way around the world to other countries you've never seen? The answer is obvious: You wouldn't. You never will. C'est la vie.
Somewhere in Los Angeles, on quite literally the other side of the world, an SUV pulls into a gas station and the driver gets out. The pump is turned on and a gas tank is filled. Sure, it cost more here at this big, fancy franchise than it did over at that little independent station, but the indy was closed today. Matter of fact, hasn't it been closed for about a week now? What's up with that? Ah, well. At least it's not that much more. What's an extra buck or two to fill the tank? No big deal. Unless Ghawar is dying, in which case it is a very big deal indeed--and will get considerably bigger before it's all over. Maybe this was a sign of a weakening pulse?
You're Invited to the FuneralMeasured up against the big scheme of things, the death of Ghawar and our oil-powered industrial civilization will fall somewhere between the Black Plague of 14th Century Europe and the meteor that wiped out the dinosaurs. Unlike the plague, this will effect humans world-wide, but unlike the meteor, it will effect only humans. Chickens may some day cross the road with impunity. Animals both large and small will prosper (Hey, you try whaling in a row boat!) And the earth will undoubtedly cool off a bit. Too bad we all won't be here to enjoy it.
With the death of Ghawar will undoubtedly come the deaths of humans. Many humans, it would seem, the result of probably unavoidable wars for the last remaining oil to the much-predicted pandemics and mass starvation. Estimates on the sustainable limit to humans on this planet have ranged from an utterly dismal 1/70th of the current population (about 100 million) to an almost cheerful (by comparison) two billion. Keep in mind there's six billion of us here right now, so some of you will have to leave. You'll stay for the funeral, though, won't you? I mean, after all, Ghawar is dying.
I don't expect to be told. Politics and the global economy being what they are these days, I really can't picture anyone standing up in front of a row of television cameras and announcing to the world that the largest field of crude oil known to man is, in fact, drying up. What's Arabic for, "Ghawar is dying"? It doesn't matter. It's a phrase we'll never need to know--or hear. If it is the biggest, it will also be the last. By the time Ghawar begins to die--and by the time we hear about it--hundreds of other oil fields all over the world will also be dead and gone. Ghawar will still be pumping crude oil at an impressive rate as the industrial world of man comes to a creaking, painful halt. That's the irony of it, you see: by the time the Ghawar starts to run dry, we will have either found another way to get things done or simply stopped doing them. There's a very good chance that the last of the oil in the Ghawar will remain in the ground, untouched and unneeded, forever.
So is the Ghawar dying? Does it matter? There may come a time when all the SUVs in Los Angeles will roll to a tank-dry halt. After the riots and the wars, after the yelling and screaming and dying, what's left of humanity (if we have any humanity left) will stand up, dust itself off and get on with Life. The Ghawar, virtually unknown today, will be all but forgotten by then. The troubles of Saudi Arabia and the Middle East will cease to be a common feature of the nightly news, as they would no longer have anything to offer the West--nothing left to fight over. Just footnotes in a history book.
Cries and WhispersMaybe what's called for here, as Blutto Blutowski so eloquently put it, is a stupid and futile gesture that could serve as a mind-bite for the masses--some bit of mysterious innuedno that could spread like backfence gossip or a clever teaser ad. Tell people the world is running out of oil and they glaze like a donut. We know the direct approach doesn't work. We have to be subtle. Devious. Underhanded. But without any actual outright lying. (The truth is, after all, so much more annoying!) So how about bumper stickers? Everybody reads them when they're stuck in traffic or stopped at a light. You do. I do. And if you read it on a bumper sticker, it must be true, right? All we need now is a whole pile of "Ghawar is Dying" bumper stickers. It need not say any more than that. The truth is always mysterious and seldom obvious. Let 'em figure it out for themselves. Of course, the ultimate irony would be to see that bumper sticker on a big SUV--the very thing that's draining the Ghawar to death. That's right up there with "Honk if you hate noise pollution"! HA!
