TradingTheCharts.com :: View topic - week of 6/11 outlook- * Current Week*: "For new members, I start the Weekly Maps here on Saturday with my big picture view of where we might be at within the Financial markets. I cover many markets and time frames. It is how members at TTC begin to plan for the next week. It’s like me delivering a financial paper full of charts to your desktop. Some markets make
no sense at first to look at, but you will see that they all play a role in the big picture. They also play a huge role for the member that is trying to trade his pension fund account or grandkids account, instead of what many of us crazy traders do all week, trade like maniacs. Bottom line is they have a place for everyone here one way or another."
13 June 2007
Global dollar crisis dead ahead
The financial and stock exchange players are now focusing on a single indicator, the evolution of the interest rates fixed by the central banks, and in particular that of the American Federal Reserve. Indeed, because of the United States central role in the world financial system, they play the part of the catalyst of hopes and fears; and their financial authorities will, during this phase II, accelerate the crisis. The US government and Federal Reserve have indeed led their economy and the whole of the financial markets towards a total dead end. The return of inflation has led to an increase in interest rates everywhere in the world, and the loss of confidence in the real American economy (with the background, the general loss of confidence in the United States) imposes a dramatic choice between two solutions with painful consequences:
. Solution 1 - towards stagflation: to raise of the US interest rate to fight against inflation and to preserve the credibility of the Dollar (since it is only the differential in the interest rate with the EU and Japan that now maintains its relative value), but to accelerate the collapse of the growth of the United States economy, by making the real estate bubble (which is already deflating quickly) explode, and by disrupting up household consumption (on which the essence of the US growth has rested for 5 years). Inflation, high interest rates and growth at half-mast, even recession, this is a well-known situation which prevailed during the Seventies: stagflation [1].
. Solution 2 - towards hyperinflation: stability of the US interest rates (and thus a drop of their relative value compared to the EU and Japan) to try (without guarantee, given the current state of the US economy [9]) to maintain the American internal growth and cause a collapse of the Dollar whose value “only just holds” on this differential, leading to the brutal interruption of the financing by the rest of the world of the American deficit (commercial and public) and thus a total financial crisis. This decision of course leaves the space open to inflation by trying to privilege growth, but it opens a period of generalized loss of confidence which reinforces, with the collapse of the Dollar, a very strong inflationary pressure in the United States which could lead to hyperinflation [10].
LEAP/E2020 believes that the US Reserve Federal, whose shareholders are large banks [11], will choose Solution 1 because in the second case the Federal Reserve is itself marginalized and loses the possibility of using one of its main instruments of action (interest rates). In addition, the current president of the Federal Reserve is convinced that parallel to a rise of the interest rates, an additional contribution of liquidity [12] to the economy will make it possible for the latter to set out again on the path towards growth [13]
For the team of LEAP/E2020, neither of the two solutions open to the American authorities can cure the total systemic crisis, their choice will be in fact primordial in determining the form and the extent of phase III of the total systemic crisis, the phase known as “impact phase”. The rest of the world will indeed not be affected the same way if the American authorities choose solution 1 or solution 2.
. Solution 1 - towards stagflation: to raise of the US interest rate to fight against inflation and to preserve the credibility of the Dollar (since it is only the differential in the interest rate with the EU and Japan that now maintains its relative value), but to accelerate the collapse of the growth of the United States economy, by making the real estate bubble (which is already deflating quickly) explode, and by disrupting up household consumption (on which the essence of the US growth has rested for 5 years). Inflation, high interest rates and growth at half-mast, even recession, this is a well-known situation which prevailed during the Seventies: stagflation [1].
. Solution 2 - towards hyperinflation: stability of the US interest rates (and thus a drop of their relative value compared to the EU and Japan) to try (without guarantee, given the current state of the US economy [9]) to maintain the American internal growth and cause a collapse of the Dollar whose value “only just holds” on this differential, leading to the brutal interruption of the financing by the rest of the world of the American deficit (commercial and public) and thus a total financial crisis. This decision of course leaves the space open to inflation by trying to privilege growth, but it opens a period of generalized loss of confidence which reinforces, with the collapse of the Dollar, a very strong inflationary pressure in the United States which could lead to hyperinflation [10].
LEAP/E2020 believes that the US Reserve Federal, whose shareholders are large banks [11], will choose Solution 1 because in the second case the Federal Reserve is itself marginalized and loses the possibility of using one of its main instruments of action (interest rates). In addition, the current president of the Federal Reserve is convinced that parallel to a rise of the interest rates, an additional contribution of liquidity [12] to the economy will make it possible for the latter to set out again on the path towards growth [13]
For the team of LEAP/E2020, neither of the two solutions open to the American authorities can cure the total systemic crisis, their choice will be in fact primordial in determining the form and the extent of phase III of the total systemic crisis, the phase known as “impact phase”. The rest of the world will indeed not be affected the same way if the American authorities choose solution 1 or solution 2.
Stocks to correct 15% by year end
If there is a single salient truth about the U.S. stock market, it
is that 2007 is a record setting year from almost every aspect.
While there are a few rare exceptions that place either 1929 or 2000
in the spotlight instead, our overall impression is that the mania
for stocks appears to be at least as emphatic now as it has ever
been. We have repeatedly illustrated margin debt extremes and the
historically low mutual fund cash-to-assets ratio as evidence, but
the best picture of the continuing mania for stocks remains the
sheer volume of trading. Not only is the volume of trading at a
historic high, the velocity of transactions have exceeded the
previous highs with such ease that one's only choice is the
assumption that a veritable mania is still in progress, and in fact,
never really ended. Apparently, the collapse and bear market that
endured from March 2000 to March 2003 was only a corrective phase to
the greatest stock market mania of all time.
We make the distinction of a "corrective phase" rather than a bear
market due to the observable fact that we cannot find one instance
of back-to-back stock manias in the past. Perhaps the semantics and
definitions do not work for some, but nevertheless, we find it
extremely difficult to dispute that the mania never really ended.
Even at the nadir in 2002, Dollar Trading Volume was still at a
level that equated to a 18.3% rate of growth in velocity from 1995,
when we posit the mania actually commenced. This seven year path
would have been extraordinary sans the final manic peak and
subsequent collapse!
As it now stands, DTV has grown 18.1% from last year's record total
and exceeds the fateful year of 2000 by 28.1%. Compared with Gross
domestic Product and total stock market capitalization, we are close
enough to record extremes to posit the possibility that a similar
outcome to 1929 and 2000 should eventually be at hand.
DTV is more than three times the size of GDP
for only the second time in history.
DTV versus market capitalization is 223%, only nominally lower than
the 228% registered in the Roaring Twenties.
If there is only one salient truth about the stock market today, it
is that the mania remains largely unrecognized by professionals and
the public, who blithely continue without concern, taking larger
risks with greater exposures than ever before, while denying
investments in favor of trading, per se.
We define Speculative Fervor as the one-year differential in DTV
compared with the level of GDP. A market that trades an additional
$2 trillion while GDP rises by 3% is more speculative than a market
that trades an additional $1 trillion while GDP rises the same 3%.
Although Speculative Fervor has not reached the levels registered in
1999 and 2000, this indicator has remained at "Roaring Twenties"
levels for four full years. It is easy to posit that recent high
levels have reinforced the notion that stocks can do no wrong, hence
the game is still played to the hilt. We believe it is imperative
to note that Speculative Fervor remained between +15% to -10% for a
stretch of 64 years (!!!) from 1933 to 1996, equating to the
historic norm. A return to these levels will result in a huge
dénouement for traders and investors. In our view, this outcome is
inevitable. We do not expect an identical collapse such as occurred
from 2000 to 2003, but an initial shock followed by a consistent and
steady disenchantment with the inability of stocks to recover over
the long term.
Stocks are overowned and clearly, overtraded.
is that 2007 is a record setting year from almost every aspect.
While there are a few rare exceptions that place either 1929 or 2000
in the spotlight instead, our overall impression is that the mania
for stocks appears to be at least as emphatic now as it has ever
been. We have repeatedly illustrated margin debt extremes and the
historically low mutual fund cash-to-assets ratio as evidence, but
the best picture of the continuing mania for stocks remains the
sheer volume of trading. Not only is the volume of trading at a
historic high, the velocity of transactions have exceeded the
previous highs with such ease that one's only choice is the
assumption that a veritable mania is still in progress, and in fact,
never really ended. Apparently, the collapse and bear market that
endured from March 2000 to March 2003 was only a corrective phase to
the greatest stock market mania of all time.
We make the distinction of a "corrective phase" rather than a bear
market due to the observable fact that we cannot find one instance
of back-to-back stock manias in the past. Perhaps the semantics and
definitions do not work for some, but nevertheless, we find it
extremely difficult to dispute that the mania never really ended.
Even at the nadir in 2002, Dollar Trading Volume was still at a
level that equated to a 18.3% rate of growth in velocity from 1995,
when we posit the mania actually commenced. This seven year path
would have been extraordinary sans the final manic peak and
subsequent collapse!
As it now stands, DTV has grown 18.1% from last year's record total
and exceeds the fateful year of 2000 by 28.1%. Compared with Gross
domestic Product and total stock market capitalization, we are close
enough to record extremes to posit the possibility that a similar
outcome to 1929 and 2000 should eventually be at hand.
DTV is more than three times the size of GDP
for only the second time in history.
DTV versus market capitalization is 223%, only nominally lower than
the 228% registered in the Roaring Twenties.
If there is only one salient truth about the stock market today, it
is that the mania remains largely unrecognized by professionals and
the public, who blithely continue without concern, taking larger
risks with greater exposures than ever before, while denying
investments in favor of trading, per se.
We define Speculative Fervor as the one-year differential in DTV
compared with the level of GDP. A market that trades an additional
$2 trillion while GDP rises by 3% is more speculative than a market
that trades an additional $1 trillion while GDP rises the same 3%.
Although Speculative Fervor has not reached the levels registered in
1999 and 2000, this indicator has remained at "Roaring Twenties"
levels for four full years. It is easy to posit that recent high
levels have reinforced the notion that stocks can do no wrong, hence
the game is still played to the hilt. We believe it is imperative
to note that Speculative Fervor remained between +15% to -10% for a
stretch of 64 years (!!!) from 1933 to 1996, equating to the
historic norm. A return to these levels will result in a huge
dénouement for traders and investors. In our view, this outcome is
inevitable. We do not expect an identical collapse such as occurred
from 2000 to 2003, but an initial shock followed by a consistent and
steady disenchantment with the inability of stocks to recover over
the long term.
Stocks are overowned and clearly, overtraded.
12 June 2007
Get gold asap, clearly
In a recent article as important for its source as its content, the Director of International Economics at the Council on Foreign Relations adapted a metaphor first employed by Jacques Rueff to describe the "absurdity" of the Bretton Woods post-war international monetary monetary system a few years before its collapse. B. Steil, "The End of National Currency," Foreign Affairs (Vol. 86, No. 3, May/June 2007), pp. 83-96. Rueff had compared the chronic balance-of-payments deficit then being run by the United States to buying from a tailor who, whatever you paid him for a suit, would loan the money back to you the very next day. Bringing the metaphor current, Mr. Steil writes (at p. 93):
With the U.S. current account deficit running at an enormous 6.6 percent of GDP ... , the United States is in the fortunate position of the suit buyer with a Chinese tailor who instantaneously returns his payments in the form of loans -- generally, in the U.S. case, as purchases of U.S. Treasury bonds. The current account deficit is partially fueled by the budget deficit ... , which will soar in the next decade in the absence of reforms to curtail federal "entitlement" spending on medical care and retirement benefits for a longer-living population. The United States -- and, indeed, its Chinese tailor -- must therefore be concerned with the sustainability of what Rueff called an "absurdity." In the absence of long-term fiscal prudence, the United States risks undermining the faith foreigners have placed in its management of the dollar -- that is, their belief that the U.S government can continue to sustain low inflation without having to resort to growth-crushing interest-rate hikes as a means of ensuring continued high capital inflows.
The rising nervousness of America's Chinese tailor is reflected in its recent efforts to redeploy a portion of its mammoth foreign exchange reserves, mostly held in U.S. dollars, into other investments. See, e.g., F. Gimbel, Trickle of money could become investment flood, FT.com (May 21, 2007) (alternate link).
Mr. Steil's preference (at p. 95) is for a world in which governments "replace national currencies with the dollar, the euro or, in the case of Asia, collaborate to produce a new multinational currency over a comparably large and economically diversified area." Of course, as he freely admits, this solution requires the United States to get its fiscal house in order and the European Union to deal effectively with similar fiscal concerns. "It is," he concludes (at p. 96), "the market that made the dollar into global money -- and what the market giveth, the market can taketh away. If the tailors balk and the dollar fails, the market may privatize money on its own (emphasis supplied)."
When Mr. Steil talks about privatizing money, he pulls no punches. He asks (at p. 94): "So what about gold?" And he answers:
A revived gold standard is out of the question. In the nineteenth century, governments spent less than ten percent of national income in a given year. Today, they routinely spend half or more, and so they would never subordinate spending to the stringent requirements of sustaining a commodity-based monetary system. But private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the dollar's decline. A new gold-based international monetary system surely sounds farfetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support.
So there it is, straight from the Council on Foreign Relations: James Turk's GoldMoney and other digital gold payments systems could supplant the dollar and the euro in international trade if the United States and the members of the European Union cannot bring their structural budget deficits under control. What is more, a nudge or misstep from America's Chinese tailor could accelerate the dollar's fall and rapidly plunge the international payments system into crisis.
source
With the U.S. current account deficit running at an enormous 6.6 percent of GDP ... , the United States is in the fortunate position of the suit buyer with a Chinese tailor who instantaneously returns his payments in the form of loans -- generally, in the U.S. case, as purchases of U.S. Treasury bonds. The current account deficit is partially fueled by the budget deficit ... , which will soar in the next decade in the absence of reforms to curtail federal "entitlement" spending on medical care and retirement benefits for a longer-living population. The United States -- and, indeed, its Chinese tailor -- must therefore be concerned with the sustainability of what Rueff called an "absurdity." In the absence of long-term fiscal prudence, the United States risks undermining the faith foreigners have placed in its management of the dollar -- that is, their belief that the U.S government can continue to sustain low inflation without having to resort to growth-crushing interest-rate hikes as a means of ensuring continued high capital inflows.
The rising nervousness of America's Chinese tailor is reflected in its recent efforts to redeploy a portion of its mammoth foreign exchange reserves, mostly held in U.S. dollars, into other investments. See, e.g., F. Gimbel, Trickle of money could become investment flood, FT.com (May 21, 2007) (alternate link).
Mr. Steil's preference (at p. 95) is for a world in which governments "replace national currencies with the dollar, the euro or, in the case of Asia, collaborate to produce a new multinational currency over a comparably large and economically diversified area." Of course, as he freely admits, this solution requires the United States to get its fiscal house in order and the European Union to deal effectively with similar fiscal concerns. "It is," he concludes (at p. 96), "the market that made the dollar into global money -- and what the market giveth, the market can taketh away. If the tailors balk and the dollar fails, the market may privatize money on its own (emphasis supplied)."
When Mr. Steil talks about privatizing money, he pulls no punches. He asks (at p. 94): "So what about gold?" And he answers:
A revived gold standard is out of the question. In the nineteenth century, governments spent less than ten percent of national income in a given year. Today, they routinely spend half or more, and so they would never subordinate spending to the stringent requirements of sustaining a commodity-based monetary system. But private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the dollar's decline. A new gold-based international monetary system surely sounds farfetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support.
So there it is, straight from the Council on Foreign Relations: James Turk's GoldMoney and other digital gold payments systems could supplant the dollar and the euro in international trade if the United States and the members of the European Union cannot bring their structural budget deficits under control. What is more, a nudge or misstep from America's Chinese tailor could accelerate the dollar's fall and rapidly plunge the international payments system into crisis.
source
Brighter future awaits Laos -- and Oxiana
Laos, a mountainous land-locked nation of about six million people, is making the transition to a market economy in the same manner that Vietnam followed the path laid even earlier by China.
Although it has been among the poorest nations in the world, the Lao Peoples’ Democratic Republic, as it is known, has made great headway in the battle to reduce the grinding poverty that afflict so many of its citizens.
Despite the relatively low starting point in per capita incomes, the Asian Development Bank expects Laos to be able to meet its Millennium Development Goals in income poverty reduction.
“However, some non-income targets related to basic education, maternal health, child nutrition and access to clean drinking water may be beyond reach,” it noted in a recent country review.
At the heart of the double-digit industry growth has been exports from the copper-gold mine owned by Australian-listed Oxiana, which is presently expanding output at its two mines in the country.
Oxiana expects to produce about 60,000 tonnes of copper and about 120,000 ounces of gold from its Sepon mine in Laos this year.
Mineral exports commenced at US$58 million in 2004 and had risen to US$216 million in 2005.
Economic growth accelerated to 7.3% last year to take average growth over the past five years to 6.5%.
“Robust growth over the period is largely attributable to industry, particularly to the development of hydropower projects and gold and copper mining,” according to the ADB.
Industry expanded by 13% last year to account for 31% of the economy, a gain of 10% in the past decade. Services grew by 5.5% and agriculture by 3.3%.
Foreign direct investment last year increased by 30% to US$650 million, driven by large investments such as the Nam Theung 2 hydroelectric project and mining.
The government’s 6th Socio-economic Development Plan (2006-2010) aims to attain annual GDP growth of 7.5% to 8% annually during the period with industry growing by about 14% annually.
As in PNG, about 80% of Laotians are farmers although arable land in the landlocked 236,800 sq km country – nearly half the size of PNG – only amounts to 4% of the landmass.
Nevertheless, agriculture and forestry is anticipated in the current five-year plan to grow by more than 3% annually with the services sector experiencing 8% growth.
Data from the World Bank showed that per capita income in Laos has risen from a mere US$280 in 2000 to US$430 in 2005.
The Laotian government is planning for per capita GDP to increase to between US$700 and US$750 by 2010.
By the end of the decade, average income levels in Laos would overtake PNG, even though the Laotian starting base at the start of the decade was around half the level in PNG.
On current plans the Laotian government is on track for its goal of graduating from the ranks of least developed countries to a middle income developing country by 2020.
One sign of the rapidly improving socio-economic situation is access to fixed line and mobile telephones, which has risen 12-fold from 10.1 subscribers per 1,000 people to 120.4 in a mere five-year period.
Life expectancy at birth for the average Laotian is only 55.7, slightly better than Papua New Guinea’s 56.4 years but well below the Asia-Pacific average of 70 years.
In the case of both Laos and PNG, life expectancy has increased by about two years in the past five years.