Ghawar is dying. If you whisper it quietly, maybe people will listen. If not, the approaching silence will get their attention soon enough.
Some two hundred kilometers east of Riyadh, Saudi Arabia, is a stretch of uninhabited and unremarkable desert in the Empty Quarter. This hot, desolate landscape sits above the largest oil field in the world: the Ghawar. It's a big chunk of nothing one hundred and fifty miles long and twenty-five miles wide, but thousands of meters below its surface lie seventy billion barrels of oil patiently waiting to be pumped out. They've waited for millions of years. A few more won't matter. And after that? After that, Ghawar will no longer be dying. It will be dead. Nothing left but sand and sinkholes.
Before you sit back, all smug and comfy with that seventy billion barrel figure, let me do a bit of quick math for you: that's only an 875 day supply of oil for the world at the current rate of use. (And that rate rises every year, just as the Ghawar's not unlimited oil reserves get lower.) Admittedly, the Ghawar is not our only source of oil. (And unless you happen to be Saudi, its not even your oil at all, now is it?) Still, the Ghawar is The Big One, and when it goes, things will change--forever. The only questions are: When will it happen, and how will we know?
The when is easy, if vague: it could happen at any time from two years ago to twenty years from now. But how will we know? That's a far more difficult question to answer.
I can picture a Mercedes Unimog lumbering alongside pipelines in the desert, stopping at each well head. At each stop, a man climbs down from the machine and walks over to the well. He looks and records a number from the gauge, then returns to the truck. This scene plays out over and over. It would take days to record all the numbers from the wells in the Ghawar. Still, it must be done. Those hand-written numbers are given to a field technician who dutifully records them, one well at a time, in a computer database. All that data gets sent to the Saudi government, where the numbers are studied, analyzed, and agonized over. If the figures are the same as or higher than the last figures, life is good. If not, then what?
What if the Ghawar IS dying? It would be easy enough to play with the numbers for a year or two--until the decline rate starts to speed up and the loss can't be hidden. After that? Plan B might call for a declared "voluntary reduction" in oil production to "stabilize the market at the optimum level." Yeah, right. How in the world would you ever know exactly how much oil is being pumped or shipped from a country half way around the world to other countries you've never seen? The answer is obvious: You wouldn't. You never will. C'est la vie.
Somewhere in Los Angeles, on quite literally the other side of the world, an SUV pulls into a gas station and the driver gets out. The pump is turned on and a gas tank is filled. Sure, it cost more here at this big, fancy franchise than it did over at that little independent station, but the indy was closed today. Matter of fact, hasn't it been closed for about a week now? What's up with that? Ah, well. At least it's not that much more. What's an extra buck or two to fill the tank? No big deal. Unless Ghawar is dying, in which case it is a very big deal indeed--and will get considerably bigger before it's all over. Maybe this was a sign of a weakening pulse?
You're Invited to the FuneralMeasured up against the big scheme of things, the death of Ghawar and our oil-powered industrial civilization will fall somewhere between the Black Plague of 14th Century Europe and the meteor that wiped out the dinosaurs. Unlike the plague, this will effect humans world-wide, but unlike the meteor, it will effect only humans. Chickens may some day cross the road with impunity. Animals both large and small will prosper (Hey, you try whaling in a row boat!) And the earth will undoubtedly cool off a bit. Too bad we all won't be here to enjoy it.
With the death of Ghawar will undoubtedly come the deaths of humans. Many humans, it would seem, the result of probably unavoidable wars for the last remaining oil to the much-predicted pandemics and mass starvation. Estimates on the sustainable limit to humans on this planet have ranged from an utterly dismal 1/70th of the current population (about 100 million) to an almost cheerful (by comparison) two billion. Keep in mind there's six billion of us here right now, so some of you will have to leave. You'll stay for the funeral, though, won't you? I mean, after all, Ghawar is dying.