One of the prime keys to rapid economic growth has been the construction of the 1,070MW Nam Theung 2 hydroelectric project in central Laos.
Work commenced in 2004 with financial assistance from the World Bank and Asian Development Bank and the US$1.45 billion (K4.4 billion) project remains on schedule for completion in 2009.
The vital reservoir impoundment stage will take place in June next year.
About 93% of electricity will be exported to neighbouring Thailand with the remainder going to local consumers.
ADB estimates suggest that the hydroelectric project will generate about US$1.9 billion (K5.8 billion) in revenue for the government over a 25-year operating period.
It will generate US$30 million (K91.9 million) a year in the first 10 years, during which time project debt is paid down, and rise to around US$110 million (K337 million) a year from 2020 to 2034.
The project is being undertaken on a build-own-operate-transfer basis by a consortium owned by Electricte de France International (35%), Electricity Generating Public Company of Thailand (25%), Italian Thai Development Public Co of Thailand (15%) and the Laotian government (25%).
Following the concession period of 31 years, the project will be transferred free-of-charge to the Laos government.
The ADB said the project “has been designed with a suite of environmental and social mitigation measures to ensure that living standards of people affected by the project improve and that the largest biodiversity area in mainland Southeast Asia is better protected and preserved.”
Although it has been among the poorest nations in the world, the Lao Peoples’ Democratic Republic, as it is known, has made great headway in the battle to reduce the grinding poverty that afflict so many of its citizens.
Despite the relatively low starting point in per capita incomes, the Asian Development Bank expects Laos to be able to meet its Millennium Development Goals in income poverty reduction.
“However, some non-income targets related to basic education, maternal health, child nutrition and access to clean drinking water may be beyond reach,” it noted in a recent country review.
At the heart of the double-digit industry growth has been exports from the copper-gold mine owned by Australian-listed Oxiana, which is presently expanding output at its two mines in the country.
Oxiana expects to produce about 60,000 tonnes of copper and about 120,000 ounces of gold from its Sepon mine in Laos this year.
Mineral exports commenced at US$58 million in 2004 and had risen to US$216 million in 2005.
Economic growth accelerated to 7.3% last year to take average growth over the past five years to 6.5%.
“Robust growth over the period is largely attributable to industry, particularly to the development of hydropower projects and gold and copper mining,” according to the ADB.
Industry expanded by 13% last year to account for 31% of the economy, a gain of 10% in the past decade. Services grew by 5.5% and agriculture by 3.3%.
Foreign direct investment last year increased by 30% to US$650 million, driven by large investments such as the Nam Theung 2 hydroelectric project and mining.
The government’s 6th Socio-economic Development Plan (2006-2010) aims to attain annual GDP growth of 7.5% to 8% annually during the period with industry growing by about 14% annually.
As in PNG, about 80% of Laotians are farmers although arable land in the landlocked 236,800 sq km country – nearly half the size of PNG – only amounts to 4% of the landmass.
Nevertheless, agriculture and forestry is anticipated in the current five-year plan to grow by more than 3% annually with the services sector experiencing 8% growth.
Data from the World Bank showed that per capita income in Laos has risen from a mere US$280 in 2000 to US$430 in 2005.
The Laotian government is planning for per capita GDP to increase to between US$700 and US$750 by 2010.
By the end of the decade, average income levels in Laos would overtake PNG, even though the Laotian starting base at the start of the decade was around half the level in PNG.
On current plans the Laotian government is on track for its goal of graduating from the ranks of least developed countries to a middle income developing country by 2020.
One sign of the rapidly improving socio-economic situation is access to fixed line and mobile telephones, which has risen 12-fold from 10.1 subscribers per 1,000 people to 120.4 in a mere five-year period.
Life expectancy at birth for the average Laotian is only 55.7, slightly better than Papua New Guinea’s 56.4 years but well below the Asia-Pacific average of 70 years.
In the case of both Laos and PNG, life expectancy has increased by about two years in the past five years.
One of the prime keys to rapid economic growth has been the construction of the 1,070MW Nam Theung 2 hydroelectric project in central Laos.
Work commenced in 2004 with financial assistance from the World Bank and Asian Development Bank and the US$1.45 billion (K4.4 billion) project remains on schedule for completion in 2009.
The vital reservoir impoundment stage will take place in June next year.
About 93% of electricity will be exported to neighbouring Thailand with the remainder going to local consumers.
ADB estimates suggest that the hydroelectric project will generate about US$1.9 billion (K5.8 billion) in revenue for the government over a 25-year operating period.
It will generate US$30 million (K91.9 million) a year in the first 10 years, during which time project debt is paid down, and rise to around US$110 million (K337 million) a year from 2020 to 2034.
The project is being undertaken on a build-own-operate-transfer basis by a consortium owned by Electricte de France International (35%), Electricity Generating Public Company of Thailand (25%), Italian Thai Development Public Co of Thailand (15%) and the Laotian government (25%).
Following the concession period of 31 years, the project will be transferred free-of-charge to the Laos government.
The ADB said the project “has been designed with a suite of environmental and social mitigation measures to ensure that living standards of people affected by the project improve and that the largest biodiversity area in mainland Southeast Asia is better protected and preserved.”
11 June 2007
Tsunami Survivor at Munich Re Warns of Intense Hurricane Season
Warm Seas
``The current warm phase of sea-surface temperatures, which started in 1995, is still the most important driver behind higher hurricane intensity and frequency,'' Hoeppe said in an interview last week at Munich Re's headquarters. ``We will remain in this phase for at least another 10 years.''
His research guides Munich Re's management board and underwriters in deciding how much risk to take and at what price. ``We need to know what burdens we would have to bear if the worst came to the worst,'' said Heike Trilovszky, the head of Munich Re's underwriting department.
Munich Re almost doubled rates for property and casualty reinsurance in hurricane-affected areas after Katrina. Prices for coverage of oil rigs in the Gulf of Mexico jumped as much as 400 percent. The company said it further raised rates for storm-prone regions this January.
The 127-year-old Munich-based company and larger rival Swiss Reinsurance Co., based in Zurich, help insurers such as American International Group Inc. and Allstate Corp. shoulder risks for clients.
Climate Change
``The trend clearly points toward more frequent and more expensive natural disasters,'' said Ernst Konrad, the Munich- based head of equities at Bayern-Invest, which manages about $35 billion and owns shares of Munich Re and Swiss Re. ``That's good for reinsurers as it will drive demand and prices.''
Munich Re's net income rose for the past three years, reaching a record 3.4 billion euros ($4.6 billion) in 2006. Shares of Munich Re rose 32 percent in the past year, topping the 24 percent gain of the Bloomberg Europe 500 Insurance Index.
Hoeppe expects human-driven global warming to trigger more severe natural disasters.
This winter he predicted a major storm in Europe after noting that warmer-than-usual weather left less snow cover in the region. In mid-January, winter storm Kyrill swept through Britain, France and Germany, resulting in more than 40 deaths. Climate models indicate winter storms in Europe will become more intense and less frequent, Hoeppe said.
He reckons the 2007 hurricane season will be worse than usual because of the likely absence of El Nino, a warming of the Pacific Ocean that occurs every few years, and Saharan sandstorms that diminished the impact of last year's storms.
$100 Billion Storm
Hoeppe and most of his team work from the reinsurer's five- story complex in the Schwabing district of Munich, where a glass- encased mock-tornado machine whips up a cloud of mist to greet visitors. They analyze loss reports connected with major catastrophes since 1975, and have archives stretching back to the eruption of Mount Vesuvius in 79 AD.
Other forecasters concur on the likelihood of more big storms. Colorado State University's Philip Klotzbach and William Gray last month predicted five major hurricanes, or those with winds of at least 111 miles (179 kilometers) per hour, will form from the 17 hurricanes expected this season.
Hoeppe foresees a storm resulting in insured damages of $100 billion within the next 20 years. Climate change may eventually bring hotter summers to Europe, hurricanes to Lisbon and bigger storms in the Mediterranean, he said.
Cyclone Gonu, the worst to hit the Arabian Peninsula in more than 60 years, over the past two days pummelled coastal areas of Oman and Iran, including oil shipping lanes around the Strait of Hormuz. Earlier in the week Gonu was a Category 5 storm, the strongest on the Saffir-Simpson scale, as it churned across the northern Arabian Sea.
`Relatively Lucky'
Down the hall from Hoeppe's office, past maps showing ocean currents and storm systems, a computer model pinpoints the oil rigs in the Gulf of Mexico that are reinsured by Munich Re.
``With Hurricane Katrina we were relatively lucky that it didn't hit New Orleans with full force and that it didn't cross the areas most densely used by oil rigs,'' Hoeppe said, pointing to the storm's path colored in red and green.
One mouse click and Lorenz Dolezalek, the department's geoinformatics expert, shows a hurricane path moving through the Gulf toward the Houston-Galveston area. That represents one of Munich Re's worst-case scenarios because such a hurricane ``would hit an awful lot of drilling rigs,'' Hoeppe said.
Galveston, Houston
The region around Galveston is vulnerable because it ``has open access to the Gulf and therefore the sea could be pushed all the way into Houston,'' Hoeppe said. ``This would be a similar scenario to New Orleans, however not as severe since New Orleans is located in part below sea level.''
Losses from hurricanes could be surpassed by earthquakes in Los Angeles, San Francisco or Tokyo, events that are much harder to predict. ``Geologic risks like earthquakes, volcanoes and tsunamis don't show real trends,'' he said. ``Atmospheric events like hurricanes and winter storms do.''
Hoeppe, a native of the Bavarian town of Hassfurt, had little experience outside academia when he joined Munich Re. A year later he replaced Gerhard Berz, who tracked and forecast natural disasters there for 30 years.
``Berz was a famous personality in the international research community,'' said Robert Muir-Wood, chief research officer at Newark, California-based risk-modeler Risk Management Solutions Inc. ``Hoeppe is well on the way to establishing a similar reputation.''
One in 100
An adjunct professor at Ludwig-Maximilians-University, Hoeppe also lectures at the Geneva-based World Health Organization and World Meteorological Organization, and the Paris-based Organization for Economic Cooperation and Development.
The tsunami caught Hoeppe off-guard on Dec. 26, 2004.
``We felt an earthquake about 2 1/2-hours earlier, but I didn't expect that to result in a tsunami because that only happens in about one out of 100 quakes,'' Hoeppe said.
He fled with other guests to a higher point on the atoll, which was submerged under hip-deep water for several minutes. Reefs surrounding the island where he was staying diminished the waves' surge, he said.
more
``The current warm phase of sea-surface temperatures, which started in 1995, is still the most important driver behind higher hurricane intensity and frequency,'' Hoeppe said in an interview last week at Munich Re's headquarters. ``We will remain in this phase for at least another 10 years.''
His research guides Munich Re's management board and underwriters in deciding how much risk to take and at what price. ``We need to know what burdens we would have to bear if the worst came to the worst,'' said Heike Trilovszky, the head of Munich Re's underwriting department.
Munich Re almost doubled rates for property and casualty reinsurance in hurricane-affected areas after Katrina. Prices for coverage of oil rigs in the Gulf of Mexico jumped as much as 400 percent. The company said it further raised rates for storm-prone regions this January.
The 127-year-old Munich-based company and larger rival Swiss Reinsurance Co., based in Zurich, help insurers such as American International Group Inc. and Allstate Corp. shoulder risks for clients.
Climate Change
``The trend clearly points toward more frequent and more expensive natural disasters,'' said Ernst Konrad, the Munich- based head of equities at Bayern-Invest, which manages about $35 billion and owns shares of Munich Re and Swiss Re. ``That's good for reinsurers as it will drive demand and prices.''
Munich Re's net income rose for the past three years, reaching a record 3.4 billion euros ($4.6 billion) in 2006. Shares of Munich Re rose 32 percent in the past year, topping the 24 percent gain of the Bloomberg Europe 500 Insurance Index.
Hoeppe expects human-driven global warming to trigger more severe natural disasters.
This winter he predicted a major storm in Europe after noting that warmer-than-usual weather left less snow cover in the region. In mid-January, winter storm Kyrill swept through Britain, France and Germany, resulting in more than 40 deaths. Climate models indicate winter storms in Europe will become more intense and less frequent, Hoeppe said.
He reckons the 2007 hurricane season will be worse than usual because of the likely absence of El Nino, a warming of the Pacific Ocean that occurs every few years, and Saharan sandstorms that diminished the impact of last year's storms.
$100 Billion Storm
Hoeppe and most of his team work from the reinsurer's five- story complex in the Schwabing district of Munich, where a glass- encased mock-tornado machine whips up a cloud of mist to greet visitors. They analyze loss reports connected with major catastrophes since 1975, and have archives stretching back to the eruption of Mount Vesuvius in 79 AD.
Other forecasters concur on the likelihood of more big storms. Colorado State University's Philip Klotzbach and William Gray last month predicted five major hurricanes, or those with winds of at least 111 miles (179 kilometers) per hour, will form from the 17 hurricanes expected this season.
Hoeppe foresees a storm resulting in insured damages of $100 billion within the next 20 years. Climate change may eventually bring hotter summers to Europe, hurricanes to Lisbon and bigger storms in the Mediterranean, he said.
Cyclone Gonu, the worst to hit the Arabian Peninsula in more than 60 years, over the past two days pummelled coastal areas of Oman and Iran, including oil shipping lanes around the Strait of Hormuz. Earlier in the week Gonu was a Category 5 storm, the strongest on the Saffir-Simpson scale, as it churned across the northern Arabian Sea.
`Relatively Lucky'
Down the hall from Hoeppe's office, past maps showing ocean currents and storm systems, a computer model pinpoints the oil rigs in the Gulf of Mexico that are reinsured by Munich Re.
``With Hurricane Katrina we were relatively lucky that it didn't hit New Orleans with full force and that it didn't cross the areas most densely used by oil rigs,'' Hoeppe said, pointing to the storm's path colored in red and green.
One mouse click and Lorenz Dolezalek, the department's geoinformatics expert, shows a hurricane path moving through the Gulf toward the Houston-Galveston area. That represents one of Munich Re's worst-case scenarios because such a hurricane ``would hit an awful lot of drilling rigs,'' Hoeppe said.
Galveston, Houston
The region around Galveston is vulnerable because it ``has open access to the Gulf and therefore the sea could be pushed all the way into Houston,'' Hoeppe said. ``This would be a similar scenario to New Orleans, however not as severe since New Orleans is located in part below sea level.''
Losses from hurricanes could be surpassed by earthquakes in Los Angeles, San Francisco or Tokyo, events that are much harder to predict. ``Geologic risks like earthquakes, volcanoes and tsunamis don't show real trends,'' he said. ``Atmospheric events like hurricanes and winter storms do.''
Hoeppe, a native of the Bavarian town of Hassfurt, had little experience outside academia when he joined Munich Re. A year later he replaced Gerhard Berz, who tracked and forecast natural disasters there for 30 years.
``Berz was a famous personality in the international research community,'' said Robert Muir-Wood, chief research officer at Newark, California-based risk-modeler Risk Management Solutions Inc. ``Hoeppe is well on the way to establishing a similar reputation.''
One in 100
An adjunct professor at Ludwig-Maximilians-University, Hoeppe also lectures at the Geneva-based World Health Organization and World Meteorological Organization, and the Paris-based Organization for Economic Cooperation and Development.
The tsunami caught Hoeppe off-guard on Dec. 26, 2004.
``We felt an earthquake about 2 1/2-hours earlier, but I didn't expect that to result in a tsunami because that only happens in about one out of 100 quakes,'' Hoeppe said.
He fled with other guests to a higher point on the atoll, which was submerged under hip-deep water for several minutes. Reefs surrounding the island where he was staying diminished the waves' surge, he said.
more
Foreign central banks net sellers of U.S. debt-Fed
NEW YORK, June 7 (Reuters) - Foreign central banks were net sellers of U.S. Treasuries last week, Federal Reserve data showed on Thursday.
The Fed said its holdings of Treasury and agency debt kept for overseas central banks fell $12.5 billion in the week ended June 6, to stand at a total of $1.950 trillion.
The breakdown of custody holdings showed overseas central banks sold $9.769 billion in Treasury debt to stand at a total of $1.225 trillion.
The foreign institutions also sold securities from government-sponsored agencies like Fannie Mae (FNM.N: Quote, Profile , Research) and Freddie Mac (FRE.N: Quote, Profile , Research), subtracting $2.727 billion from their holdings, to stand at $725.21 billion.
fed report
The Fed said its holdings of Treasury and agency debt kept for overseas central banks fell $12.5 billion in the week ended June 6, to stand at a total of $1.950 trillion.
The breakdown of custody holdings showed overseas central banks sold $9.769 billion in Treasury debt to stand at a total of $1.225 trillion.
The foreign institutions also sold securities from government-sponsored agencies like Fannie Mae (FNM.N: Quote, Profile , Research) and Freddie Mac (FRE.N: Quote, Profile , Research), subtracting $2.727 billion from their holdings, to stand at $725.21 billion.
fed report
8 June 2007
What you call a bearish analysis
It’s easy. The markets are just responding to the growth in the money supply which is in double-digits just about everywhere around the world. When there are more dollars chasing the same number of assets---stocks go up. It’s just that simple. What we’re seeing isn’t the result of investor confidence or industrial output. Heck no! Stocks are rising because our $800 billion current account deficit is recycling into the stock market. What we are really seeing is the first signs of inflation---galloping inflation which will soon spill over into the broader economy.
If we eliminate the “frothy” exuberance of America’s trade deficit, then the stock market would be sucking air through a tube right now. And, you can bet that as soon as our foreign creditors wise-up and start raising interest rates the Dow Jones will quickly become the Dow Doldrums and the economy will nosedive into a 1929-type Depression.
Does that sound overly pessimistic?
At present, the “don’t worry, be happy” crowd still thinks the good times will roll on forever. They don’t see that the US consumer is running out of gas and won’t be able to sustain his gluttonous spending spree much longer. He’s already stopped siphoning the equity out of his home ($600 billion last year) and now he’s has started to max-out his credit cards. (Credit card debt increased 9.2% last month alone!) Now, US consumers are facing a blizzard of bad economic news---rising prices at the gas pump, a 6.7% increase in food prices, and a sickly dollar that keeps losing ground on the currency exchange. (Kuwait is the latest country to announce they will be dumping the dollar for a basket of currencies)
Currently, the US gobbles up two-thirds of the world’s credit each year with no conceivable way of paying it back. That won’t last much longer. Central banks around the world are increasingly hesitant to accept are our flaccid greenbacks and the Chinese are the only ones who are still buying our Treasuries. That’s mainly because it gives them power over political decision-making in Washington. The truth is the Chinese are planning to send the US into receivership and take over as the world’s bank. With dollar-backed reserves of $1.3 trillion, their plan appears to be going “full-steam ahead”.
The bottom line is that we are buried beneath a $9 trillion mountain of debt and there’s no way to dig out. If there’s a break in the liquidity-flows to our stock market---stocks will crash, unemployment will soar, and we’ll be pulled into a deflationary downspin.
Economic soothsayer Elaine Supkis puts it like this:
“World wealth isn't growing, world DEBTS are growing and the place they are growing the fastest is the US which is the sole terminus of world trade at this point. The biggest growth industry today is selling debt instruments. The entire existence of hedge funds, for example, is to funnel profits from uneven trade with the US back into the US via dumping debts onto the backs of any corporations that can run up more debts!” (http://elainemeinelsupkis.typepad.com/money_matters/)
Get it? It’s all just recycled dollars---debt piled on debt piled on debt piled on debt-- repeat ad infinitum. America’s equities portfolio = 1% assets, 99% pure helium.
This may explain why Treasury Secretary Hank Paulson has been frantically beating the bushes for “foreign investment” to keep the stock market bubble afloat. He has no interest in rebuilding America’s industries or increasing our competitiveness. No way. What he’s looking for is a quick liquidity-fix to keep the over-bloated stock market sputtering along while more wealth is shifted to mega-rich corporations. In fact, no one in Washington is even talking about renovating America’s battered manufacturing sector. What do they care if we turn into a nation of busboys and bed-pan cleaners? They’re just hanging around long enough to sell off whatever’s left of our national assets then it’s “off to new markets in the Far East”.
And, they are doing a great job, too! The United States is handing over 1.5% of its national wealth every year to foreign investors while the American public continues to snooze away.
We’re having a giant garage sale and everything must go---roads, water, mineral rights, natural gas etc. We’re getting “picked clean” and no one seems to care.
The boys in Washington and Wall Street don’t work for you and me. They’re destroying the currency and selling everything that isn’t bolted to the floor. Then, they’ll pack-off to Asia and Europe where they can begin the scavenging-cycle all over again.
How bad will it get in the USA?
Consider these comments from Princeton University economist Alan Blinder, who recently attended the business summit at Davos, Switzerland: (summarized by Rep. Ron Paul)
“Word has it that there may be plans yet again to “outsource” highly skilled American jobs to other countries. Approximately 40-million American jobs could be at stake and yet US workers have not been told or consulted about it, until now. Just to put the number of 40 million into perspective, that is more than twice the amount of people that are employed in manufacturing. (According to Alan Blinder) The ‘choice’ jobs of skilled Americans could be lost and given to foreign countries within the next decade or two.”
40 million high-paying US jobs will be outsourced to lower-wage countries within the decade?!?
This is a blueprint for the economic destruction of America!
Maybe this will finally convince the dozy American public that the corporatists who run Washington are a disloyal gaggle of traitorous swine. “Globalization” is public relations swindle designed to steal jobs, plunder the economy, and shift wealth to ruling elites.
The name of the game now is to keep the stock market flying-high for as long as possible while the transfer of wealth continues unabated. That means the hucksters on Wall Street will have to devise even better scams for expanding debt---increasing margin limits, escalating derivatives trading, loosening accounting standards, inflating the booming hedge fund industry, and---the new darling of Wall Street---increasing the mega-mergers, the biggest swindle of all.
These over-leveraged mergers create boatloads of new credit, but add nothing to GDP. They reflect the basic disconnect between the stock market and the real economy. May is on track to be the biggest month for global mergers ever recorded. Marketwatch reports:
“For the year to date, companies have announced at least $2.2 trillion in deals worldwide. Of these, US companies have engaged in $830 billion”.
But look at the figures---Do they sound familiar?
Once again, the insightful Elaine Supkis makes this observation:
“Note that the 'deals' roughly equal our trade deficit. This isn't accidental. They are one and the same! And I will never see this fact stated so baldly in our media. No one dares say it in public.”
Wow; she’s right. Our trade deficit is being concealed by these gargantuan mega-deals in the markets.
And there’s something else we need consider about these mergers; they’re not producing growth in the economy. In fact, GDP keeps falling while stocks keep going higher.
Why?
Because the mergers do not increase productivity; they’re an indication of “asset inflation”. As Thorsten Polleit says, “the government-controlled paper money systems have decoupled credit expansion from the from the economy’s productive capacities.” The link between the stock market and GDP has been broken by inflation.
Henry C K Liu explains it like this in his article “Liquidity Boom and Looming Crisis” in the Asia Times:
“The five-year global growth boom and four-year secular bull market may simple run out of steam, or become oversaturated by too many late-coming imitators entering a very specialized and exotic market of high-risk, high-leverage arbitrage. The liquidity boom has been delivering strong growth through asset inflation (property, credit spreads, commodities, and emerging-market stocks) WITHOUT ADDING COMMENSURATE SUBSTANTIVE EXPANSION OF THE REAL ECONOMY. Unlike real physical assets, virtual financial mirages that arise out of thin air can evaporate again into thin air without warning. As inflation picks up, the liquidity boom and asset inflation will draw to a close, leaving a hollowed economy devoid of substance. …A global financial crisis is inevitable”.
Liu’s right. There’s no “expansion in the real economy”—no increase in output; no boost in GDP. It’s all recycled credit which will “evaporate” at the first sign of trouble.
Greenspan’s low interest rates and currency deregulation have set us up for “global liquidity crisis”.
The basic problem is that credit growth has been outpacing GDP for some time now. That means that debt has been building up faster than the rate of growth in the economy. Eventually those imbalances will have to work themselves out by way of a steep recession or perhaps another Great Depression. There’s a price to pay for low interest rates and, inevitably, we will end up paying it.
Thorsten Polleit of the Mises Institute explains it like this in his article “The Dark Side of the Credit Boom”:
“Today's government-controlled paper-money systems have decoupled credit expansion from the economies' productive capacities: "circulation credit" feeds a "credit boom" that is doomed to end in severe economic, social and political crisis. Austrian economists of the Mises Institute fear that the collapse of the credit boom will lead to the destruction of the currency through a deliberate policy of (hyper-)inflation, destroying the free-market order.”
“Destruction of the currency”; is that too strong?
No. In fact, the United Nations issued this gloomy statement just last week:
“The United States dollar is facing IMMINENT COLLAPSE in the face of an unsustainable debt”. America’s current account deficit is now a matter of international concern.
Polleit says that “the increase in debt-to-GDP ratios ….can actually be observed in all major currency areas, not only in the United States”. This is true. Most of the industrial countries in the world have increased their money supplies to dangerous levels to avoid strengthening against the dollar. It is a prescription for disaster.
If the Fed chooses to lower interest rates now; (to ease the slumping housing market) they will only aggravate “existing disequilibria”. In fact lowering of interest rates will only perpetuate “the fateful expansion of circulation credit that must end in a collapse of the monetary system”.
So, why would the Fed engage in such reckless behavior when it violates fundamental laws of economics? According to Polleit, “the ongoing lowering of interest rates and the accompanying rise in circulation credit and debt-to-GDP ratios — the characteristic features of today's state-controlled paper-money systems — is driven by a deep-seated anti-capitalist ideology.”
This is also true. The serial “bubble-makers” at the Federal Reserve secretly hate the free market system; that’s why they are engaged in plutocratic social engineering. They're using interest rates as a means for shifting wealth from one class to another and creating a centrally-controlled economy. There actions are essentially anti-free market and “anti-capitalist” as Polleit says. We can see this trend even more clearly in US foreign policy where the pretense of “free markets” has been abandoned altogether and America is securing its resources with gunboats and missiles rather than with a checkbook.
The current credit bubble is bigger than anything we’ve ever seen before. For example “The total market volume of credit derivatives outstanding was an estimated US $20.2 trillion in 2006, amounting to around 1.5 times annual nominal US GDP….The market is expected to grow further to US$33.1 trillion until 2008. In fact, the credit derivative market has become the biggest market segment of the international banking business already. The problem, however, is that the “credit derivative markets have emerged on the back of a government-controlled credit and money supply system. And as the latter is assumed to be crisis prone, credit derivative markets might be seen as a multiplier of the crisis potential inherent in today's monetary system”.
In other words, the whole $20 trillion derivative’s market is at risk because it is built on a shaky foundation of hyper-inflated currency. Once again, if money supply exceeds GDP there’ll eventually be a day of reckoning. We expect that derivatives and hedge funds will get hammered once the huge imbalances begin rumble through the markets.
So, what should we be looking for now?
Any break in the liquidity chain will send markets into downward spiral. The likely catalyst for such a crash could be contagion from the housing bubble creeping into the stock market, a sudden downturn in the Shanghai stock market, (which is up nearly 300% in just 2 years) or an increase in Japan’s interest rates. Any one of these could potentially trigger a massive sell-off on Wall Street.
Today’s stock market needs a steady flow of cheap capital to stay aright. That’s why Paulson is desperately looking for new investors. But there’s a basic problem which the markets cannot escape. Inflation is surfacing in all the countries where the stock markets are soaring because of their increases in the money supply. When the central banks are finally forced to raise interest rates; money will tighten up, it’ll be harder for creditors to make their payments or for banks to issue additional loans. As credit dries up more people will default on their loans, demand will drop off for consumer goods, prices will fall, and we will go into deep recession.
Once this process begins, speculators will be forced to abandon their positions, liquidity will continue to evaporate and the market will go into freefall.
Markets are self-correcting. Eventually the overleveraged debt-instruments, which pushed the Dow to historic highs, will be expelled from the system, but not without considerable pain for everyone involved.
Here’s an excerpt from Paul Lamont’s excellent article “Credit Collapse—May 10” which provides a compelling description of what happens a credit bubble begins to unwind:
“On May 10, 1837, the banks of New York suspended gold and silver payments for their notes. Fear of a bank run spread throughout the United States. The young country fell into a 7 year depression. How could two decades of prosperity end so suddenly? According to America: A Narrative History: “monetary inflation had fueled an era of speculation in real estate, canals, and railroad stocks.” Cracks in the dam were visible much earlier, as the stock market peaked in inflation-adjusted value three years prior. According to Rolf Nef, debt levels in the private sector rose to 150% of GDP. In late 1836, the Bank of England concerned with inflation raised interest rates. As rates rose in England, credit tightened, and U.S. asset prices began to fall.
On May 10, investors panicked and scrambled for cash. “By the fall of 1837 one third of the work force was jobless, and those still fortunate to have jobs saw their wages fall 30-50% within 2 years. At the same time, prices for food and clothing soared.”
We can expect a similar scenario in the very near future. When interest rates are kept below the rate of inflation for an extended period of time; enormous equity bubbles arise and threaten the entire system. The stock market is undergoing a period of asset inflation. It has broken free from the real economy and is headed for a crash. As Edward Chancellor, author of “Devil Take the Hindmost: A History of Financial Speculation” says: “The growth of credit has created an illusory prosperity while producing profound imbalances” in the American economy….At some point the system will have to adjust “to face a new reality. The process of adjustment is likely to be painful. It may well end in either an extraordinary deflation...or an extraordinary inflation."
If we eliminate the “frothy” exuberance of America’s trade deficit, then the stock market would be sucking air through a tube right now. And, you can bet that as soon as our foreign creditors wise-up and start raising interest rates the Dow Jones will quickly become the Dow Doldrums and the economy will nosedive into a 1929-type Depression.
Does that sound overly pessimistic?
At present, the “don’t worry, be happy” crowd still thinks the good times will roll on forever. They don’t see that the US consumer is running out of gas and won’t be able to sustain his gluttonous spending spree much longer. He’s already stopped siphoning the equity out of his home ($600 billion last year) and now he’s has started to max-out his credit cards. (Credit card debt increased 9.2% last month alone!) Now, US consumers are facing a blizzard of bad economic news---rising prices at the gas pump, a 6.7% increase in food prices, and a sickly dollar that keeps losing ground on the currency exchange. (Kuwait is the latest country to announce they will be dumping the dollar for a basket of currencies)
Currently, the US gobbles up two-thirds of the world’s credit each year with no conceivable way of paying it back. That won’t last much longer. Central banks around the world are increasingly hesitant to accept are our flaccid greenbacks and the Chinese are the only ones who are still buying our Treasuries. That’s mainly because it gives them power over political decision-making in Washington. The truth is the Chinese are planning to send the US into receivership and take over as the world’s bank. With dollar-backed reserves of $1.3 trillion, their plan appears to be going “full-steam ahead”.
The bottom line is that we are buried beneath a $9 trillion mountain of debt and there’s no way to dig out. If there’s a break in the liquidity-flows to our stock market---stocks will crash, unemployment will soar, and we’ll be pulled into a deflationary downspin.
Economic soothsayer Elaine Supkis puts it like this:
“World wealth isn't growing, world DEBTS are growing and the place they are growing the fastest is the US which is the sole terminus of world trade at this point. The biggest growth industry today is selling debt instruments. The entire existence of hedge funds, for example, is to funnel profits from uneven trade with the US back into the US via dumping debts onto the backs of any corporations that can run up more debts!” (http://elainemeinelsupkis.typepad.com/money_matters/)
Get it? It’s all just recycled dollars---debt piled on debt piled on debt piled on debt-- repeat ad infinitum. America’s equities portfolio = 1% assets, 99% pure helium.
This may explain why Treasury Secretary Hank Paulson has been frantically beating the bushes for “foreign investment” to keep the stock market bubble afloat. He has no interest in rebuilding America’s industries or increasing our competitiveness. No way. What he’s looking for is a quick liquidity-fix to keep the over-bloated stock market sputtering along while more wealth is shifted to mega-rich corporations. In fact, no one in Washington is even talking about renovating America’s battered manufacturing sector. What do they care if we turn into a nation of busboys and bed-pan cleaners? They’re just hanging around long enough to sell off whatever’s left of our national assets then it’s “off to new markets in the Far East”.
And, they are doing a great job, too! The United States is handing over 1.5% of its national wealth every year to foreign investors while the American public continues to snooze away.
We’re having a giant garage sale and everything must go---roads, water, mineral rights, natural gas etc. We’re getting “picked clean” and no one seems to care.
The boys in Washington and Wall Street don’t work for you and me. They’re destroying the currency and selling everything that isn’t bolted to the floor. Then, they’ll pack-off to Asia and Europe where they can begin the scavenging-cycle all over again.
How bad will it get in the USA?
Consider these comments from Princeton University economist Alan Blinder, who recently attended the business summit at Davos, Switzerland: (summarized by Rep. Ron Paul)
“Word has it that there may be plans yet again to “outsource” highly skilled American jobs to other countries. Approximately 40-million American jobs could be at stake and yet US workers have not been told or consulted about it, until now. Just to put the number of 40 million into perspective, that is more than twice the amount of people that are employed in manufacturing. (According to Alan Blinder) The ‘choice’ jobs of skilled Americans could be lost and given to foreign countries within the next decade or two.”
40 million high-paying US jobs will be outsourced to lower-wage countries within the decade?!?
This is a blueprint for the economic destruction of America!
Maybe this will finally convince the dozy American public that the corporatists who run Washington are a disloyal gaggle of traitorous swine. “Globalization” is public relations swindle designed to steal jobs, plunder the economy, and shift wealth to ruling elites.
The name of the game now is to keep the stock market flying-high for as long as possible while the transfer of wealth continues unabated. That means the hucksters on Wall Street will have to devise even better scams for expanding debt---increasing margin limits, escalating derivatives trading, loosening accounting standards, inflating the booming hedge fund industry, and---the new darling of Wall Street---increasing the mega-mergers, the biggest swindle of all.
These over-leveraged mergers create boatloads of new credit, but add nothing to GDP. They reflect the basic disconnect between the stock market and the real economy. May is on track to be the biggest month for global mergers ever recorded. Marketwatch reports:
“For the year to date, companies have announced at least $2.2 trillion in deals worldwide. Of these, US companies have engaged in $830 billion”.
But look at the figures---Do they sound familiar?
Once again, the insightful Elaine Supkis makes this observation:
“Note that the 'deals' roughly equal our trade deficit. This isn't accidental. They are one and the same! And I will never see this fact stated so baldly in our media. No one dares say it in public.”
Wow; she’s right. Our trade deficit is being concealed by these gargantuan mega-deals in the markets.
And there’s something else we need consider about these mergers; they’re not producing growth in the economy. In fact, GDP keeps falling while stocks keep going higher.
Why?
Because the mergers do not increase productivity; they’re an indication of “asset inflation”. As Thorsten Polleit says, “the government-controlled paper money systems have decoupled credit expansion from the from the economy’s productive capacities.” The link between the stock market and GDP has been broken by inflation.
Henry C K Liu explains it like this in his article “Liquidity Boom and Looming Crisis” in the Asia Times:
“The five-year global growth boom and four-year secular bull market may simple run out of steam, or become oversaturated by too many late-coming imitators entering a very specialized and exotic market of high-risk, high-leverage arbitrage. The liquidity boom has been delivering strong growth through asset inflation (property, credit spreads, commodities, and emerging-market stocks) WITHOUT ADDING COMMENSURATE SUBSTANTIVE EXPANSION OF THE REAL ECONOMY. Unlike real physical assets, virtual financial mirages that arise out of thin air can evaporate again into thin air without warning. As inflation picks up, the liquidity boom and asset inflation will draw to a close, leaving a hollowed economy devoid of substance. …A global financial crisis is inevitable”.
Liu’s right. There’s no “expansion in the real economy”—no increase in output; no boost in GDP. It’s all recycled credit which will “evaporate” at the first sign of trouble.
Greenspan’s low interest rates and currency deregulation have set us up for “global liquidity crisis”.
The basic problem is that credit growth has been outpacing GDP for some time now. That means that debt has been building up faster than the rate of growth in the economy. Eventually those imbalances will have to work themselves out by way of a steep recession or perhaps another Great Depression. There’s a price to pay for low interest rates and, inevitably, we will end up paying it.
Thorsten Polleit of the Mises Institute explains it like this in his article “The Dark Side of the Credit Boom”:
“Today's government-controlled paper-money systems have decoupled credit expansion from the economies' productive capacities: "circulation credit" feeds a "credit boom" that is doomed to end in severe economic, social and political crisis. Austrian economists of the Mises Institute fear that the collapse of the credit boom will lead to the destruction of the currency through a deliberate policy of (hyper-)inflation, destroying the free-market order.”
“Destruction of the currency”; is that too strong?
No. In fact, the United Nations issued this gloomy statement just last week:
“The United States dollar is facing IMMINENT COLLAPSE in the face of an unsustainable debt”. America’s current account deficit is now a matter of international concern.