I don't expect to be told. Politics and the global economy being what they are these days, I really can't picture anyone standing up in front of a row of television cameras and announcing to the world that the largest field of crude oil known to man is, in fact, drying up. What's Arabic for, "Ghawar is dying"? It doesn't matter. It's a phrase we'll never need to know--or hear. If it is the biggest, it will also be the last. By the time Ghawar begins to die--and by the time we hear about it--hundreds of other oil fields all over the world will also be dead and gone. Ghawar will still be pumping crude oil at an impressive rate as the industrial world of man comes to a creaking, painful halt. That's the irony of it, you see: by the time the Ghawar starts to run dry, we will have either found another way to get things done or simply stopped doing them. There's a very good chance that the last of the oil in the Ghawar will remain in the ground, untouched and unneeded, forever.
So is the Ghawar dying? Does it matter? There may come a time when all the SUVs in Los Angeles will roll to a tank-dry halt. After the riots and the wars, after the yelling and screaming and dying, what's left of humanity (if we have any humanity left) will stand up, dust itself off and get on with Life. The Ghawar, virtually unknown today, will be all but forgotten by then. The troubles of Saudi Arabia and the Middle East will cease to be a common feature of the nightly news, as they would no longer have anything to offer the West--nothing left to fight over. Just footnotes in a history book.
Cries and WhispersMaybe what's called for here, as Blutto Blutowski so eloquently put it, is a stupid and futile gesture that could serve as a mind-bite for the masses--some bit of mysterious innuedno that could spread like backfence gossip or a clever teaser ad. Tell people the world is running out of oil and they glaze like a donut. We know the direct approach doesn't work. We have to be subtle. Devious. Underhanded. But without any actual outright lying. (The truth is, after all, so much more annoying!) So how about bumper stickers? Everybody reads them when they're stuck in traffic or stopped at a light. You do. I do. And if you read it on a bumper sticker, it must be true, right? All we need now is a whole pile of "Ghawar is Dying" bumper stickers. It need not say any more than that. The truth is always mysterious and seldom obvious. Let 'em figure it out for themselves. Of course, the ultimate irony would be to see that bumper sticker on a big SUV--the very thing that's draining the Ghawar to death. That's right up there with "Honk if you hate noise pollution"! HA!
Ghawar is dying. If you whisper it quietly, maybe people will listen. If not, the approaching silence will get their attention soon enough.
13 February 2007
Dell's saga: When facts don't matter - MSN Money
Dell's saga: When facts don't matter - MSN Money: "Obviously, this level of lunacy can't continue indefinitely, but while it goes on, it can reach any magnitude. There's no determining in advance whether it lasts for five minutes or 90 days. One can only try to tell when it has exhausted itself. All I can say is, the spectacle that I see on a daily basis is really something for the history books."
12 February 2007
Uranium: How high could the price go…$576?
Uranium: How high could the price go…$576?: "As uranium prices continue to rocket upwards vast profits are being made in uranium stocks. However it is impossible to ignore the question: How high could the uranium price go?
This article is meant to be provocative and stimulating with the aim being to encourage more discussion resulting in the picture for uranium becoming clearer for investment purposes.
Oil is generally considered the staple fuel of the world, along with the other fossil fuels. It recently made an all time high, but when you take inflation into account oil was at its most expensive in 1980 when it reached levels of around $37.75 a barrel which is $92.26 in today’s US dollars. As oil prices rise, the cost of energy from oil-powered plants rises considerably. "
This article is meant to be provocative and stimulating with the aim being to encourage more discussion resulting in the picture for uranium becoming clearer for investment purposes.