Polleit says that “the increase in debt-to-GDP ratios ….can actually be observed in all major currency areas, not only in the United States”. This is true. Most of the industrial countries in the world have increased their money supplies to dangerous levels to avoid strengthening against the dollar. It is a prescription for disaster.
If the Fed chooses to lower interest rates now; (to ease the slumping housing market) they will only aggravate “existing disequilibria”. In fact lowering of interest rates will only perpetuate “the fateful expansion of circulation credit that must end in a collapse of the monetary system”.
So, why would the Fed engage in such reckless behavior when it violates fundamental laws of economics? According to Polleit, “the ongoing lowering of interest rates and the accompanying rise in circulation credit and debt-to-GDP ratios — the characteristic features of today's state-controlled paper-money systems — is driven by a deep-seated anti-capitalist ideology.”
This is also true. The serial “bubble-makers” at the Federal Reserve secretly hate the free market system; that’s why they are engaged in plutocratic social engineering. They're using interest rates as a means for shifting wealth from one class to another and creating a centrally-controlled economy. There actions are essentially anti-free market and “anti-capitalist” as Polleit says. We can see this trend even more clearly in US foreign policy where the pretense of “free markets” has been abandoned altogether and America is securing its resources with gunboats and missiles rather than with a checkbook.
The current credit bubble is bigger than anything we’ve ever seen before. For example “The total market volume of credit derivatives outstanding was an estimated US $20.2 trillion in 2006, amounting to around 1.5 times annual nominal US GDP….The market is expected to grow further to US$33.1 trillion until 2008. In fact, the credit derivative market has become the biggest market segment of the international banking business already. The problem, however, is that the “credit derivative markets have emerged on the back of a government-controlled credit and money supply system. And as the latter is assumed to be crisis prone, credit derivative markets might be seen as a multiplier of the crisis potential inherent in today's monetary system”.
In other words, the whole $20 trillion derivative’s market is at risk because it is built on a shaky foundation of hyper-inflated currency. Once again, if money supply exceeds GDP there’ll eventually be a day of reckoning. We expect that derivatives and hedge funds will get hammered once the huge imbalances begin rumble through the markets.
So, what should we be looking for now?
Any break in the liquidity chain will send markets into downward spiral. The likely catalyst for such a crash could be contagion from the housing bubble creeping into the stock market, a sudden downturn in the Shanghai stock market, (which is up nearly 300% in just 2 years) or an increase in Japan’s interest rates. Any one of these could potentially trigger a massive sell-off on Wall Street.
Today’s stock market needs a steady flow of cheap capital to stay aright. That’s why Paulson is desperately looking for new investors. But there’s a basic problem which the markets cannot escape. Inflation is surfacing in all the countries where the stock markets are soaring because of their increases in the money supply. When the central banks are finally forced to raise interest rates; money will tighten up, it’ll be harder for creditors to make their payments or for banks to issue additional loans. As credit dries up more people will default on their loans, demand will drop off for consumer goods, prices will fall, and we will go into deep recession.
Once this process begins, speculators will be forced to abandon their positions, liquidity will continue to evaporate and the market will go into freefall.
Markets are self-correcting. Eventually the overleveraged debt-instruments, which pushed the Dow to historic highs, will be expelled from the system, but not without considerable pain for everyone involved.
Here’s an excerpt from Paul Lamont’s excellent article “Credit Collapse—May 10” which provides a compelling description of what happens a credit bubble begins to unwind:
“On May 10, 1837, the banks of New York suspended gold and silver payments for their notes. Fear of a bank run spread throughout the United States. The young country fell into a 7 year depression. How could two decades of prosperity end so suddenly? According to America: A Narrative History: “monetary inflation had fueled an era of speculation in real estate, canals, and railroad stocks.” Cracks in the dam were visible much earlier, as the stock market peaked in inflation-adjusted value three years prior. According to Rolf Nef, debt levels in the private sector rose to 150% of GDP. In late 1836, the Bank of England concerned with inflation raised interest rates. As rates rose in England, credit tightened, and U.S. asset prices began to fall.
On May 10, investors panicked and scrambled for cash. “By the fall of 1837 one third of the work force was jobless, and those still fortunate to have jobs saw their wages fall 30-50% within 2 years. At the same time, prices for food and clothing soared.”
We can expect a similar scenario in the very near future. When interest rates are kept below the rate of inflation for an extended period of time; enormous equity bubbles arise and threaten the entire system. The stock market is undergoing a period of asset inflation. It has broken free from the real economy and is headed for a crash. As Edward Chancellor, author of “Devil Take the Hindmost: A History of Financial Speculation” says: “The growth of credit has created an illusory prosperity while producing profound imbalances” in the American economy….At some point the system will have to adjust “to face a new reality. The process of adjustment is likely to be painful. It may well end in either an extraordinary deflation...or an extraordinary inflation."
Sydney defaults hidden away
THE number of home repossessions around the nation is up to four times higher than reported figures because lenders are disguising the nature of forced sales to prop up property prices.
Australia's biggest private debt collector, Prushka, yesterday said about three-quarters of sales forced by bank and non-bank lenders were co-ordinated with the consent of home owners, meaning they were not recorded in court repossession figures.
"By far the most popular way for lenders is to sell the property with the consent of the borrower to avoid advertising the property as a forced sale," Prushka chief executive Roger Mendelson said.
"The idea is to work with the seller because if they sell the property as a mortgagee in possession that will slaughter the price because you're going to attract the bargain hunters."
Mr Mendelson said statements by Peter Costello yesterday that Australia had a low home loan "default rate" - where borrowers can't meet mortgage repayments - failed to address the impact of increasing unreported levels of repossessions.
During a discussion about US default rates hitting an all-time high in the first quarter of 2007, the Treasurer had told Macquarie Regional Radio: "The default rate in Australia is much, much lower than it is in the US ... in fact, we have one of the lowest default rates in the world."
Experts said rising interest rates, coupled with the prevalence of low-documentation loans that do not force borrowers to disclose their income, had caused a spike in mortgage defaults in Australia.
Ian Graham, chief executive of PMI Mortgage Insurance, which insures about one million home loans, said Australia had no register for compiling total home repossessions.
"We would like to see a register introduced - I think the Reserve Bank would be one body in particular that would benefit from more complete data," Mr Graham said.
State "writs of possession" registers record only sales where lenders are forced to apply for repossession orders.
Sydney's outer western suburbs are being hardest hit by the surge in repossessions.
In NSW, 5363 writs of possession were issued last year - up 10 per cent on 2005.
Figures from the Victorian Supreme Court show there were 2791 repossession claims lodged last year, up from 2578 in 2005. The figure has more than doubled since 2003, when there were 1225.
"In southwest, west and northwest Sydney, property prices are weakest and in forced-sale situations property price declines of between 20 and 25 per cent are not unusual," Mr Graham said.
Dara Dhillon, principal of Dhillon Real Estate in Ingleburn in Sydney's outer southwest, said 90 per cent of properties coming to the market were forced sales, and the number of homes hitting the market was rising.
"It's actually getting worse by the month - in one family I was working with, the elderly mother had to return to work to keep a roof over their heads," he said.
But he said that with high employment and healthy wages growth, it was last year's interest rate rises and lax lending policies of non-bank lenders - especially "low-doc" loans where borrowers are not required to prove their income - that were to blame for the current fallout.
"It's a joke - if it was my money I wouldn't lend it but I believe lenders are still doing it," he said. "Low-doc, no-doc, whatever doc - doc doesn't even come into the picture."
Australia's biggest private debt collector, Prushka, yesterday said about three-quarters of sales forced by bank and non-bank lenders were co-ordinated with the consent of home owners, meaning they were not recorded in court repossession figures.
"By far the most popular way for lenders is to sell the property with the consent of the borrower to avoid advertising the property as a forced sale," Prushka chief executive Roger Mendelson said.
"The idea is to work with the seller because if they sell the property as a mortgagee in possession that will slaughter the price because you're going to attract the bargain hunters."
Mr Mendelson said statements by Peter Costello yesterday that Australia had a low home loan "default rate" - where borrowers can't meet mortgage repayments - failed to address the impact of increasing unreported levels of repossessions.
During a discussion about US default rates hitting an all-time high in the first quarter of 2007, the Treasurer had told Macquarie Regional Radio: "The default rate in Australia is much, much lower than it is in the US ... in fact, we have one of the lowest default rates in the world."
Experts said rising interest rates, coupled with the prevalence of low-documentation loans that do not force borrowers to disclose their income, had caused a spike in mortgage defaults in Australia.
Ian Graham, chief executive of PMI Mortgage Insurance, which insures about one million home loans, said Australia had no register for compiling total home repossessions.
"We would like to see a register introduced - I think the Reserve Bank would be one body in particular that would benefit from more complete data," Mr Graham said.
State "writs of possession" registers record only sales where lenders are forced to apply for repossession orders.
Sydney's outer western suburbs are being hardest hit by the surge in repossessions.
In NSW, 5363 writs of possession were issued last year - up 10 per cent on 2005.
Figures from the Victorian Supreme Court show there were 2791 repossession claims lodged last year, up from 2578 in 2005. The figure has more than doubled since 2003, when there were 1225.
"In southwest, west and northwest Sydney, property prices are weakest and in forced-sale situations property price declines of between 20 and 25 per cent are not unusual," Mr Graham said.
Dara Dhillon, principal of Dhillon Real Estate in Ingleburn in Sydney's outer southwest, said 90 per cent of properties coming to the market were forced sales, and the number of homes hitting the market was rising.
"It's actually getting worse by the month - in one family I was working with, the elderly mother had to return to work to keep a roof over their heads," he said.
But he said that with high employment and healthy wages growth, it was last year's interest rate rises and lax lending policies of non-bank lenders - especially "low-doc" loans where borrowers are not required to prove their income - that were to blame for the current fallout.
"It's a joke - if it was my money I wouldn't lend it but I believe lenders are still doing it," he said. "Low-doc, no-doc, whatever doc - doc doesn't even come into the picture."
Roubini at the AEI- the trouble is here, finally.
Desmond Lachman (summing up): … that we’re in for a pretty rough ride, and I’d be as bold as to say that I think that this issue is going to be the issue in the 2008 election campaign.
Alex Pollock [0:22:36]: Thank-you Desmond. I thought issues were floated on Wall Street, not bodies. … ah, Nouriel …
Nouriel Roubini [0:22:43]: Thanks. Like Desmond I’d like to actually discuss how the fallout of the subprime meltdown is going to have some implication for the economy. I think that’s one of the crucial things because right now there is this debate ongoing between the consensus that says that the economy is going to experience a soft landing and the alternative view that it might actually experience a hard landing in the form of either a growth recession or actual recession. I’m certainly of the latter view.
I’m a little bit curious that we’re talking only about subprime mortgages because if you think about it, we are literally in a subprime economy, and I’m not talking about it just metaphorically, but think of it, we have dozens of millions of, for example, subprime credit cards, and even before you default on your subprime mortgage you’re going to default on your credit cards, there are dozens of millions of subprime auto loans. And today there was a report [2] on Bloomberg that S&P says that autoloans, subprime auto loans are sharply increasing in terms of default rates. And there was another piece today,[3] I actually thought it was interesting that suggested, you know, that twenty percent plus of all the loans that financed the purchase of a Harley-Davidson’s hogs are also subprime and the default rate for today, the delinquencies has gone, since last year, from two and a half percent to five percent today.
[24:06]: So the point is we’re talking about subprime mortgages, but it’s auto loans, it’s credit cards, it’s all sorts of other things. There’s a whole economy that is subprime, and as I’ll point out also, it’s not just subprime, the spillovers are going to all other parts of the mortgage market and all other parts of consumer credit, and also to corporate creditors.
I think that, you know, the consensus view again, I think has been that somehow felt since last summer, because a bunch of people were worried about the housing recession and its deepening, about the subprime mortgages and the trouble coming of it, and the risk of a hard landing … The consensus was wrong then, then they discovered there was a subprime problem, and now what they’re telling you is that it’s just a niche problem and there’s no contagion from housing for the rest of the economy and no contagion from subprime to [???] mortgages and so on, so I’d like to address some of these consensus views and make some points on why they were wrong then and they’re going to be wrong again now.
[0:24:58]: First point. Consensus tells us since last fall that the housing recession is bottoming out. I have a long paper [4] that was distributed around … I’m not going to be able to go into details of it. Essentially it says that we’re nowhere near close to the bottom of the housing recession. In the typical housing recession housing starts fall by fifty percent approximately. And in some of the deeper ones over sixty percent. We’re down only thirty percent. There’s a long way to go. And any indicator you have right now from the housing market, whether it is building permits, whether it is the housing starts, whether it’s construction, whether it’s completions, where is the demand for new homes, it’s just heading south. The glut of existing and new homes is becoming worse by any standard — unprecedented. The price pressure is downwards.
[0:25:45]: The official numbers are not showing it all to you. The Case-Shiller number came out yesterday, now showing falling prices, but a lot of it is actually seller side incentives that are not measured. You know when you get a forty thousand dollar free swimming pool when you buy a four hundred thousand dollar home, that’s a ten percent price cut that doesn’t show up in any one of the official numbers. So home prices are already falling today. At the rate it’s closer to ten percent, even if the official number is telling you otherwise.
So if you look at any indicator of the housing market, before we even talk about subprime or mortgages, it’s a disaster. This is going to be the worst housing recession we’re going to have since 1960. That’s my view of it. And I cannot flesh out the details of it right now.
[0:26:25]: Second point. The consensus now says — OK, yeah now we are in a subprime problem — now everybody just, whenever they say the words "subprime" they attach to it the term "meltdown" or "carnage." It’s just become almost automatic, when three months ago they were not even talking about the problem, but now the consensus is that it’s just a niche problem, it’s only subprime, it’s not the rest of the mortgages. But think about the reckless lending practices that were essentially being used for the last four or five years. You have zero downpayments, no documentation of assets or income, what people refer to as "liar loans." Interest only mortgages. Teaser rates. Negative amortization. Option ARMs. Was it only subprime? Look at the numbers — was subprime, was Alt-A, was piggyback loans, was home equity, was also a good chunk of the option ARMs. Subprime, near-prime, prime. If you look carefully, the numbers, I would argue that about fifty percent if not more of all originational mortgages for the last couple of years would be things I would consider as reckless — as just toxic waste.
[0:27:31]: So that’s what’s happening. Of course the rate at which Alt-A and other stuff is going to defaulting and get in trouble is going to be later. It’s going to start with subprime and going to go to all the other stuff. But the idea that this is just a niche, that subprime is only ten percent of the stock of mortgages and therefore it’s not a problem is just nonsense. OK.
Additional point. Now people are recognizing, where there’s a total mess in subprime, there’s also a credit crunch in subprime (guess what, about thirty of the lenders have already gone bankrupt [5] in the last three months), but again the problem they say is only a niche problem, it’s going to be a mini credit crunch only for the subprime section, and so on.
The reality is otherwise. When you look at the whole series of indicators and the chart [6] that Desmond showed about … now loan officers are getting more worried by tightening stardards. They’re not tightening standards only for subprime. They’re doing it across the board.
[0:28:19]: The borrowers now are facing a credit crunch, regulators are now, they were asleep at the wheel for six years, under the ideology they should not regulate markets … they let this thing fester and grow. So now they’re cranking on the other side. We’ve seen it every time before. Where we’ve seen all this sort of boom and then bust. And then there was a nasty credit crunch, and we got a recession in 1990.
This time around it’s going to spread — it’s going to spread from subprime to other mortgages, it’s going to spread to consumer credit, first subprime, and it [most problem??] among consumer credit, and to the rest of the economy.
[0:28:52]: Fourth point. People say, you know, the residential mortgage backed security market is still kind of OK. So, as long as it’s OK, then there’s going to be financing and all the rest. I think there’s already evidence that actually, that there have been massive losses in the CDO [7] market, and in a recent study [8] by Rosner and Mason show [9] that if you’re going to have a significant interruption in the CDO market then the whole financing base for the residential MBS market is, figure about 1.33 trillion dollars of issues of new residential mortgage based securities last year, is going to essentially falter. So that’s the kind of thing we’re facing.
Securitization helped the growth of this credit boom and bubble, and this squeeze now on the other side is going to create a mess on the other side around.
[0:29:35]: Additional point. People say there is no contagion to corporate credit risk. You know, those spreads are still relatively low. We’ve seen actually ripple effects and guess what, in a matter of two weeks the CDS speads for firms such as Goldman Sacks, Merrill Lynch, Morgan Stanley, went from triple-A to near junk rate. You have effects on CDX spreads,[10] on Itracks, on CMBX [??], the commercial mortgage backed securities, and so on. If you look at the numbers, and there is a study that has been done by my colleague at Stern, Ed Altman, [11] who is the world leading expert of corporate defaults, based on firms and economic fundamental default rates for corporates today should be around two and a half percent, historically they are around two and a half percent. Last year they were only around point six percent — twenty percent of what they should be given current fundamentals. Why? Well there’s just a massive amount of liquidity coming from Private Equity, levered institution, lots of firms that are under distress are being refinanced out of court, they don’t go through Chapter 11, but under serious distress there is tons of junk that is being issued right now.
[00:30:38]: Once the party is over, and I would say the party is going to be over soon, corporate profitability will be shrinking, all these problems are going to be coming to the surface. You’re going to be seeing massive increases in corporate defaults (back to normal and worse) and then the spreads are going to go through the roof. You’re going to see the contagion is going to take a few months.
Additional observation. Until now, people said, this is just a housing recession. It’s not effecting the rest of the economy. That’s actually incorrect. We don’t have just a housing recession, it’s getting worse. we have an auto sector recession, we have a manufacturing recession, we have every single component of investment that has been falling since Q4. Residential investment was falling twenty percent, but in Q4 investment in equipment and software by corporations has been falling, and given the numbers on capital goods order, last month the ones that came out this morning, it’s getting worse in Q1. People said, yes maybe the construction / residential sector’s doing terrible, but the non-residential construction’s doing great. Yeah, it was growing twenty percent in Q2. Then it went from twenty percent in Q2 annualized growth rate to fourteen percent in Q3, and it became negative in Q4. And now it’s getting even worse. So the idea of there being a decoupling between real estate, residential and the rest of the construction sector was also nonsense.
[0:31:56]: You know Janet Yellen, President of the Federal Reserve Bank of San Francisco said [12] that whole bunch of ghost towns out in the West.[13] So if you have a bunch of ghost towns in the West, why would you want to build shopping centers, offices there. Obviously, with a delay of a quarter or two, there is going to be a link between a collapse of residential and the rest of the construction sector, always happens, so why would there be a decoupling this time around.