Oil is generally considered the staple fuel of the world, along with the other fossil fuels. It recently made an all time high, but when you take inflation into account oil was at its most expensive in 1980 when it reached levels of around $37.75 a barrel which is $92.26 in today’s US dollars. As oil prices rise, the cost of energy from oil-powered plants rises considerably. "
8 February 2007
TraderFeed: Inside The Trader's Brain: Decision-Making and Emotional Arousal
TraderFeed: Inside The Trader's Brain: Decision-Making and Emotional Arousal: "Sometimes, looking back on our trading decisions, we wonder if we were in our right minds. How accurate that concern turns out to be! Some of the best trading psychology interventions are the ones that keep us in our right minds as we make decisions under conditions of risk and uncertainty."
7 February 2007
Europe 2020
Europe 2020: "Both metals are in a bull-marke,t which started in 2001 for silver and 1999 or 2001 for gold after a bear market since 1980. And what was before? (Graph11) shows you the price of gold since 1800 in US$ with an Elliott wave labeling. According to that labeling, this bull market is a fifth wave and the next one too. Fifth waves in tangibles are driven by fear, the strongest human emotion and therefore the biggest price moves take part in these parts of the bull market. Around 150,000 tonnes of gold have ever been mind by mankind and maybe 90% or 2,500 bio US$ are still around, but not liquid as lots of it disappeared in jewellery. Central banks say they hold 32,000 tonnes, but reliable research by many writers on this page come only to around half of it. Relative to a total world debt of at least 120,000 bio $US, gold is scarce and confirms the fifth wave.
Goldmines are scarce too as the capitalisation is only about 150 bio US$, relative to world stock markets of around 25,000 bio $US. Mines or metal? (Chart 12) shows the gold mining index HUI divided by silver. Mines have been stronger than silver, but are due for a corrective move against silver. Is gold cheap? Graph 13 shows the Dow industrial against gold since 1792. In 1869, at the top of the gold bull market and the end of the US Civil War, 0.17 ounces bought on Dow Jones. If the Dow Jones would drop to 5000, it would need 29,000 ounces to achieve the same ratio. Can the crisis become that heavy? Graph 14 shows Zurich real estate in gold in 1900 one ounce bought 2.9 square meters of real estate, now around 0.15. Zurichs, sell your house, buy gold and you will get at least 30 of them!! Graph 15 shows gold in real terms measured against the Swiss CPI (it's probably less cheated than the US CPI)."
Goldmines are scarce too as the capitalisation is only about 150 bio US$, relative to world stock markets of around 25,000 bio $US. Mines or metal? (Chart 12) shows the gold mining index HUI divided by silver. Mines have been stronger than silver, but are due for a corrective move against silver. Is gold cheap? Graph 13 shows the Dow industrial against gold since 1792. In 1869, at the top of the gold bull market and the end of the US Civil War, 0.17 ounces bought on Dow Jones. If the Dow Jones would drop to 5000, it would need 29,000 ounces to achieve the same ratio. Can the crisis become that heavy? Graph 14 shows Zurich real estate in gold in 1900 one ounce bought 2.9 square meters of real estate, now around 0.15. Zurichs, sell your house, buy gold and you will get at least 30 of them!! Graph 15 shows gold in real terms measured against the Swiss CPI (it's probably less cheated than the US CPI)."
Off to a Good Start in 2007
Safe Haven Off to a Good Start in 2007: "Silver also looks great. It's strong, solid and even though it weakened more than gold recently, it's still stronger than gold on a major trend basis (see Chart 3C). Silver shares have been the best of all, better than gold and silver, and much better than gold shares.
Silver is also poised to rise further. Chart 3A shows its solid rise above its rising 65-week moving average now at $11.30. With the leading indicator poised to move higher, silver now has the potential of reaching its May high near $14.88, and possibly surpassing it before the indicator reaches overbought (see Chart 3B).
Both gold and silver will be in a new ballgame above the May highs. Looking at silver's big picture on Chart 4, you can see that once silver breaks above the May high it will also be clearly breaking above its 1983 high, and it will be starting to enter the top side of its mega upchannel. Silver's next upside target would then be $22 before it eventually goes on to test the 1980 highs near $50.
For now, it's best to keep a larger portion of your metals portfolio in the physical metals or their ETFs, and keep more silver shares than gold shares"
Silver is also poised to rise further. Chart 3A shows its solid rise above its rising 65-week moving average now at $11.30. With the leading indicator poised to move higher, silver now has the potential of reaching its May high near $14.88, and possibly surpassing it before the indicator reaches overbought (see Chart 3B).
Both gold and silver will be in a new ballgame above the May highs. Looking at silver's big picture on Chart 4, you can see that once silver breaks above the May high it will also be clearly breaking above its 1983 high, and it will be starting to enter the top side of its mega upchannel. Silver's next upside target would then be $22 before it eventually goes on to test the 1980 highs near $50.
For now, it's best to keep a larger portion of your metals portfolio in the physical metals or their ETFs, and keep more silver shares than gold shares"
Brittleness and Risk,
charles hugh smith-Weblog and wEssays: "So what happens when authorities stamp out all small forest fires? They create the perfect conditions for a gigantic conflagration. The flaw is the old forest management policy of suppressing all forest fires was revealed when a huge uncontrollable fire swept through Yellowstone National Park some years ago. In other words: a system which allows occasional fires is resilient, while one which suppresses all small fires guarantees a giant conflagration.
In financial terms, this 'normal cycle' of growth, small fires and regrowth is 'the business cycle' in which credit and business expand, eventually reaching an unsustainable level (high inventories, too much debt and capacity, etc.) Businesses go bankrupt, defaulting on credit, people save rather than borrow, and capital is accumulated for the next cycle of investment and borrowing. "
In financial terms, this 'normal cycle' of growth, small fires and regrowth is 'the business cycle' in which credit and business expand, eventually reaching an unsustainable level (high inventories, too much debt and capacity, etc.) Businesses go bankrupt, defaulting on credit, people save rather than borrow, and capital is accumulated for the next cycle of investment and borrowing. "
6 February 2007
Game Over: Thirty-Six Sure-Fire Signs That Your Empire Is Crumbling
Game Over: Thirty-Six Sure-Fire Signs That Your Empire Is Crumbling: "So. You’ve built yourself an empire, eh?
Well, bully for you!
What’s next, you ask? Well, now you’ve got to do what everybody does when they have an empire, of course. You’ve got to worry about it falling apart, mate!
But how to tell for sure? Let me see if I can be helpful. Here are some rules of thumb to keep in mind, thirty-six sure-fire indicators that your empire is falling apart:
You know your empire’s crumbling when the folks who are gearing up their empire to replace yours start blowing up satellites in space. And then they don’t bother to return your phone calls when you ring up to ask why.
You know your empire’s crumbling when those same folks are cutting deals left, right and center across Asia, Latin America and Africa, while you, your lousy terms, and your arrogant attitude are no longer welcome.
You know your empire’s crumbling when you’re spending your grandchildren’s money like a drunken sailor, and letting your soon-to-be rivals finance your little splurge (i.e., letting them own your country). "
Well, bully for you!
What’s next, you ask? Well, now you’ve got to do what everybody does when they have an empire, of course. You’ve got to worry about it falling apart, mate!
But how to tell for sure? Let me see if I can be helpful. Here are some rules of thumb to keep in mind, thirty-six sure-fire indicators that your empire is falling apart:
You know your empire’s crumbling when the folks who are gearing up their empire to replace yours start blowing up satellites in space. And then they don’t bother to return your phone calls when you ring up to ask why.
You know your empire’s crumbling when those same folks are cutting deals left, right and center across Asia, Latin America and Africa, while you, your lousy terms, and your arrogant attitude are no longer welcome.