[0:32:17]: Now so we have a housing recession, we have an auto recession, we have a manufacturing recession, we have every single component of investment — residential, non-residential, equipment, inventory is collapsing — and people said, we’re not going to have a hard landing until the consumer is faltering, and consumption is seventy percent of GDP, and the consumer is resilient. Trouble is that consumption depends on four things:
it depends on job generation / income generation,
depends on interest rates,
depends on wealth, and
depends on debt servicing ratios.
We are already seeing massive losses of jobs, is going to accelerate in housing, in manufacturing, that’s going to slow down job and income generation. There’s right now interest rates on official mortgages don’t mean anything, you have now a credit crunch, and once there is a credit crunch there is adverse selection … so the price doesn’t go up, what cuts is the quantity, so you don’t see it on the price, it’s on the quantity of credit shrinking, so what houses are facing right now — a credit crunch.
[0:33:13]: Until now the households were consuming more than their income, negative savings, because they were using their homes as their ATM machine. As long as home prices were going up, you could keep up with this party. Right now home prices are falling, and home equity withdrawl was at a 700 billion dollar annual rate in 2005, Q4 it is down to 270. In the meanwhile debt servicing ratio is going up. This year alone you are going to have one trillion of ARMs that are coming to maturity and being reset at much higher interest rates.
So the issue is the consumer is on the ropes, is being squeezed, and now we have two consecutive months of retail sales that is pretty much flat. So that’s what we are facing right now.
[0:33:51]: So the point is that this argument that it is just a small housing recession, mostly a small subprime problem, doesn’t have any basis. What we’re facing right now is a serious situation which the economy is spinning into a recession; a good chunk of the economy is already in recession, the rest of it is going to enter it by next quarter. And the Fed is telling us, like the consensus, we’re going to have two and a half percent growth, this quarter and next (first half of the year) and three percent in the second half of the year. We went from a growth of 5.6 in Q1 lst year to 2.6 to 2 percent to 2.2 in the fourth quarter. Now the consensus has it this quarter has at least two and a half percent, but how could it be? I mean, that 2.2 percent number for Q4 was before the subprime collapse, before we had the lousy number of consumption, before we had the collapse of capital spending and investment by firms. How could the consensus tell you that the growth rate this quarter is going to be better than last quarter? It just doesn’t add up in no way or form.
[0:34:49]: Now will the Fed come to the rescue? In spite of what they say? They’ll try to come to the rescue. Is it going to make a difference? No difference at all. Once you have a glut of capital goods, what the Fed does doesn’t make any difference. In 2000 the Fed was behind the curve — they worried until November of 2000 about inflation rather than growth, like today there was a tightening bias, then from November to December they went from tightening to easing and two weeks later on January 3rd they announced that open after New Year had collapsed, and they cut rates in between meetings. And they slashed rates very aggressively.
[0:35:24]: Did they avoid the recession? No, they put a floor under it. And the simple reason why is that, you know, the Fed rate went from six and a half to one, long rates fell six hundred basis points. And real investment fell by four percentage points, as share of GDP, between 2001 and 2004, why? once you have a glut of capital goods and tech goods, this time around housing and consumer goods, what the Fed does doesn’t make any difference. It puts a floor, of course, on the recession, but the idea that you could just stimulate the economy that way doesn’t make sense. You know, once until you work out this glut and it’s going to take years to work out the glut of housing, the same way it took five years to work out the glut of tech, we’re not going to see a recovery. So the Fed is going to cut rate … are we going to avoid a hard landing? My answer is no. So, I think that’s the problem we’re facing today. [0:36:11]
Alex Pollock: Thank-you, Nouriel, I think thank-you, uh, for that incisive outlook. The co-author of the paper [8] you cited, Josh Rosner is with us today, Josh, thanks for coming. Good to have you. Let’s go on to Chris. …
________________________
Notes and References
[1]: "Mortgage Credit and Subprime Lending: Implications of a Deflating Bubble", Event, American Enterprise Institute & Professional Risk Managers’ International Association, March 28, 2007.
[2]: "Subprime Defaults May Spread to Auto Bonds, S&P Says", by Mark Pittman, Bloomberg, March 26, 2007.
Bonds backed by automobile loans may be hurt by rising subprime mortgage defaults as people with poor credit struggle with their household debt, according to Standard & Poor’s.
Capital One Financial Corp., Wachovia Corp., Wells Fargo & Co., and other lenders have lent more funds to people with bad credit scores in the past few years to sustain growth, S&P said today in a report by analysts led by Mark Risi. The loans are also for longer terms, increasing the probability of default, the analysts said. About 68 percent of 2006 subprime auto loans were due in five years or more, Risi said.
“There could be some fallout from subprime in auto loans,'’ Risi said in an interview. “We don’t have much data yet. We’re still in collection mode. It’s probably going to be hard to say for a while.'’
[3]: "The Subprime Economy: Subprime Meltdown Spreading from Mortgages to Subprime Credit Cards, Subprime Auto Loans and Harley Davidson’s Hog Loans", Nouriel Roubini, RGEMonitor blog, March 29, 2007.
[4]: "The US Housing Recession is Still Far from Bottoming Out", by Nouriel Roubini and Christian Menegatti, March 2007. PDF, available as "Roubini-Menegatti Paper" at [1].
[5]: Like so many others, Roubini is citing Aaron Krowne’s The Mortgage Lender Implode-O-Meter without attribution.
[6]: "Mortgage Credit and Sub-prime Lending: Implications of a Deflating Bubble", by Desmond Lachman, PPT deck, available as " Lachman Presentation" at [1]. Roubini may be referring to Slide 17 - Rising Delinquencies
[7]: Collateralized Debt Obligation (CDO).
[8]: "Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions", by Joseph R. Mason and Joshua Rosner, Draft paper. From site page of "Where Did the Risk Go", Hudson Institute Event held May 3, 2007. The earlier draft Roubini is mentioning would be the one at this Feb 15, 2007 Hudson event.
[9]: "Subprime shakeout could hurt CDOs: Complex structures helped fuel mortgage boom, but may suffer losses", by Alistair Barr, MarketWatch, March 13, 2007.
These complex structures, which are similar to a mutual fund that buys bonds, helped fuel the U.S. mortgage boom in recent years by purchasing some of the riskier parts of MBS that other investors didn’t want.
They could now do the reverse, according to a recent study by Joseph Mason, an associate finance professor at Drexel University’s business school, and Joshua Rosner, a managing director at research firm Graham Fisher & Co.
[10]: "Credit Derivatives Primer (PPT slide deck in PDF)", by Aaron Brown, Association for Financial Professionals, 2005. I hope this helps
[11]: "Conference Call Today with Ed Altman, Leading Expert on Corporate Distress and Default", Nouriel Roubini, RGE Monitor blog, February 13, 2007.
Ed Altman, a colleague of mine at Stern, is recognized as the leading world academic expert on corporate defaults and distress. His papers and books were the seminal work on the determinants of corporate distress and default, and recovery rates given default.
[12]: "Housing slowdown creating ‘ghost towns’: Fed president says some effects of rate hikes still in the pipeline", by Alistar Barr, MarketWatch, October 16, 2006.
[13]: Twist was way out ahead on this story. See her August 16, 2006 post "Welcome to the Empty Streets of Vacantville".
Alex Pollock [0:22:36]: Thank-you Desmond. I thought issues were floated on Wall Street, not bodies. … ah, Nouriel …
Nouriel Roubini [0:22:43]: Thanks. Like Desmond I’d like to actually discuss how the fallout of the subprime meltdown is going to have some implication for the economy. I think that’s one of the crucial things because right now there is this debate ongoing between the consensus that says that the economy is going to experience a soft landing and the alternative view that it might actually experience a hard landing in the form of either a growth recession or actual recession. I’m certainly of the latter view.
I’m a little bit curious that we’re talking only about subprime mortgages because if you think about it, we are literally in a subprime economy, and I’m not talking about it just metaphorically, but think of it, we have dozens of millions of, for example, subprime credit cards, and even before you default on your subprime mortgage you’re going to default on your credit cards, there are dozens of millions of subprime auto loans. And today there was a report [2] on Bloomberg that S&P says that autoloans, subprime auto loans are sharply increasing in terms of default rates. And there was another piece today,[3] I actually thought it was interesting that suggested, you know, that twenty percent plus of all the loans that financed the purchase of a Harley-Davidson’s hogs are also subprime and the default rate for today, the delinquencies has gone, since last year, from two and a half percent to five percent today.
[24:06]: So the point is we’re talking about subprime mortgages, but it’s auto loans, it’s credit cards, it’s all sorts of other things. There’s a whole economy that is subprime, and as I’ll point out also, it’s not just subprime, the spillovers are going to all other parts of the mortgage market and all other parts of consumer credit, and also to corporate creditors.
I think that, you know, the consensus view again, I think has been that somehow felt since last summer, because a bunch of people were worried about the housing recession and its deepening, about the subprime mortgages and the trouble coming of it, and the risk of a hard landing … The consensus was wrong then, then they discovered there was a subprime problem, and now what they’re telling you is that it’s just a niche problem and there’s no contagion from housing for the rest of the economy and no contagion from subprime to [???] mortgages and so on, so I’d like to address some of these consensus views and make some points on why they were wrong then and they’re going to be wrong again now.
[0:24:58]: First point. Consensus tells us since last fall that the housing recession is bottoming out. I have a long paper [4] that was distributed around … I’m not going to be able to go into details of it. Essentially it says that we’re nowhere near close to the bottom of the housing recession. In the typical housing recession housing starts fall by fifty percent approximately. And in some of the deeper ones over sixty percent. We’re down only thirty percent. There’s a long way to go. And any indicator you have right now from the housing market, whether it is building permits, whether it is the housing starts, whether it’s construction, whether it’s completions, where is the demand for new homes, it’s just heading south. The glut of existing and new homes is becoming worse by any standard — unprecedented. The price pressure is downwards.
[0:25:45]: The official numbers are not showing it all to you. The Case-Shiller number came out yesterday, now showing falling prices, but a lot of it is actually seller side incentives that are not measured. You know when you get a forty thousand dollar free swimming pool when you buy a four hundred thousand dollar home, that’s a ten percent price cut that doesn’t show up in any one of the official numbers. So home prices are already falling today. At the rate it’s closer to ten percent, even if the official number is telling you otherwise.
So if you look at any indicator of the housing market, before we even talk about subprime or mortgages, it’s a disaster. This is going to be the worst housing recession we’re going to have since 1960. That’s my view of it. And I cannot flesh out the details of it right now.
[0:26:25]: Second point. The consensus now says — OK, yeah now we are in a subprime problem — now everybody just, whenever they say the words "subprime" they attach to it the term "meltdown" or "carnage." It’s just become almost automatic, when three months ago they were not even talking about the problem, but now the consensus is that it’s just a niche problem, it’s only subprime, it’s not the rest of the mortgages. But think about the reckless lending practices that were essentially being used for the last four or five years. You have zero downpayments, no documentation of assets or income, what people refer to as "liar loans." Interest only mortgages. Teaser rates. Negative amortization. Option ARMs. Was it only subprime? Look at the numbers — was subprime, was Alt-A, was piggyback loans, was home equity, was also a good chunk of the option ARMs. Subprime, near-prime, prime. If you look carefully, the numbers, I would argue that about fifty percent if not more of all originational mortgages for the last couple of years would be things I would consider as reckless — as just toxic waste.
[0:27:31]: So that’s what’s happening. Of course the rate at which Alt-A and other stuff is going to defaulting and get in trouble is going to be later. It’s going to start with subprime and going to go to all the other stuff. But the idea that this is just a niche, that subprime is only ten percent of the stock of mortgages and therefore it’s not a problem is just nonsense. OK.
Additional point. Now people are recognizing, where there’s a total mess in subprime, there’s also a credit crunch in subprime (guess what, about thirty of the lenders have already gone bankrupt [5] in the last three months), but again the problem they say is only a niche problem, it’s going to be a mini credit crunch only for the subprime section, and so on.
The reality is otherwise. When you look at the whole series of indicators and the chart [6] that Desmond showed about … now loan officers are getting more worried by tightening stardards. They’re not tightening standards only for subprime. They’re doing it across the board.
[0:28:19]: The borrowers now are facing a credit crunch, regulators are now, they were asleep at the wheel for six years, under the ideology they should not regulate markets … they let this thing fester and grow. So now they’re cranking on the other side. We’ve seen it every time before. Where we’ve seen all this sort of boom and then bust. And then there was a nasty credit crunch, and we got a recession in 1990.
This time around it’s going to spread — it’s going to spread from subprime to other mortgages, it’s going to spread to consumer credit, first subprime, and it [most problem??] among consumer credit, and to the rest of the economy.
[0:28:52]: Fourth point. People say, you know, the residential mortgage backed security market is still kind of OK. So, as long as it’s OK, then there’s going to be financing and all the rest. I think there’s already evidence that actually, that there have been massive losses in the CDO [7] market, and in a recent study [8] by Rosner and Mason show [9] that if you’re going to have a significant interruption in the CDO market then the whole financing base for the residential MBS market is, figure about 1.33 trillion dollars of issues of new residential mortgage based securities last year, is going to essentially falter. So that’s the kind of thing we’re facing.
Securitization helped the growth of this credit boom and bubble, and this squeeze now on the other side is going to create a mess on the other side around.
[0:29:35]: Additional point. People say there is no contagion to corporate credit risk. You know, those spreads are still relatively low. We’ve seen actually ripple effects and guess what, in a matter of two weeks the CDS speads for firms such as Goldman Sacks, Merrill Lynch, Morgan Stanley, went from triple-A to near junk rate. You have effects on CDX spreads,[10] on Itracks, on CMBX [??], the commercial mortgage backed securities, and so on. If you look at the numbers, and there is a study that has been done by my colleague at Stern, Ed Altman, [11] who is the world leading expert of corporate defaults, based on firms and economic fundamental default rates for corporates today should be around two and a half percent, historically they are around two and a half percent. Last year they were only around point six percent — twenty percent of what they should be given current fundamentals. Why? Well there’s just a massive amount of liquidity coming from Private Equity, levered institution, lots of firms that are under distress are being refinanced out of court, they don’t go through Chapter 11, but under serious distress there is tons of junk that is being issued right now.
[00:30:38]: Once the party is over, and I would say the party is going to be over soon, corporate profitability will be shrinking, all these problems are going to be coming to the surface. You’re going to be seeing massive increases in corporate defaults (back to normal and worse) and then the spreads are going to go through the roof. You’re going to see the contagion is going to take a few months.
Additional observation. Until now, people said, this is just a housing recession. It’s not effecting the rest of the economy. That’s actually incorrect. We don’t have just a housing recession, it’s getting worse. we have an auto sector recession, we have a manufacturing recession, we have every single component of investment that has been falling since Q4. Residential investment was falling twenty percent, but in Q4 investment in equipment and software by corporations has been falling, and given the numbers on capital goods order, last month the ones that came out this morning, it’s getting worse in Q1. People said, yes maybe the construction / residential sector’s doing terrible, but the non-residential construction’s doing great. Yeah, it was growing twenty percent in Q2. Then it went from twenty percent in Q2 annualized growth rate to fourteen percent in Q3, and it became negative in Q4. And now it’s getting even worse. So the idea of there being a decoupling between real estate, residential and the rest of the construction sector was also nonsense.
[0:31:56]: You know Janet Yellen, President of the Federal Reserve Bank of San Francisco said [12] that whole bunch of ghost towns out in the West.[13] So if you have a bunch of ghost towns in the West, why would you want to build shopping centers, offices there. Obviously, with a delay of a quarter or two, there is going to be a link between a collapse of residential and the rest of the construction sector, always happens, so why would there be a decoupling this time around.
[0:32:17]: Now so we have a housing recession, we have an auto recession, we have a manufacturing recession, we have every single component of investment — residential, non-residential, equipment, inventory is collapsing — and people said, we’re not going to have a hard landing until the consumer is faltering, and consumption is seventy percent of GDP, and the consumer is resilient. Trouble is that consumption depends on four things:
it depends on job generation / income generation,
depends on interest rates,
depends on wealth, and
depends on debt servicing ratios.
We are already seeing massive losses of jobs, is going to accelerate in housing, in manufacturing, that’s going to slow down job and income generation. There’s right now interest rates on official mortgages don’t mean anything, you have now a credit crunch, and once there is a credit crunch there is adverse selection … so the price doesn’t go up, what cuts is the quantity, so you don’t see it on the price, it’s on the quantity of credit shrinking, so what houses are facing right now — a credit crunch.
[0:33:13]: Until now the households were consuming more than their income, negative savings, because they were using their homes as their ATM machine. As long as home prices were going up, you could keep up with this party. Right now home prices are falling, and home equity withdrawl was at a 700 billion dollar annual rate in 2005, Q4 it is down to 270. In the meanwhile debt servicing ratio is going up. This year alone you are going to have one trillion of ARMs that are coming to maturity and being reset at much higher interest rates.
So the issue is the consumer is on the ropes, is being squeezed, and now we have two consecutive months of retail sales that is pretty much flat. So that’s what we are facing right now.
[0:33:51]: So the point is that this argument that it is just a small housing recession, mostly a small subprime problem, doesn’t have any basis. What we’re facing right now is a serious situation which the economy is spinning into a recession; a good chunk of the economy is already in recession, the rest of it is going to enter it by next quarter. And the Fed is telling us, like the consensus, we’re going to have two and a half percent growth, this quarter and next (first half of the year) and three percent in the second half of the year. We went from a growth of 5.6 in Q1 lst year to 2.6 to 2 percent to 2.2 in the fourth quarter. Now the consensus has it this quarter has at least two and a half percent, but how could it be? I mean, that 2.2 percent number for Q4 was before the subprime collapse, before we had the lousy number of consumption, before we had the collapse of capital spending and investment by firms. How could the consensus tell you that the growth rate this quarter is going to be better than last quarter? It just doesn’t add up in no way or form.
[0:34:49]: Now will the Fed come to the rescue? In spite of what they say? They’ll try to come to the rescue. Is it going to make a difference? No difference at all. Once you have a glut of capital goods, what the Fed does doesn’t make any difference. In 2000 the Fed was behind the curve — they worried until November of 2000 about inflation rather than growth, like today there was a tightening bias, then from November to December they went from tightening to easing and two weeks later on January 3rd they announced that open after New Year had collapsed, and they cut rates in between meetings. And they slashed rates very aggressively.