You know your empire’s crumbling when you’re spending your grandchildren’s money like a drunken sailor, and letting your soon-to-be rivals finance your little splurge (i.e., letting them own your country). "
31 January 2007
Financial Sense Online Market WrapUp with Frank Barbera, 01/30/07
Financial Sense Online Market WrapUp with Frank Barbera, 01/30/07: "Blissfully unaware, the average American sails through another day listening to the radio reports of a growing economy and the illusion of deep-seated prosperity. For twenty years, the US economy has been in a “boom,” with technology spearheading the economic growth and the standard of living continuously on the rise. At least this is the impression that has been created."
Decision Point ®: Top Advisor's Corner: John Kosar
Decision Point ®: Top Advisor's Corner: John Kosar: "In our January 10th Stock Sector Overview, we said:
'...although this (Materials) sector appears to be susceptible to more near-term weakness and relative underperformance, we believe that the sideways activity of the sector’s relative strength line versus the broad market during the past six months is indicative of a larger, more significant emerging bottom as is being suggested by a multi-year under-invested extreme in our Rydex Materials Ratio. A stabilizing and eventually outperforming Materials Sector later on this year squares with our larger view that an increase in inflationary pressures is likely to be a key economic factor for both the Fed and the financial markets in 2007.'"
'...although this (Materials) sector appears to be susceptible to more near-term weakness and relative underperformance, we believe that the sideways activity of the sector’s relative strength line versus the broad market during the past six months is indicative of a larger, more significant emerging bottom as is being suggested by a multi-year under-invested extreme in our Rydex Materials Ratio. A stabilizing and eventually outperforming Materials Sector later on this year squares with our larger view that an increase in inflationary pressures is likely to be a key economic factor for both the Fed and the financial markets in 2007.'"
Mish's Global Economic Trend Analysis: Mr. Practical on the Yen, Carry Trade, and Credit Expansion
Mish's Global Economic Trend Analysis: Mr. Practical on the Yen, Carry Trade, and Credit Expansion: "But these are not normal times. With GDP growing at 2-3% (I believe this to be overstated) and M3 (broad money) growing at an astounding 13% for the world’s largest economy, we have our first clue that things are not normal. Money is free to any who want to take the risk. When money supply grows you can by definition be sure that debt is growing commensurately. Debt is not used prudently because it is created easily for anyone and everyone out of thin air by central banks. Almost all of the current liquidity is coming from debt creation. This is the definition of inflation."
Not normal times
But these are not normal times. With GDP growing at 2-3% (I believe this to be overstated) and M3 (broad money) growing at an astounding 13% for the world’s largest economy, we have our first clue that things are not normal. Money is free to any who want to take the risk. When money supply grows you can by definition be sure that debt is growing commensurately. Debt is not used prudently because it is created easily for anyone and everyone out of thin air by central banks. Almost all of the current liquidity is coming from debt creation. This is the definition of inflation.
30 January 2007
PIMCO Bonds - Investment Outlook- February 2007 "100 Bottles of Beer on the Wall"
PIMCO Bonds - Investment Outlook- February 2007 "100 Bottles of Beer on the Wall": "my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity."
16 January 2007
Gerard Minack --Crash a coming
Courtesy Gerard Minack Morgan Stanley Sydney"I keep insisting that equity markets are a bubble,but not a TMT-like PE bubble, an earnings bubble.Look at the US as an example. US earnings per shareare now almost 70% above their long-term trend(Exhibit 1). Earnings haven't been that far above trendin a long time – since 1916, in fact. In other words, thissort of bubble is rarer than a 5-0 Ashes whitewash.The earnings surge has taken the after-tax profit shareof GDP to a post-1945 high. The profit-share is 54%above its long-term average. The only time the profitshare has been further above its average was in 1929.This is bearish big-picture stuff – so long as you believethat returns (or profit share) mean-revert. The counterargumentis that in a globalized world it makes nosense to compare profits of US firms, which can beearned anywhere in the world, to US GDP. In fact, it'sworth noting that 1916 – when EPS saw its largest-evergap to the trend – was at the end of the great Victorianera of globalization. In other words, globalizationremoves or loosens domestic constraints on profits.However, I'm not so sure it is the principal reason whymargins are so now high, at least in the US. Here are afew points to note:First, note that even after adjusting for the profits USfirms make on their offshore sales, margins on sales inthe US are around post-1945 highs.Exhibit 2 shows two series. One is after-tax profits ofUS corporates (relative to corporate GDP), whichreflects their US-sourced earnings, as well as profitsmade offshore. The second is profits earned in the US,which includes the profits made by non-US firmsoperating in America.
14 January 2007
Expensive workers are good for you
Sanders Research Associates - The Rise and Decline of the Great American Corporation: "Expensive workers are good for you
The problem of cheaper labor abroad has been treated as if it was a problem with no solution. There is simply nothing that can be done, one reads, which means that the American working and middle classes are doomed. If the cost of labor were indeed the main consideration in production, this would be true. But it most emphatically is not true.
The central factor in the creation of economic wealth and growth is not the cheapness of labor, but the productive power of machinery. If cheap labor were the road to international competitiveness, then the oversupply of near-starving peasants in China and India would have kept them at the top of the world food chain for the last 1000 years."
The problem of cheaper labor abroad has been treated as if it was a problem with no solution. There is simply nothing that can be done, one reads, which means that the American working and middle classes are doomed. If the cost of labor were indeed the main consideration in production, this would be true. But it most emphatically is not true.
The central factor in the creation of economic wealth and growth is not the cheapness of labor, but the productive power of machinery. If cheap labor were the road to international competitiveness, then the oversupply of near-starving peasants in China and India would have kept them at the top of the world food chain for the last 1000 years."
Sanders Research Associates - The Rise and Decline of the Great American Corporation
Sanders Research Associates - The Rise and Decline of the Great American Corporation: "But surely these corporations are smarter than that, they must have some plan to deal with a shrinking American market? No. Advised by a class of professional economists who are trained to explain why this is the best of all possible worlds as long as the corporations can do whatever they want, blinded by greed and the low-hanging fruit of greater profits from lower wages, no CEO will think to do what Henry Ford did when he introduced the $5 day for workers. Ford justified his largesse by pointing out that his workers could now afford to buy his cars."
Sanders Research Associates - Why a democratic economy would be a more efficient economy, Part I
Sanders Research Associates - Why a democratic economy would be a more efficient economy, Part I: "Agricultural societies are where hierarchies first became established. Whether this happened from necessity, imposition from outside, or both, one can not know; but the result was that a grain surplus was created by the unfortunate field workers which the elite used to keep themselves and their military compatriots in fine fettle. Effectively, the poor peasants were forced to create the food to feed their masters. A priest class emerged to create religions to try and convince the masses that servitude was what the gods wanted; today, neoclassical economists serve essentially the same function."
13 January 2007
Former aide criticizes Carter over Mideast book - Los Angeles Times
Former aide criticizes Carter over Mideast book - Los Angeles Times: "Stein, who was director of the Carter Center from 1983 to 1986 and had continued to serve as a fellow there, spoke to a crowd of nearly 1,000 Thursday night at Los Angeles' Sinai Temple. His comments came against a backdrop of escalating controversy over the former president's bestselling book 'Palestine: Peace Not Apartheid.'
In the book, Carter traces the stops and starts of the Israeli-Palestinian peace process, beginning with his first visit to Israel in 1973 and continuing to the present, through his 1977-1981 presidency and the historic peace accord he brokered between Israel and Egypt. "
In the book, Carter traces the stops and starts of the Israeli-Palestinian peace process, beginning with his first visit to Israel in 1973 and continuing to the present, through his 1977-1981 presidency and the historic peace accord he brokered between Israel and Egypt. "
8 January 2007
euphoria too excessive
immobilienblasen: question the euphoria / disaster risk may rise : "Jan. 8 (Bloomberg) -- Bennet Sedacca, president of Atlantic Advisors LLC in Winter Park, Florida, recalls being an equity trader during the October 1987 stock-market crash, .....