[0:35:24]: Did they avoid the recession? No, they put a floor under it. And the simple reason why is that, you know, the Fed rate went from six and a half to one, long rates fell six hundred basis points. And real investment fell by four percentage points, as share of GDP, between 2001 and 2004, why? once you have a glut of capital goods and tech goods, this time around housing and consumer goods, what the Fed does doesn’t make any difference. It puts a floor, of course, on the recession, but the idea that you could just stimulate the economy that way doesn’t make sense. You know, once until you work out this glut and it’s going to take years to work out the glut of housing, the same way it took five years to work out the glut of tech, we’re not going to see a recovery. So the Fed is going to cut rate … are we going to avoid a hard landing? My answer is no. So, I think that’s the problem we’re facing today. [0:36:11]
Alex Pollock: Thank-you, Nouriel, I think thank-you, uh, for that incisive outlook. The co-author of the paper [8] you cited, Josh Rosner is with us today, Josh, thanks for coming. Good to have you. Let’s go on to Chris. …
________________________
Notes and References
[1]: "Mortgage Credit and Subprime Lending: Implications of a Deflating Bubble", Event, American Enterprise Institute & Professional Risk Managers’ International Association, March 28, 2007.
[2]: "Subprime Defaults May Spread to Auto Bonds, S&P Says", by Mark Pittman, Bloomberg, March 26, 2007.
Bonds backed by automobile loans may be hurt by rising subprime mortgage defaults as people with poor credit struggle with their household debt, according to Standard & Poor’s.
Capital One Financial Corp., Wachovia Corp., Wells Fargo & Co., and other lenders have lent more funds to people with bad credit scores in the past few years to sustain growth, S&P said today in a report by analysts led by Mark Risi. The loans are also for longer terms, increasing the probability of default, the analysts said. About 68 percent of 2006 subprime auto loans were due in five years or more, Risi said.
“There could be some fallout from subprime in auto loans,'’ Risi said in an interview. “We don’t have much data yet. We’re still in collection mode. It’s probably going to be hard to say for a while.'’
[3]: "The Subprime Economy: Subprime Meltdown Spreading from Mortgages to Subprime Credit Cards, Subprime Auto Loans and Harley Davidson’s Hog Loans", Nouriel Roubini, RGEMonitor blog, March 29, 2007.
[4]: "The US Housing Recession is Still Far from Bottoming Out", by Nouriel Roubini and Christian Menegatti, March 2007. PDF, available as "Roubini-Menegatti Paper" at [1].
[5]: Like so many others, Roubini is citing Aaron Krowne’s The Mortgage Lender Implode-O-Meter without attribution.
[6]: "Mortgage Credit and Sub-prime Lending: Implications of a Deflating Bubble", by Desmond Lachman, PPT deck, available as " Lachman Presentation" at [1]. Roubini may be referring to Slide 17 - Rising Delinquencies
[7]: Collateralized Debt Obligation (CDO).
[8]: "Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions", by Joseph R. Mason and Joshua Rosner, Draft paper. From site page of "Where Did the Risk Go", Hudson Institute Event held May 3, 2007. The earlier draft Roubini is mentioning would be the one at this Feb 15, 2007 Hudson event.
[9]: "Subprime shakeout could hurt CDOs: Complex structures helped fuel mortgage boom, but may suffer losses", by Alistair Barr, MarketWatch, March 13, 2007.
These complex structures, which are similar to a mutual fund that buys bonds, helped fuel the U.S. mortgage boom in recent years by purchasing some of the riskier parts of MBS that other investors didn’t want.
They could now do the reverse, according to a recent study by Joseph Mason, an associate finance professor at Drexel University’s business school, and Joshua Rosner, a managing director at research firm Graham Fisher & Co.
[10]: "Credit Derivatives Primer (PPT slide deck in PDF)", by Aaron Brown, Association for Financial Professionals, 2005. I hope this helps
[11]: "Conference Call Today with Ed Altman, Leading Expert on Corporate Distress and Default", Nouriel Roubini, RGE Monitor blog, February 13, 2007.
Ed Altman, a colleague of mine at Stern, is recognized as the leading world academic expert on corporate defaults and distress. His papers and books were the seminal work on the determinants of corporate distress and default, and recovery rates given default.
[12]: "Housing slowdown creating ‘ghost towns’: Fed president says some effects of rate hikes still in the pipeline", by Alistar Barr, MarketWatch, October 16, 2006.
[13]: Twist was way out ahead on this story. See her August 16, 2006 post "Welcome to the Empty Streets of Vacantville".
7 June 2007
Hedge Funds versus Bear Stearns
NEW YORK, June 7 (Reuters) - Hedge fund managers are accusing Bear Stearns Cos. (BSC.N: Quote, Profile , Research) of trying to manipulate the market in securities based on subprime mortgages, the Wall Street Journal reported in its online edition.
The confrontation provides a rare look into the complex trading in the mammoth U.S. mortgage market, which played a critical role in financing the housing boom, and the complicated relationships between hedge funds and investment banks, the paper said.
Hedge funds that had sold short such securities made profits when an index tied to a basket of subprime bonds was falling. But the index has recovered in recent weeks, leading to howls of protest from hedge funds, according to the report.
The chief critic, John Paulson of Paulson & Co., a $12 billion fund, says Bear Stearns wanted to prop up faltering mortgages-backed securities by purchasing individual mortgages that were rapidly losing value to avoid doling out billions in swap payments, the Journal reported.
Bear Stearns is one of Wall Street's largest players in the market for credit default swaps. By selling swaps, Bear bet the subprime home loan market would improve or at least turn out to be healthier than expected.
Neither Bear Stearns not Paulson & Co. immediately returned calls seeking comment. The head of Bear's mortgage business denied the allegations, according to the report.
A downturn in the U.S. housing market this year has led to rising defaults in the subprime mortgage market, which caters to borrowers with weak credit histories. More than two dozen subprime lenders have collapsed, while others have tightened their lending standards
The confrontation provides a rare look into the complex trading in the mammoth U.S. mortgage market, which played a critical role in financing the housing boom, and the complicated relationships between hedge funds and investment banks, the paper said.
Hedge funds that had sold short such securities made profits when an index tied to a basket of subprime bonds was falling. But the index has recovered in recent weeks, leading to howls of protest from hedge funds, according to the report.
The chief critic, John Paulson of Paulson & Co., a $12 billion fund, says Bear Stearns wanted to prop up faltering mortgages-backed securities by purchasing individual mortgages that were rapidly losing value to avoid doling out billions in swap payments, the Journal reported.
Bear Stearns is one of Wall Street's largest players in the market for credit default swaps. By selling swaps, Bear bet the subprime home loan market would improve or at least turn out to be healthier than expected.
Neither Bear Stearns not Paulson & Co. immediately returned calls seeking comment. The head of Bear's mortgage business denied the allegations, according to the report.
A downturn in the U.S. housing market this year has led to rising defaults in the subprime mortgage market, which caters to borrowers with weak credit histories. More than two dozen subprime lenders have collapsed, while others have tightened their lending standards
China's energy blackhole: Buildings
Buildings account for nearly 30 percent of China’s energy use and are responsible for about a quarter of the nation’s greenhouse gas emissions, according to the latest assessment on China’s energy development. The report, the 2007 China Energy Blue Book, concludes that inefficient buildings and homes waste a tremendous amount of energy each year.
The report notes that nearly 95 percent of existing buildings in China are energy intensive, while more than 80 percent of new buildings built each year—covering some 2 billion square meters in area—fail to meet efficiency rules. China typically spends two or three times as much energy per unit of building area as most industrialized countries.
In 2005, energy required for heating, cooling, ventilating, and lighting China’s 40 billion square meters of buildings accounted for nearly a third of the nation’s total energy consumption, up from roughly 10 percent in the 1970s. Heating and cooling systems alone use nearly 55 percent of this total. As much as 30 percent of the heat generated from conventional heating systems is lost directly, while another 7 percent leaks out through windows opened by residents who are unable to control room temperatures themselves.
Most Chinese buildings are also water inefficient, with sanitary facilities requiring 30 percent more water than those in industrialized countries. Each year, some 20 percent of the water carried via municipal supply networks is lost to leaks, representing almost 10 billion cubic meters of wasted tap water each year, or more than is currently targeted for delivery under China’s massive new south-to-north water transfer project [1].
Office buildings in China use 10 times as much energy as most residential buildings. Government buildings, in particular, waste significant amounts of energy in the absence of consistent government standards on energy use, the report says. Electricity consumed by Chinese government departments and agencies accounts for 5 percent of the nation’s total use.
The report suggests that some 135 million tons of standard coal could be saved each year if all existing and new buildings in China were renovated or designed to meet 50-percent energy savings standards.
Jianqiang Liu is a senior investigative journalist with China Southern Weekend and a visiting scholar at Peking University. Outside contributions to China Watch reflect the views of the author and are not necessarily the views of the Worldwatch Institute.
The report notes that nearly 95 percent of existing buildings in China are energy intensive, while more than 80 percent of new buildings built each year—covering some 2 billion square meters in area—fail to meet efficiency rules. China typically spends two or three times as much energy per unit of building area as most industrialized countries.
In 2005, energy required for heating, cooling, ventilating, and lighting China’s 40 billion square meters of buildings accounted for nearly a third of the nation’s total energy consumption, up from roughly 10 percent in the 1970s. Heating and cooling systems alone use nearly 55 percent of this total. As much as 30 percent of the heat generated from conventional heating systems is lost directly, while another 7 percent leaks out through windows opened by residents who are unable to control room temperatures themselves.
Most Chinese buildings are also water inefficient, with sanitary facilities requiring 30 percent more water than those in industrialized countries. Each year, some 20 percent of the water carried via municipal supply networks is lost to leaks, representing almost 10 billion cubic meters of wasted tap water each year, or more than is currently targeted for delivery under China’s massive new south-to-north water transfer project [1].
Office buildings in China use 10 times as much energy as most residential buildings. Government buildings, in particular, waste significant amounts of energy in the absence of consistent government standards on energy use, the report says. Electricity consumed by Chinese government departments and agencies accounts for 5 percent of the nation’s total use.
The report suggests that some 135 million tons of standard coal could be saved each year if all existing and new buildings in China were renovated or designed to meet 50-percent energy savings standards.
Jianqiang Liu is a senior investigative journalist with China Southern Weekend and a visiting scholar at Peking University. Outside contributions to China Watch reflect the views of the author and are not necessarily the views of the Worldwatch Institute.
Iraqi unions fight to keep oil out of corporate hands
By David Bacon
San Jose Mercury News
Article Launched:06/06/2007 01:32:14 AM PDT
The Bush administration calls the Iraq occupation an exercise in democracy building. Yet from the beginning, many of the Iraqis who want democracy most are treated as its enemies - Iraq's unions.
Iraq has a long labor history. Union activists, banned and jailed under the British and its puppet monarchy, organized a labor movement that was the admiration of the Arab world when Iraq became independent after 1958. Saddam Hussein later drove its leaders underground, killing and jailing the ones he could catch.
When Saddam fell, Iraqi unionists came out of prison, up from underground and back from exile, determined to rebuild their labor movement. Miraculously, in the midst of war and bombings, they did. The oil workers union in the south is now one of the largest organizations in Iraq, with thousands of members on the rigs, pipelines and refineries. The electrical workers union is the first national labor organization headed by a woman, Hashmeya Muhsin Hussein.
Together with other unions in railroads, hotels, ports, schools and factories, they've gone on strike, held elections, won wage increases, and made democracy a living reality. Yet the Bush administration, and the Baghdad government it controls, has outlawed collective bargaining, impounded union funds and turned its back (or worse) on a wave of assassinations of Iraqi union leaders.
President Bush doesn't believe what he preaches. He says he wants democracy, yet he will not accept the one political demand that unites Iraqis above all others: They want the country's oil "
San Jose Mercury News
Article Launched:06/06/2007 01:32:14 AM PDT
The Bush administration calls the Iraq occupation an exercise in democracy building. Yet from the beginning, many of the Iraqis who want democracy most are treated as its enemies - Iraq's unions.
Iraq has a long labor history. Union activists, banned and jailed under the British and its puppet monarchy, organized a labor movement that was the admiration of the Arab world when Iraq became independent after 1958. Saddam Hussein later drove its leaders underground, killing and jailing the ones he could catch.
When Saddam fell, Iraqi unionists came out of prison, up from underground and back from exile, determined to rebuild their labor movement. Miraculously, in the midst of war and bombings, they did. The oil workers union in the south is now one of the largest organizations in Iraq, with thousands of members on the rigs, pipelines and refineries. The electrical workers union is the first national labor organization headed by a woman, Hashmeya Muhsin Hussein.
Together with other unions in railroads, hotels, ports, schools and factories, they've gone on strike, held elections, won wage increases, and made democracy a living reality. Yet the Bush administration, and the Baghdad government it controls, has outlawed collective bargaining, impounded union funds and turned its back (or worse) on a wave of assassinations of Iraqi union leaders.
President Bush doesn't believe what he preaches. He says he wants democracy, yet he will not accept the one political demand that unites Iraqis above all others: They want the country's oil "
Shadow Government Statistics: May 2007 Edition
Shadow Government Statistics: May 2007 Edition: "The Federal Reserve has been in a long-term liquidity trap, where pumping up of the money supply generally has not stimulated normal economic growth in the post-1987 era. Excessive liquidity did help to build stock-market and housing bubbles, which helped boost economic growth from the standpoint of a perceived wealth effect and extraordinary debt expansion.
The Fed's pushing on string, however, never addressed the underlying structural collapse in economic activity, the long-term decline in inflation-adjusted household income, with a meaningful portion of the U.S. manufacturing base moving offshore. Therein lies the heart of the current economic crisis. Without a new gimmick from the Fed aimed at somehow buying more time, the economy is foundering based on negative fundamentals that cannot be turned quickly (as in decades), and certainly not with excessive money supply pumping. Without sustainable real income growth there can be no sustainable economic growth.
The Fed can hide whatever numbers it chooses, the government can massage its economic statistics as much as it wants, but the underlying reality of a deteriorating inflationary recession remains in place. What the politicians are missing is that Main Street U.S.A., which tends to vote its pocketbook, does not believe the gimmicked data and has an amazingly good sense as to what is going on. The reference there was to Main Street not Wall Street. "
The Fed's pushing on string, however, never addressed the underlying structural collapse in economic activity, the long-term decline in inflation-adjusted household income, with a meaningful portion of the U.S. manufacturing base moving offshore. Therein lies the heart of the current economic crisis. Without a new gimmick from the Fed aimed at somehow buying more time, the economy is foundering based on negative fundamentals that cannot be turned quickly (as in decades), and certainly not with excessive money supply pumping. Without sustainable real income growth there can be no sustainable economic growth.
The Fed can hide whatever numbers it chooses, the government can massage its economic statistics as much as it wants, but the underlying reality of a deteriorating inflationary recession remains in place. What the politicians are missing is that Main Street U.S.A., which tends to vote its pocketbook, does not believe the gimmicked data and has an amazingly good sense as to what is going on. The reference there was to Main Street not Wall Street. "
Solazyme selling algal oil feedstock
In answer to a public challenge six months ago, biotech company Solazyme is to announce a deal today to start supplying oil derived from algae feedstock to biodiesel maker Imperium Renewables.
Solazyme has entered into a biodiesel feedstock development agreement under which Solazyme is to generate algal oil for Imperium’s biodiesel production process.
Under the agreement, Solazyme is to grow proprietary strains of microalgae, extract the oil, and deliver it to Imperium, which then intends to convert it into fuel.
Industry observers haven't expected any company to be in a position to provide meaningful commercial quantities of algal oils in the near future, given difficulties in cultivating the right strains of algae and the challenge of extracting oil from it cost-effectively.
But Solazyme co-founder Jonathan Wolfson, president and chief operating office, told Inside Greentech that his traditionally "media-shy" company is farther along than many might think.
"Our technology is advanced enough that we're producing the kinds of quantities that were interesting to do a deal with. We'll be delivering agreed-upon quantities [to Imperium] this year."
Wolfson wouldn't clarify exactly what those quantities would be, however.
He did say that beyond the Imperium relationship, Solazyme expected to hold public demonstration projects this year, showing fuel made from its algal oil powering an internal combustion engine.
Speaking at an event last December with companies pursuing algae oil for biofuels, Imperium CEO Martin Tobias said, in front of hundreds of investors, that he'd "buy 1,000,000 gallons of algae oil today if anyone here on the panel can deliver it." (see Inside Greentech's Biofuel from algae on horizon, say experts.)
At that time, nobody on the panel, which included leading algae companies LiveFuels and GreenFuel Technologies, made commitments.
Why not? Getting oil out of algae cost effectively has turned out to be difficult.
Government researchers experimenting with algae oil extraction have been using centrifuges, which have been expensive and scale poorly. Front-running well funded commercial developers—which, in addition to LiveFuels and GreenFuel, also include Solix Biofuels and Aurora BioFuels—are investigating other techniques.
When asked about Solazyme's extraction process, Wolfson was coy.
"I think we're probably going to keep that under wraps for a while. This is a pretty competitive space. There's certainly money going in, as you know. You can file for intellectual property six ways to Sunday, but there are some things that you should keep private as long as possible."
"I can tell you we've spent a couple of years developing technology around extraction."
Wolfson made it clear that Solazyme does not feel it is at commercialization economics with the technology yet, but said the company is a lot closer than many people believe algae is currently.
"I won't tell you that the economics of extraction are exactly where we want them to be in the long run, but we've made giant strides to get a point where we now feel comfortable that we'll be able to get to the extraction price per gallon that we think is appropriate."
Imperium Renewables has submitted an S-1 filing to the Securities and Exchange Commission, announcing its intention to become publicly traded, and, as a result, is now in a quiet period.
Founded in 2003 and headquartered in South San Francisco, Solazyme is focused on the engineering and optimization of algae for production of biofuels and health and wellness materials. In March, the company raised a $8m+ Series B, plus $2m of debt. The Roda Group led the financing, with participation from Harris & Harris and other undisclosed investors (see Inside Greentech's Another week, another three Khosla biofuel investments.)
Imperium Renewables currently operates a 5 million gallon per year biodiesel production facility, but is constructing a 100 million gallon per year facility in Grays Harbor, Washington, scheduled to open next month.
Solazyme has entered into a biodiesel feedstock development agreement under which Solazyme is to generate algal oil for Imperium’s biodiesel production process.
Under the agreement, Solazyme is to grow proprietary strains of microalgae, extract the oil, and deliver it to Imperium, which then intends to convert it into fuel.
Industry observers haven't expected any company to be in a position to provide meaningful commercial quantities of algal oils in the near future, given difficulties in cultivating the right strains of algae and the challenge of extracting oil from it cost-effectively.