...... In the last three months he has reduced his holdings of stocks and raised investments in short-term Treasury and other securities on the view that another crash may be coming, two decades later.
``Disasters may be rare, but I see the kind of conditions that could make one happen,'' said Sedacca. ``It's like a big keg of dynamite with a fuse. I don't know when, but I think the conditions exist for the explosion to eventually occur.'' "
...... In the last three months he has reduced his holdings of stocks and raised investments in short-term Treasury and other securities on the view that another crash may be coming, two decades later.
``Disasters may be rare, but I see the kind of conditions that could make one happen,'' said Sedacca. ``It's like a big keg of dynamite with a fuse. I don't know when, but I think the conditions exist for the explosion to eventually occur.'' "
6 January 2007
US Dollar/Euro/OPEC/Iran War/Iran Oil US Dollar/Euro Replacing US Dollar For Oil/Death Of The Dollar
US Dollar/Euro/OPEC/Iran War/Iran Oil US Dollar/Euro Replacing US Dollar For Oil/Death Of The Dollar: "The Euro-zone does not run a huge trade deficit nor is it heavily indebted to the rest of the world like the US and interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East’s main trading partner. And nearly everything you can buy for dollars you can also buy for euros—apart, of course, from oil. If OPEC were to convert their dollar assets to euro assets and then require payment for oil in Euros, their assets would immediately increase in value, since oil-importing countries would be forced to also convert part of their assets, driving the prices up. [Common Dreams Nov 15/04]
In the coming rearrangement of the world economic order, the euro could easily hold equal parity with the US dollar—if not supplant it outright as the world’s premiere “product”."
In the coming rearrangement of the world economic order, the euro could easily hold equal parity with the US dollar—if not supplant it outright as the world’s premiere “product”."
5 January 2007
Global Liquidity issues
immobilienblasen: The global gusher / economist: "First, average real interest rates in the developed world are still below their long-term average. Second, America's huge current-account deficit and the consequent build-up of foreign-exchange reserves by countries with external surpluses has also pumped vast quantities of dollars into the financial system. A large chunk of Asia's reserves and oil exporters' petrodollars have been used to buy American Treasury securities, thereby reducing bond yields. In turn, low bond-market returns have encouraged bigger inflows into higher yielding emerging-market bonds, equities and property, especially in Asia. Liquidity has been further boosted by the use of derivatives, and by carry trades(borrowing in currencies with low interest rates, such as yen, to buy higher-yielding currencies).
The spread on emerging-market bond yields over American Treasury bonds fell to another record low last week. Share prices in emerging economies have risen by 243% on average from their trough in 2003. That still leaves the average price/earnings ratio below its historical average and less than that in developed countries, so for most markets it is premature to talk about bubbles. But if asset prices continue to climb at their recent pace, central bankers will become increasingly nervous. "
The spread on emerging-market bond yields over American Treasury bonds fell to another record low last week. Share prices in emerging economies have risen by 243% on average from their trough in 2003. That still leaves the average price/earnings ratio below its historical average and less than that in developed countries, so for most markets it is premature to talk about bubbles. But if asset prices continue to climb at their recent pace, central bankers will become increasingly nervous. "
The Mortgage Lender Implode-O-Meter
The Mortgage Lender Implode-O-Meter: "I set this page up to keep track of mortgage lenders in the US going bust since approximately December 2006, when it seems the first of them started going under. Many observers (including myself) have been anticipating this for some time, as rising home prices (and other financial assets) have collided with the deteriorating consumer balance sheet and low-as-they-can-possibly-go interest rates (heavily reliant on the dole of China and the oil exporters). "
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