But Solazyme co-founder Jonathan Wolfson, president and chief operating office, told Inside Greentech that his traditionally "media-shy" company is farther along than many might think.
"Our technology is advanced enough that we're producing the kinds of quantities that were interesting to do a deal with. We'll be delivering agreed-upon quantities [to Imperium] this year."
Wolfson wouldn't clarify exactly what those quantities would be, however.
He did say that beyond the Imperium relationship, Solazyme expected to hold public demonstration projects this year, showing fuel made from its algal oil powering an internal combustion engine.
Speaking at an event last December with companies pursuing algae oil for biofuels, Imperium CEO Martin Tobias said, in front of hundreds of investors, that he'd "buy 1,000,000 gallons of algae oil today if anyone here on the panel can deliver it." (see Inside Greentech's Biofuel from algae on horizon, say experts.)
At that time, nobody on the panel, which included leading algae companies LiveFuels and GreenFuel Technologies, made commitments.
Why not? Getting oil out of algae cost effectively has turned out to be difficult.
Government researchers experimenting with algae oil extraction have been using centrifuges, which have been expensive and scale poorly. Front-running well funded commercial developers—which, in addition to LiveFuels and GreenFuel, also include Solix Biofuels and Aurora BioFuels—are investigating other techniques.
When asked about Solazyme's extraction process, Wolfson was coy.
"I think we're probably going to keep that under wraps for a while. This is a pretty competitive space. There's certainly money going in, as you know. You can file for intellectual property six ways to Sunday, but there are some things that you should keep private as long as possible."
"I can tell you we've spent a couple of years developing technology around extraction."
Wolfson made it clear that Solazyme does not feel it is at commercialization economics with the technology yet, but said the company is a lot closer than many people believe algae is currently.
"I won't tell you that the economics of extraction are exactly where we want them to be in the long run, but we've made giant strides to get a point where we now feel comfortable that we'll be able to get to the extraction price per gallon that we think is appropriate."
Imperium Renewables has submitted an S-1 filing to the Securities and Exchange Commission, announcing its intention to become publicly traded, and, as a result, is now in a quiet period.
Founded in 2003 and headquartered in South San Francisco, Solazyme is focused on the engineering and optimization of algae for production of biofuels and health and wellness materials. In March, the company raised a $8m+ Series B, plus $2m of debt. The Roda Group led the financing, with participation from Harris & Harris and other undisclosed investors (see Inside Greentech's Another week, another three Khosla biofuel investments.)
Imperium Renewables currently operates a 5 million gallon per year biodiesel production facility, but is constructing a 100 million gallon per year facility in Grays Harbor, Washington, scheduled to open next month.
Make way for the Chinese giant
By Walter T Molano
The emergence of China as a global superpower occurred much faster than anyone imagined. China is the new giant on the block, with enormous resources at its disposal. An exporting powerhouse, China displaced the United States last year as the largest exporter to the European Union.
Chinese exports to the EU jumped 21% year on year in 2006, reaching 255 billion euros (US$336 billion), versus an 8% year-on-year increase in US exports, which totaled 176 billion euros. Chinese exports continue to expand aggressively, driving up
shipping prices around the world. The Dry Freight Index on the Baltic Exchange was up 41% year-to-date, with no end in sight. The earnings from trade are becoming a headache for the Chinese central bank. International reserves recently passed the $1.3 trillion mark. China's current-account surplus is expected to reach $400 billion this year - representing 12.8% of gross domestic product (GDP). The heady expansion of the Chinese economy is putting it in a leadership position, allowing it to move to center stage in the global arena.
China is having a positive effect on the global economy, which in 2006 grew 5.4% year on year. Developed countries expanded 3.1% year on year, while non-Japan Asia grew more than twice as much - expanding 7.9%. China's GDP growth was 10.7% year on year and India expanded 9.2%. The Chinese effect on the developing world was remarkable. The former member states of the Soviet Union surged 7.7% year on year, sub-Sahara Africa expanded 5.7% and Latin America grew 5.5%.
The commodity boom is changing the economic landscape across the developing world. The volume of global trade rose 9.2% year on year in 2006, and emerging-market countries increased their international reserves by $738 billion. This explains the emerging-market boom. This is not a fad or a reflection of global liquidity. The $256 billion of net private inflows into the emerging markets reflect the credit strength of these economies and their ability to grow.
At the same time, the United States is withering away under the weight of its enormous debt load and various asset bubbles. The US economy grew an anemic 1.3% year on year during the first quarter of 2007. Unemployment is picking up and the dollar is collapsing. The unemployment rate in the US increased to 4.5% in April. Indeed, April saw the weakest pace of job creation in two years. The impact of the housing slowdown is starting to appear in the employment data. The tightening of lending standards is reducing the availability of mortgages, forcing further slowdowns in the construction sector.
The economic slowdown in the US is accompanied by serious concerns about the health of the financial sector. With more than $700 trillion in derivative contracts floating in the marketplace, and much of it tied to the mortgage market, an accident is definitely on the way. Some analysts attribute the steady rise in gold prices to concerns about a looming crisis in the US financial sector.
The changes in the global economic order are also realigning the planet's geopolitical structure. China is starting to set the tempo in the international arena. It has the indisputable lead in Africa, committing $20 billion over the course of the next three years to develop infrastructure and trade. It is shepherding the reconciliation between North and South Korea, easing tensions on its eastern flank.
The growing irrelevance of the multilateral institutions, such as the World Bank, International Monetary Fund and World Trade Organization, is providing a greater opportunity for China to exert a more prominent role without appearing to be a usurper of power. Fortunately, the changes are for the better, at least for most emerging-market countries. China's insatiable appetite for commodities is breathing new life across the developing world.
Last of all, China is providing a bonanza of cheap manufactured goods to developing nations - fueling an unprecedented consumer frenzy. The Chinese behemoth is rapidly displacing the US as the world's main source of capital, manufacturing and commodity demand, leading to a decoupling of the waning North American giant from the rest of the marketplace.
The emergence of China as a global superpower occurred much faster than anyone imagined. China is the new giant on the block, with enormous resources at its disposal. An exporting powerhouse, China displaced the United States last year as the largest exporter to the European Union.
Chinese exports to the EU jumped 21% year on year in 2006, reaching 255 billion euros (US$336 billion), versus an 8% year-on-year increase in US exports, which totaled 176 billion euros. Chinese exports continue to expand aggressively, driving up
shipping prices around the world. The Dry Freight Index on the Baltic Exchange was up 41% year-to-date, with no end in sight. The earnings from trade are becoming a headache for the Chinese central bank. International reserves recently passed the $1.3 trillion mark. China's current-account surplus is expected to reach $400 billion this year - representing 12.8% of gross domestic product (GDP). The heady expansion of the Chinese economy is putting it in a leadership position, allowing it to move to center stage in the global arena.
China is having a positive effect on the global economy, which in 2006 grew 5.4% year on year. Developed countries expanded 3.1% year on year, while non-Japan Asia grew more than twice as much - expanding 7.9%. China's GDP growth was 10.7% year on year and India expanded 9.2%. The Chinese effect on the developing world was remarkable. The former member states of the Soviet Union surged 7.7% year on year, sub-Sahara Africa expanded 5.7% and Latin America grew 5.5%.
The commodity boom is changing the economic landscape across the developing world. The volume of global trade rose 9.2% year on year in 2006, and emerging-market countries increased their international reserves by $738 billion. This explains the emerging-market boom. This is not a fad or a reflection of global liquidity. The $256 billion of net private inflows into the emerging markets reflect the credit strength of these economies and their ability to grow.
At the same time, the United States is withering away under the weight of its enormous debt load and various asset bubbles. The US economy grew an anemic 1.3% year on year during the first quarter of 2007. Unemployment is picking up and the dollar is collapsing. The unemployment rate in the US increased to 4.5% in April. Indeed, April saw the weakest pace of job creation in two years. The impact of the housing slowdown is starting to appear in the employment data. The tightening of lending standards is reducing the availability of mortgages, forcing further slowdowns in the construction sector.
The economic slowdown in the US is accompanied by serious concerns about the health of the financial sector. With more than $700 trillion in derivative contracts floating in the marketplace, and much of it tied to the mortgage market, an accident is definitely on the way. Some analysts attribute the steady rise in gold prices to concerns about a looming crisis in the US financial sector.
The changes in the global economic order are also realigning the planet's geopolitical structure. China is starting to set the tempo in the international arena. It has the indisputable lead in Africa, committing $20 billion over the course of the next three years to develop infrastructure and trade. It is shepherding the reconciliation between North and South Korea, easing tensions on its eastern flank.
The growing irrelevance of the multilateral institutions, such as the World Bank, International Monetary Fund and World Trade Organization, is providing a greater opportunity for China to exert a more prominent role without appearing to be a usurper of power. Fortunately, the changes are for the better, at least for most emerging-market countries. China's insatiable appetite for commodities is breathing new life across the developing world.
Last of all, China is providing a bonanza of cheap manufactured goods to developing nations - fueling an unprecedented consumer frenzy. The Chinese behemoth is rapidly displacing the US as the world's main source of capital, manufacturing and commodity demand, leading to a decoupling of the waning North American giant from the rest of the marketplace.
Morgan Stanley issues triple sell warning
By Ambrose Evans-Pritchard
06/06/2007
Morgan Stanley has advised clients to slash exposure to the stock
market after its three key warning indicators began flashing a "Full
House" sell signal for the first time since the dotcom bust.
Teun Draaisma, chief of European equities strategist for the US
investment bank, said the triple warning was a "very powerful"
signal that had been triggered just five times since 1980.
"Interest rates are rising and reaching critical levels. This
matters more than growth for equities, so we think the mid-cycle
rally is over. Our model is forecasting a 14pc correction over the
next six months, but it could be more serious," he said. Mr Draaisma
said the MSCI index of 600 European and British equities had dropped
by an average of 15.2pc over six months after each "Full House"
signal, with falls of 25.2pc after September 1987 and 26.2pc after
April 2002. "We prefer to be on the right side of these odds," he
said.
The first of the three signals Morgan Stanley monitors is
a "composite valuation indicator" that divides the price/earnings
ratio on stocks by bond yields. It measures "median" share prices
that capture the froth of the merger boom, rather than relying on a
handful of big companies on the major indexes.
"If you look at all shares, the p/e ratio is at an all-time high of
20," he said.
The other two gauges measure fundamentals such as growth and
inflation, as well as risk appetite. "Investors are taking far too
much comfort from global liquidity. Markets always return to
fundamental value, so people could be in for a rude awakening. This
is the greater fool theory," he said. "The trigger may be rate rises
by the Bank of Japan, or a widening of credit spreads. There are
lots of little triggers."
Morgan Stanley is not predicting a recession, believing bond yields
will fall during a correction and act as an "automatic stabiliser"
for the world economy. Once the market shakes off the latest
excesses, it's back to the races.
06/06/2007
Morgan Stanley has advised clients to slash exposure to the stock
market after its three key warning indicators began flashing a "Full
House" sell signal for the first time since the dotcom bust.
Teun Draaisma, chief of European equities strategist for the US
investment bank, said the triple warning was a "very powerful"
signal that had been triggered just five times since 1980.
"Interest rates are rising and reaching critical levels. This
matters more than growth for equities, so we think the mid-cycle
rally is over. Our model is forecasting a 14pc correction over the
next six months, but it could be more serious," he said. Mr Draaisma
said the MSCI index of 600 European and British equities had dropped
by an average of 15.2pc over six months after each "Full House"
signal, with falls of 25.2pc after September 1987 and 26.2pc after
April 2002. "We prefer to be on the right side of these odds," he
said.
The first of the three signals Morgan Stanley monitors is
a "composite valuation indicator" that divides the price/earnings
ratio on stocks by bond yields. It measures "median" share prices
that capture the froth of the merger boom, rather than relying on a
handful of big companies on the major indexes.
"If you look at all shares, the p/e ratio is at an all-time high of
20," he said.
The other two gauges measure fundamentals such as growth and
inflation, as well as risk appetite. "Investors are taking far too
much comfort from global liquidity. Markets always return to
fundamental value, so people could be in for a rude awakening. This
is the greater fool theory," he said. "The trigger may be rate rises
by the Bank of Japan, or a widening of credit spreads. There are
lots of little triggers."
Morgan Stanley is not predicting a recession, believing bond yields
will fall during a correction and act as an "automatic stabiliser"
for the world economy. Once the market shakes off the latest
excesses, it's back to the races.
5 June 2007
Iran Vows Large-Scale Retaliation if U.S. Attacks
If U.S. forces strike Iranian nuclear facilities, Iranian officials say Tehran will respond by triggering all-out regional war.
“Ballistic missiles would be fired in masses against targets in Arab gulf states and Israel,” one Foreign Ministry official said. “The objective would be to overwhelm U.S. missile defense systems with dozens and maybe hundreds of missiles fired simultaneously at specific targets.”
Tehran’s primary targets would be U.S. military installations and strategic targets in U.S.-allied Arabian Gulf states, including oil depots, refineries, power plants and desalination facilities. U.S. warships would also face waves of surface-to-surface cruise missiles sent to overwhelm their countermeasures, said several senior Iranian officials whose comments reflect the official line but who could not obtain permission to speak on the record at short notice.
“The name of the game is simply to saturate strategic targets with missile firepower in order to render the Patriots and other defenses useless,” said Hassan Fahs, a journalist and political analyst based here.
One Iranian official with knowledge of the leadership’s national-security discussions said his country’s leaders anticipate that U.S. forces will strike with no warning against the military’s command-and-control network, and have ordered ballistic- and cruise-missile battery crews to launch the retaliation plan within an hour after a U.S. attack begins.
“The U.S. will be as surprised with Iranian military capabilities as the Israelis were with Hizbollah in last summer’s war in Lebanon,” he said. “Most of our people are confident we would give the Americans hell and likely emerge victorious.”
Special targets would include Arabian Gulf states that help Washington to justify a strike, said Adm. Ali Shamkhani, a former Iranian defense minister. Sham-khani runs the Center of Strategic Studies, a think tank comprised of former senior foreign, defense and interior ministers who advise Ayatollah Ali Khameni, the country’s supreme leader.
“Allegations by some Arab gulf states that the Iranian nuclear program poses an environmental threat to the area and that it would spark a nuclear arms race are aimed at helping the U.S. establish legitimacy for its anticipated aggression against Iran,” Shamkhani said.
U.S. military action threatens Iran’s existence, he said, “but most of those who speak about the war option are well aware that Iran has the capability to face this choice.”
Tehran would also allow al-Qaida and other Islamic terrorist groups free passage across its borders from Afghanistan and Asia into the Middle East, Iranian officials said.
“Iran will open a freeway for terrorists from Afghanistan all the way to Lebanon, enabling the terrorists to strike in almost every country in the Middle East,” said the official with knowledge of national-security discussions. He added that Iran currently bans such transits from Afghanistan, forcing them to take longer routes and risk capture in other countries. “This positive action would not continue if Iran is attacked by the U.S.”
One Kuwaiti analyst said Iran-backed terror attacks are expected if war breaks out.
“Most Arab gulf states expect to face a series of terrorist attacks in their major cities carried out by either Iranian sleeper cells or al-Qaida members in case of a war with Iran,” said Sami Al-Faraj, head of the Kuwait Center for Strategic Studies.
All this tough talk makes some Iranian analysts nervous.
“Iran regards itself as a regional superpower who is conducting a Cold War-style confrontation with the U.S.,” said one. “The risks involved in playing such a dangerous game with a world superpower are so big that many Iranian officials are anxious about the hardline policies of the current leadership in Tehran, and are pressing for political engagement and de-escalation of tension with the U.S.”
Info Campaign
Iranian military officials are providing data to local think tanks and journalists to show that leaders, aware of U.S. intentions and capabilities, are prepared to overpower them.
“The Iranian street is now more aware of the threat of war than it used to be a year ago, but authorities here are raising the morale and assuring the people by showing they were a step ahead of the Americans,” Fahs said.
In the past few months, the Iranian Revolutionary Guards has shown off new weapons in testing or deployment: ballistic missiles such as Scud variants and the Shihab-3, anti-ship cruise missiles such as the Chinese C-802 and Silkworm, a new high-speed torpedo and spying drones. Guards troops displayed several of the weapons in war games in the past few months, and broadcast on local TV channels and some government-run Web sites what it called UAV-shot footage of the USS Eisenhower aircraft carrier.
“This was to tell the Iranian people that we know where the Americans are and what they are up to, and we can strike them any time,” Fahs said.
The public release of information is a marked change for the often secretive Iranian military, which has widely distributed claims that it has put a spy satellite in orbit, acquired advanced S-300 high-altitude anti-aircraft missiles from Russia, built stealth drones that cannot be picked up on American radars, and deployed missiles that cannot be defeated by the U.S. Navy.
Shamkhani said Tehran has blocked U.S. moves in many parts of the region, boosting Iran’s regional influence, especially in relatively unstable Afghanistan, Iraq, Lebanon and the occupied Palestinian territories.
This puts “Iran today in control of about 70 percent of the U.S. game in the region,” he said.
Iranian officials held talks with U.S. officials in Baghdad on May 28 on the security situation there and offered to help reduce tension in Lebanon.
Shamkhani and other Iranian officials denied U.S. charges Iran is building nuclear weapons and inciting sectarian violence in Iraq.
“All the talk about a Sunni-Shiite divide and Iranian expansionist or hegemonic ambitions are lies spread by the U.S. and Israel to rally regional support and justify a military attack on Iran,” he said. “All the troubles in the region are caused by the U.S. military presence and Israel.” •
E-mail: rkahwaji@defensenews.com.
“Ballistic missiles would be fired in masses against targets in Arab gulf states and Israel,” one Foreign Ministry official said. “The objective would be to overwhelm U.S. missile defense systems with dozens and maybe hundreds of missiles fired simultaneously at specific targets.”
Tehran’s primary targets would be U.S. military installations and strategic targets in U.S.-allied Arabian Gulf states, including oil depots, refineries, power plants and desalination facilities. U.S. warships would also face waves of surface-to-surface cruise missiles sent to overwhelm their countermeasures, said several senior Iranian officials whose comments reflect the official line but who could not obtain permission to speak on the record at short notice.
“The name of the game is simply to saturate strategic targets with missile firepower in order to render the Patriots and other defenses useless,” said Hassan Fahs, a journalist and political analyst based here.
One Iranian official with knowledge of the leadership’s national-security discussions said his country’s leaders anticipate that U.S. forces will strike with no warning against the military’s command-and-control network, and have ordered ballistic- and cruise-missile battery crews to launch the retaliation plan within an hour after a U.S. attack begins.
“The U.S. will be as surprised with Iranian military capabilities as the Israelis were with Hizbollah in last summer’s war in Lebanon,” he said. “Most of our people are confident we would give the Americans hell and likely emerge victorious.”
Special targets would include Arabian Gulf states that help Washington to justify a strike, said Adm. Ali Shamkhani, a former Iranian defense minister. Sham-khani runs the Center of Strategic Studies, a think tank comprised of former senior foreign, defense and interior ministers who advise Ayatollah Ali Khameni, the country’s supreme leader.
“Allegations by some Arab gulf states that the Iranian nuclear program poses an environmental threat to the area and that it would spark a nuclear arms race are aimed at helping the U.S. establish legitimacy for its anticipated aggression against Iran,” Shamkhani said.
U.S. military action threatens Iran’s existence, he said, “but most of those who speak about the war option are well aware that Iran has the capability to face this choice.”
Tehran would also allow al-Qaida and other Islamic terrorist groups free passage across its borders from Afghanistan and Asia into the Middle East, Iranian officials said.
“Iran will open a freeway for terrorists from Afghanistan all the way to Lebanon, enabling the terrorists to strike in almost every country in the Middle East,” said the official with knowledge of national-security discussions. He added that Iran currently bans such transits from Afghanistan, forcing them to take longer routes and risk capture in other countries. “This positive action would not continue if Iran is attacked by the U.S.”
One Kuwaiti analyst said Iran-backed terror attacks are expected if war breaks out.
“Most Arab gulf states expect to face a series of terrorist attacks in their major cities carried out by either Iranian sleeper cells or al-Qaida members in case of a war with Iran,” said Sami Al-Faraj, head of the Kuwait Center for Strategic Studies.
All this tough talk makes some Iranian analysts nervous.
“Iran regards itself as a regional superpower who is conducting a Cold War-style confrontation with the U.S.,” said one. “The risks involved in playing such a dangerous game with a world superpower are so big that many Iranian officials are anxious about the hardline policies of the current leadership in Tehran, and are pressing for political engagement and de-escalation of tension with the U.S.”
Info Campaign
Iranian military officials are providing data to local think tanks and journalists to show that leaders, aware of U.S. intentions and capabilities, are prepared to overpower them.
“The Iranian street is now more aware of the threat of war than it used to be a year ago, but authorities here are raising the morale and assuring the people by showing they were a step ahead of the Americans,” Fahs said.
In the past few months, the Iranian Revolutionary Guards has shown off new weapons in testing or deployment: ballistic missiles such as Scud variants and the Shihab-3, anti-ship cruise missiles such as the Chinese C-802 and Silkworm, a new high-speed torpedo and spying drones. Guards troops displayed several of the weapons in war games in the past few months, and broadcast on local TV channels and some government-run Web sites what it called UAV-shot footage of the USS Eisenhower aircraft carrier.
“This was to tell the Iranian people that we know where the Americans are and what they are up to, and we can strike them any time,” Fahs said.
The public release of information is a marked change for the often secretive Iranian military, which has widely distributed claims that it has put a spy satellite in orbit, acquired advanced S-300 high-altitude anti-aircraft missiles from Russia, built stealth drones that cannot be picked up on American radars, and deployed missiles that cannot be defeated by the U.S. Navy.
Shamkhani said Tehran has blocked U.S. moves in many parts of the region, boosting Iran’s regional influence, especially in relatively unstable Afghanistan, Iraq, Lebanon and the occupied Palestinian territories.
This puts “Iran today in control of about 70 percent of the U.S. game in the region,” he said.
Iranian officials held talks with U.S. officials in Baghdad on May 28 on the security situation there and offered to help reduce tension in Lebanon.
Shamkhani and other Iranian officials denied U.S. charges Iran is building nuclear weapons and inciting sectarian violence in Iraq.
“All the talk about a Sunni-Shiite divide and Iranian expansionist or hegemonic ambitions are lies spread by the U.S. and Israel to rally regional support and justify a military attack on Iran,” he said. “All the troubles in the region are caused by the U.S. military presence and Israel.” •
E-mail: rkahwaji@defensenews.com.
2 June 2007
Jeremy Warner's Outlook: Sir Fred's euro-superjumbo takes flight - Independent Online Edition > Business Comment
Jeremy Warner's Outlook: Sir Fred's euro-superjumbo takes flight - Independent Online Edition > Business Comment: "Consequences of dirham shake-up
I cannot recall ever having written about the dirham, the currency of the United Arab Emirates, but it seems this is a situation now worth watching. Despite official denials, the markets are convinced that the currency is about to abandon its dollar peg.
Kuwait has already taken the plunge. Speculation is rife that the UAE will shortly be following suit. The only thing standing in the way would seem to be regional efforts to forge a currency union, a project dear to the heart of Dubai's ruling Sheikh Mohammed bin Rashid Al Maktoum. Floating exchange rates would plainly not be helpful to these efforts.
Yet local banks are so convinced that it will eventually happen, resulting in a substantial appreciation against the dollar, that they are already imposing constraints on large transactions at current exchange rates, resulting in growing paralysis in one of the region's biggest trading centres. The artificially depressed state of the currency is causing severe inflationary pressures in the region - most of its imports come from Europe and Asia - as well as depressing the UAE's buying power abroad. The logical thing would be either to float, or establish a new peg against a basket of currencies more representative of the region's trading patt"
I cannot recall ever having written about the dirham, the currency of the United Arab Emirates, but it seems this is a situation now worth watching. Despite official denials, the markets are convinced that the currency is about to abandon its dollar peg.
Kuwait has already taken the plunge. Speculation is rife that the UAE will shortly be following suit. The only thing standing in the way would seem to be regional efforts to forge a currency union, a project dear to the heart of Dubai's ruling Sheikh Mohammed bin Rashid Al Maktoum. Floating exchange rates would plainly not be helpful to these efforts.
Yet local banks are so convinced that it will eventually happen, resulting in a substantial appreciation against the dollar, that they are already imposing constraints on large transactions at current exchange rates, resulting in growing paralysis in one of the region's biggest trading centres. The artificially depressed state of the currency is causing severe inflationary pressures in the region - most of its imports come from Europe and Asia - as well as depressing the UAE's buying power abroad. The logical thing would be either to float, or establish a new peg against a basket of currencies more representative of the region's trading patt"
1 June 2007
KNOC confirms huge oil
KNOC confirms huge oil field off Russia's Kamchatka penisula
A South Korean consortium led by state-run Korea National Oil Corp. has
confirmed its field in Russia's Kamchatka has an estimated 10 billion barrels
of crude reserves, company officials said Thursday.
The consortium has a 40% stake in the field off the Kamchatka peninsula,
while the remaining 60% interest is controlled by Russia's state-run oil
company Rosneft.
"The estimated oil reserves are much bigger than previously expected," a
KNOC official said. The field was previously estimated to hold up to 3.7
billion barrels of crude.
The size of the deposit was confirmed by an internationally accredited
petroleum exploration company, the official said.
KNOC controls a 50% stake in the South Korean consortium that also
includes state-run Korea Gas Corp. with a 10% interest, GS-Caltex Corp with a
10% stake, SK Corp. with a 10% stake and Daewoo International Corp. with a 10%
interest. Kumho Petrochemical and Hyundai Corp. has a 5% stake, respectively.
KNOC signed a memorandum of understanding on joint development of the
block in Kamchatka in September 2004 when President Roh Moo-Hyun made a state
visit to Russia. In February 2005, KNOC signed an interim finance agreement
for the project, and the consortium acquired the stake ten months later.
KNOC is spearheading upstream oil projects abroad for South Korea. The
country imports all of its crude oil requirements overseas, with more than 80%
of the supplies comes from the Middle East. The state oil company has
designated Kamchatka as the upstream oil development hub in Northeast Asia.
The South Korean government has provided benefits to local companies
involved upstream oil projects in countries other than the Middle East, in an
effort to diversify oil supply sources.
A South Korean consortium led by state-run Korea National Oil Corp. has
confirmed its field in Russia's Kamchatka has an estimated 10 billion barrels
of crude reserves, company officials said Thursday.
The consortium has a 40% stake in the field off the Kamchatka peninsula,
while the remaining 60% interest is controlled by Russia's state-run oil
company Rosneft.
"The estimated oil reserves are much bigger than previously expected," a
KNOC official said. The field was previously estimated to hold up to 3.7
billion barrels of crude.
The size of the deposit was confirmed by an internationally accredited
petroleum exploration company, the official said.
KNOC controls a 50% stake in the South Korean consortium that also
includes state-run Korea Gas Corp. with a 10% interest, GS-Caltex Corp with a
10% stake, SK Corp. with a 10% stake and Daewoo International Corp. with a 10%
interest. Kumho Petrochemical and Hyundai Corp. has a 5% stake, respectively.
KNOC signed a memorandum of understanding on joint development of the
block in Kamchatka in September 2004 when President Roh Moo-Hyun made a state
visit to Russia. In February 2005, KNOC signed an interim finance agreement
for the project, and the consortium acquired the stake ten months later.
KNOC is spearheading upstream oil projects abroad for South Korea. The
country imports all of its crude oil requirements overseas, with more than 80%
of the supplies comes from the Middle East. The state oil company has
designated Kamchatka as the upstream oil development hub in Northeast Asia.
The South Korean government has provided benefits to local companies
involved upstream oil projects in countries other than the Middle East, in an
effort to diversify oil supply sources.
Calvin on bond prices
It may be of some value – for serious players here - to stop arguing around quite different sets of factors that can cause the movements in bond prices as if there were only one set of variables to look at.
The bond price (interest rate) equation is a differential equation with multiple variables.
One analogy might be to consider a large body of water such as a big lake or a small sea: the total volume of water in the lake might increase, in which case the waves upon the shore beat more vigorously compared to when the total water body was less.
Or, the speed of the tide might merely be at its peak (although the total water body volume remains the same) so that the waves upon the shore beat AS VIGOROUSLY AS THE CASE ABOVE. In other words, there might be two completely different causes of the same wave force or wave rate outcome.
Thus it is possible for interest rates pressure to decline because of lack of demand for cash (low velocity circulation), or for interest rates pressure to decline because of rapidly decreasing total volume of cash.
And, the equation can get much more complex still.
In theory it is possible for a low relative force (pressure) over a time series distribution - of demands for cash – to be exhibited as high nominal interest rates where the economy is not smoothly or perfectly distributed. This would be the situation in which there is a strong and clear disparity between the risk models for credit, of say a monopoly in a business sector, compared to another sector in which there is high competition. Applied interest rates at which the monopoly would consider borrowing money would be totally different to the interest rates at which the competitive businesses would be prepared to take up credit.
Demand for money is not completely symmetrical in respect to risk factors across an entire economy, nor is it totally homogeneous with regard to pure demand in any case.
The total average of all the prices of money throughout an entire economy might come out as a particular figure – and mostly this is expressed as the catchall benchmark prime rate or the benchmark average on Ten Year Government Bonds – but this in itself can hide the asymmetrical topology of credit transactions in an economy. Hence the very reason there is such a thing as capital formation policy led by Central Banks, or fiscal policy led by political government ideologies that people vote about at main elections.
My personal view of the current situation tends towards the idea that there is a very large body of ‘water' (liquidity, or money!) on issue as currency and as government obligations on financial paper, and, that there is a highly controlled set of channels into which this money is helped to ‘run.' Quite obviously, one of these channels is mortgage lending (real estate). Here, there is a rapidly declining total volume of liquidity (falling real estate prices, rising defaults) paired with a very high supply of real estate ‘stock' (properties). On the other hand, there is an extremely low supply of companies in the general equities market with high earnings, paired with a relatively very high historical participation rate of share buyers whether through 401k plans or direct share buying and especially, through virtually globally incoming foreign demand and derivatives.
Risk of liquidity loss and loss of substantial capital value when investing in real estate may well be very high at present, whereas risk of total capital loss in the share market assuming an investor is trying to control their TRADING profits via hedged derivatives only, might be relatively small. The whole big difference between real estate and the share market is namely that it is possible to trade an entire company ‘brick by brick' as it were in ‘shares,' whereas it is impossible to trade a house mortgage brick by brick.
When assuming or trying to assume that major realized losses in real estate will necessarily translate into losses in the general share market Indexes because of the need to liquidate positions held in order to get cash or to pay for debts, it is important to consider if or whether credit channeled into the real estate market happened in quite the same way as money was channeled into the rising prices of equities.
General retail banks and mortgage providers were the sources of the real estate credit boom, whereas investment banks, who were also issuers and ultimately free-carried shareholders of shares were the source of the share market boom. Moreover, the building boom carried with it the seeds of an upside in velocity flows of money in sectors such as building materials and transport. The ultimate owners of shares are the investment bank issuers themselves, whereas the ultimate owners of real estate stock will be the mortgages. These mortgages need to foreclose to gain control of the asset base as fully owned capital; until they do that they only ‘own' the credit contracts (in o0ther words they are ledger short cash). The investment banks do not need to do anything to own their capital base and they are not ledger short cash because in theory, if they were prudent, they would not have been lending cash out in order for the market to buy their shares.
Investment banks indeed should have been the recipients of the cash value of the helocs from mortgage providers.
It is unlikely, in my view, that the major equities Indexes can fall substantially at this stage if this assumption were to be based only on the negative effects of the real estate crash currently being experienced.
Because of this differential equation spoken of at the beginning of this essay, it is unlikely, in my view, that there should be an equities market crash because of sudden hitherto unforeseen fluctuations in interest rates springing from a platform of around 5% ANNUAL at the benchmark. This is a relatively LOW rate of interest if it is used to take short-term hedged derivative positions in equities.
However it is absolutely possible for there to be a huge equities market crash. And, there is no question in my mind that it is possible to accurately pinpoint when this is to occur. The whole point about being a professional bear, is about being correct about when to put your shorts in. And that aspect of the differential equation comes under the Time component, and also whether you think the absolute Volume of realizable Money is vastly in, or out of kilter with the market value of equities, or whether you think the Velocity of the available Volume is vastly higher, or lower, than would substantiate and support equity prices.
Calvin J. Bear
The bond price (interest rate) equation is a differential equation with multiple variables.
One analogy might be to consider a large body of water such as a big lake or a small sea: the total volume of water in the lake might increase, in which case the waves upon the shore beat more vigorously compared to when the total water body was less.
Or, the speed of the tide might merely be at its peak (although the total water body volume remains the same) so that the waves upon the shore beat AS VIGOROUSLY AS THE CASE ABOVE. In other words, there might be two completely different causes of the same wave force or wave rate outcome.
Thus it is possible for interest rates pressure to decline because of lack of demand for cash (low velocity circulation), or for interest rates pressure to decline because of rapidly decreasing total volume of cash.
And, the equation can get much more complex still.
In theory it is possible for a low relative force (pressure) over a time series distribution - of demands for cash – to be exhibited as high nominal interest rates where the economy is not smoothly or perfectly distributed. This would be the situation in which there is a strong and clear disparity between the risk models for credit, of say a monopoly in a business sector, compared to another sector in which there is high competition. Applied interest rates at which the monopoly would consider borrowing money would be totally different to the interest rates at which the competitive businesses would be prepared to take up credit.
Demand for money is not completely symmetrical in respect to risk factors across an entire economy, nor is it totally homogeneous with regard to pure demand in any case.
The total average of all the prices of money throughout an entire economy might come out as a particular figure – and mostly this is expressed as the catchall benchmark prime rate or the benchmark average on Ten Year Government Bonds – but this in itself can hide the asymmetrical topology of credit transactions in an economy. Hence the very reason there is such a thing as capital formation policy led by Central Banks, or fiscal policy led by political government ideologies that people vote about at main elections.
My personal view of the current situation tends towards the idea that there is a very large body of ‘water' (liquidity, or money!) on issue as currency and as government obligations on financial paper, and, that there is a highly controlled set of channels into which this money is helped to ‘run.' Quite obviously, one of these channels is mortgage lending (real estate). Here, there is a rapidly declining total volume of liquidity (falling real estate prices, rising defaults) paired with a very high supply of real estate ‘stock' (properties). On the other hand, there is an extremely low supply of companies in the general equities market with high earnings, paired with a relatively very high historical participation rate of share buyers whether through 401k plans or direct share buying and especially, through virtually globally incoming foreign demand and derivatives.
Risk of liquidity loss and loss of substantial capital value when investing in real estate may well be very high at present, whereas risk of total capital loss in the share market assuming an investor is trying to control their TRADING profits via hedged derivatives only, might be relatively small. The whole big difference between real estate and the share market is namely that it is possible to trade an entire company ‘brick by brick' as it were in ‘shares,' whereas it is impossible to trade a house mortgage brick by brick.
When assuming or trying to assume that major realized losses in real estate will necessarily translate into losses in the general share market Indexes because of the need to liquidate positions held in order to get cash or to pay for debts, it is important to consider if or whether credit channeled into the real estate market happened in quite the same way as money was channeled into the rising prices of equities.
General retail banks and mortgage providers were the sources of the real estate credit boom, whereas investment banks, who were also issuers and ultimately free-carried shareholders of shares were the source of the share market boom. Moreover, the building boom carried with it the seeds of an upside in velocity flows of money in sectors such as building materials and transport. The ultimate owners of shares are the investment bank issuers themselves, whereas the ultimate owners of real estate stock will be the mortgages. These mortgages need to foreclose to gain control of the asset base as fully owned capital; until they do that they only ‘own' the credit contracts (in o0ther words they are ledger short cash). The investment banks do not need to do anything to own their capital base and they are not ledger short cash because in theory, if they were prudent, they would not have been lending cash out in order for the market to buy their shares.
Investment banks indeed should have been the recipients of the cash value of the helocs from mortgage providers.
It is unlikely, in my view, that the major equities Indexes can fall substantially at this stage if this assumption were to be based only on the negative effects of the real estate crash currently being experienced.
Because of this differential equation spoken of at the beginning of this essay, it is unlikely, in my view, that there should be an equities market crash because of sudden hitherto unforeseen fluctuations in interest rates springing from a platform of around 5% ANNUAL at the benchmark. This is a relatively LOW rate of interest if it is used to take short-term hedged derivative positions in equities.
However it is absolutely possible for there to be a huge equities market crash. And, there is no question in my mind that it is possible to accurately pinpoint when this is to occur. The whole point about being a professional bear, is about being correct about when to put your shorts in. And that aspect of the differential equation comes under the Time component, and also whether you think the absolute Volume of realizable Money is vastly in, or out of kilter with the market value of equities, or whether you think the Velocity of the available Volume is vastly higher, or lower, than would substantiate and support equity prices.
Calvin J. Bear
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